Our Six Favorite Picks For 2013

12/17/2012


The Focus List, up 15.4% so far this year versus a 13.5% gain for the S&P 500 Index, is on pace to exceed the benchmark for the third time in four years and the sixth time in nine years.

Since 2003, the Focus List has delivered a return of 99.3% on a fully invested basis, well ahead of the 62.3% return of the S&P 500. Since its inception in late 1994, the Focus List has returned 323.2%, versus 210.5% for the S&P 500. Returns exclude dividends, taxes, and transaction costs.

The Focus List contains our 12 to 17 best ideas for 12-month gains, emphasizing reasonably valued companies with strong fundamentals and growth prospects. Among the 14 current constituents (listed in the table below), six of our favorite picks are reviewed below.

Aflac ($54; AFL), a U.S.-based insurer that draws nearly 80% of its sales from Japan, generated record highs for revenue, operating cash flow, and earnings per share in the last 12 months. Growth seems likely to continue in 2013, though at a slower pace. The stock has returned 29% this year but still looks cheap at just eight times trailing earnings, 48% below its 10-year average P/E. Aflac also looks attractive relative to the 10-year norm based on its 2.6% dividend yield, and the dividend has been raised in 30 consecutive years. All six Quadrix category scores rank in the top 25% of our research universe, and both sector-specific scores exceed 90. With an Overall score of 100, Aflac is a Focus List Buy and a Long-Term Buy.


There's no shortage of Apple ($541; AAPL) investors frustrated by the stock's 23% drop from an all-time high in September. And there's no shortage of challenges for the company: a September-quarter profit miss, supply headaches, and a creeping fear that Apple may finally fail to fend off new threats in the mobile-device market. If this sounds familiar, recall that a similar scenario played out late last year, when Apple plunged nearly 15% from a record high in October. True, some new worries have taken the stage, and near-term margins seem likely to remain under pressure. But Apple shares trade at just 11 times estimated per-share profits for the next 12 months. Apple is a Focus List Buy and a Long-Term Buy.


Both of CVS Caremark's ($48; CVS) businesses are delivering strong growth. Revenue from the pharmacy-benefit-management unit soared 27% in the first nine months of this year, and management sees 15% to 17% growth in the December quarter. At the drugstore unit, same-store sales have advanced 6.1% so far this year, and CVS expects 2% to 3% growth in the December quarter. The company had planned to outline its guidance for next year on Dec. 13, after the Forecasts went to press. And in each of the past three years, CVS has announced hikes in late December or early January. CVS Caremark is a Focus List Buy and a Long-Term Buy.


Favorable trends in footwear show some signs of abating. But athletic shoes, especially those geared toward basketball, remain strong for Foot Locker ($35; FL). The retailer has topped consensus profit estimates by more than 7% in 11 straight quarters. Despite profit growth of 42% over the last 12 months, the stock trades at less than 15 times trailing earnings, 36% below their three-year average. Even if the P/E lingers at its current depressed level, the stock stands to rise 15% over the next year if Foot Locker merely meets the consensus profit estimate of $2.78 for the 12 months ending in October. Yielding 2.1%, Foot Locker is a Focus List Buy and a Long-Term Buy.


The corporate and government focus on containing health-care costs plays to the strength of Mylan ($28; MYL), a maker of generic drugs, copycat versions generally priced well below their branded counterparts. In the coming year, Mylan is projected to grow profits 10%. Despite its superior growth profile, Mylan shares trade at just 11 times trailing earnings (a 21% discount to its peer-group median) and 10 times estimated earnings for the next 12 months (a 24% discount). Mylan is a Focus List Buy and a Long-Term Buy.


Thermo Fisher Scientific ($65; TMO) furnishes research labs with instruments, equipment, flasks, solvents, and analytical software. The company's free cash flow rose 34% over the past year to $1.63 billion, and management seeks to return half of free cash flow to investors through stock buybacks and dividends. Budget constraints could put pressure on Thermo Fisher's academic and government research clients (25% of sales). However, the stock's valuation — just 14 times trailing earnings, a 31% discount to its three-year average, discounts those budget worries. All six Quadrix category scores exceed 50, contributing to an Overall rank of 92. Thermo Fisher is a Focus List Buy and a Long-Term Buy.

OUR FOCUS LIST
Date
Added To
Focus
List
Price Change
Since Stocks'
Addition
---- To List ----
Growth, Last
-- 12 Months --
-- Trailing P/E --
Estimated
12-Month
--- Growth ---
Estimated
-- Forward P/E --
Company (Price; Ticker)
Stock
(%)
S&P
500
(%)
EPS
(%)
Sales
(%)
Stock
Industry
Median
EPS
(%)
Sales
(%)
Stock
Industry
Median
S&P 1500 Industry
(No. Of Cos.)
Apple ($541; AAPL)
9/9/10
106
29
60
45
12.3
10.3
12
24
11.0
11.8
Hardware (8)
Alliance Data
($145; ADS)
5/26/11
57
8
63
14
16.9
16.5
8
11
15.6
14.4
Processing (26)
Aflac ($54; AFL)
8/23/12
18
2
69
16
8.2
8.2
2
8
8.0
7.9
Life/Health
Insurance (10)
American Express
($57; AXP)
7/5/12
(4)
4
18
5
13.1
9.0
6
(2)
12.4
8.4
Consumer
Finance (8)
CF Industries
($217; CF)
9/15/11
24
18
50
13
7.8
20.2
(5)
(3)
8.3
17.4
Agricultural
Chemicals (6)
CVS Caremark
($48; CVS)
10/4/12
(3)
(2)
27
16
14.9
14.3
15
6
12.9
12.1
Drug Retail (2)
DirecTV ($50; DTV)
10/9/08
150
57
28
10
12.3
16.8
23
8
10.0
17.1
Cable/
Satellite (5)
Foot Locker
($35; FL)
9/13/12
(7)
(2)
43
8
14.5
15.8
16
7
12.5
13.8
Apparel
Retail (29)
Google
($697; GOOG)
8/9/12
8
2
26
33
18.0
18.0
13
6
15.9
17.6
Software (25)
Macy's ($39; M)
3/29/12
(3)
2
15
4
12.3
14.1
18
5
10.4
12.0
Dept.
Stores (5)
Mylan Laboratories
($28; MYL)
12/6/12
2
1
88
10
11.2
14.6
10
6
10.2
13.4
Drugs (21)
Thermo Fisher
($65; TMO)
11/1/12
5
0
62
11
13.7
16.6
10
3
12.4
16.4
Life
Sciences (15)
UnitedHealth
($55; UNH)
8/23/12
2
2
14
8
10.4
9.7
3
11
10.2
11.2
Managed
Care (12)
Wells Fargo
($33; WFC)
6/14/12
4
7
9
1
10.5
10.8
13
(6)
9.3
10.5
Banks (3)
Focus List Average
26
9
41
14
12.6
13.9
10
6
11.4
13.1

 


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