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Dear Santa: A "Santa Portfolio" for You

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dear Santa, 

I know your gig is giving, but surely you must also like to receive? As a thanks for my childhood gifts, I’ve constructed a ‘Santa Portfolio’ just for you.

1. Apple (NASDAQ: AAPL)

I chose Apple because, like you, it is peerless in delighting. While children may have visions of sugarplums dancing through their heads this holiday, there are good reasons you should have visions of adding Apple to your portfolio.  

Apple is on sale this holiday, Santa. It’s priced at a 12.4 trailing P/E, a 9.5 forward P/E, and a 0.54 5-year PEG. We’re talking about a company that has fat profit margins – 26.7% over the past year – while also growing at a rate hardly typical of mature companies. Revenue and earnings increased 27% and 24%, respectively, last quarter.

Yes, Santa, a proven “delighter” with a pristine balance sheet (no debt, sleigh loads of cash) and earnings growing at 24% (and that was a “bad” quarter) priced at a 12.4 P/E.

Google's priced at a 21.7 trailing P/E and a 1.3 5-year PEG, and Microsoft at a 14.5 trailing P/E and a 1.0 5-year PEG.

The issue? Expectations, Santa.

I’m sure you’ve had middle-class kids send you a list containing, say, a child-sized Mercedes costing thousands of dollars. Then one of them wakes to a shiny new bike you so generously leave, and is disappointed. Yes, that kid could use a bit of coal, but you get the point. The gift was great; it was the expectations that were ‘off.’ The same is true for Apple’s results; analysts’ expectations were off last quarter.

As for new product expectations, I’d wish you’d put coal in the stockings of those saying Apple’s pace of introducing “totally new” products is slowing, because that is not true. iPod: early 2000s; iPhone: 2007; iPad: 2010. Since there are three years between 2007 and 2010, this argument should hold no water until 2013 is over.

The catalysts for future growth? China (here's my 'Just How Important is Apple's Chinese Market?') and (I predict) some disruption of TV as we know it.

How's your coal supply? One more group that could use some slipped into their stockings: the scare tactics headline writers proclaiming that Apple dead. If you read the headlines, you'd think Apple's stock price was in the dumpster. Yes, it had a "pullback" -- all stocks do -- but this 1-year stock price chart says it all:  

<img src="http://media.ycharts.com/charts/e66320c921a6fcbd785a863a4ab75835.png" />

AAPL data by YCharts

2. Novo Nordisk (NYSE: NVO), or another “diabetes stock”

A diabetes stock is a ‘Santa stock’ because diabetes is highly correlated with obesity -- and, just as you are...umm..."jolly," so is an ever-increasing percentage of the world’s population. (In the U.S., 1/3 of adults are obese, 2/3 are overweight.) While you, immortal Santa, are not subject to diabetes, the rest of us mere mortals are at risk of the disease.

Diabetes affected 366 million people worldwide in 2011, and the diabetes rate is exploding. By 2050, it’s estimated that up to 1 in 3 adults in the U.S. could have diabetes. That is a staggering – and tragic – projection. Given these stats, a diabetes stock belongs in your portfolio.

I’ve chosen Novo Nordisk to highlight here for a couple reasons, other than just its great numbers.

First, Novo Nordisk, which has a $73 billion market cap, is the world's biggest maker of drugs for diabetes. Roughly 75% of its revenue comes from its diabetes care unit, while the remaining 25% comes from biopharmaceuticals (haemostasis management, growth hormone therapy, and hormone replacement therapy).

Second, it is a Danish company, and since you are an international figure, it seems appropriate to construct a global portfolio for you. Given your annual jaunt, you surely know it's a big world. However, investors need to keep this in mind to avoid "home country bias," which results in being too heavily invested in one's own country.

Even when investors are open to investing in foreign-based companies, it's likely that tiny Denmark doesn't come to mind as a place to fish for a powerhouse. But those Danes have kicked some bigger-country company...umm...posteriors:  

<img src="http://media.ycharts.com/charts/dc3800a65c13c13dcac5bb1809d83046.png" />

NVO data by YCharts

(Eli Lilly, Pfizer and Bristol-Myers are U.S.-based; Sanofi is based in France.)

While the majority of Big Pharmas and Biopharmas have experienced decreases in revenue and earnings, Novo Nordisk has bucked that trend. Additionally, profit margins have been increasing (net income has grown faster than revenue):

<img src="http://media.ycharts.com/charts/4c9a72f023896ea5046751b924bd18c3.png" />

NVO Revenue TTM data by YCharts

The company's strong numbers include a 27% profit margin, and 57% ROE -- and that's without leverage, as the company has close to no debt.

While P/E valuations might seem a bit high (25 trailing, 20 forward), the stock is reasonably priced on a 5-year PEG basis (1.4), considering the class of business and low volatility (0.55 beta).

3. Polaris Industries (NYSE: PII)

Polaris is a ‘Santa stock’ because it manufactures snowmobiles – and there is plenty of snow at your home, the North Pole.

Though Polaris started out as a snowmobile manufacturer, it's expanded considerably. It also makes all-terrain vehicles, motorcycles, and electric vehicles. I'd recommend you read my article, "Which Recreational Vehicle Maker is Best Positioned to Win a Stock Price Race?" for a more thorough analysis. Here's a quick look at the 5-year stock price performance, and revenue and earnings growth. 

<img src="http://media.ycharts.com/charts/2e44b4950630c0d18866a06e8b7e3ab1.png" />

PII data by YCharts; recessionary period in gray 

Two notables:

1. Stock price only declined in line with the market during the Great Recession (impressive for this class of business).

2. Profit margins have been expanding (earnings increasing faster than revenue).

4. Hershey Company (NYSE: HSY)

This is a ‘Santa stock' because I'm going to start a drive for dark chocolate to replace cookies in the 'cookies and milk' treats that greet you upon your descents down chimneys around the globe. Dark chocolate is good for generating endorphins, which will help you carry your heavy sacks.  

Hershey is the only game in town for a pure play on a chocolate/confectionery retailer that trades on a major U.S. stock exchange. You may want to check out my article, 2 Key Tailwinds = Chocolate Stocks Long-term Winners, to learn more. Hershey needs to darken up its dark chocolate offerings, though, so it doesn't lose sales to others in this growing segment. 

Hershey has expanded profit margins (earnings increasing faster than revenue) nicely over the past 5 years. 

<img src="http://media.ycharts.com/charts/8f2c51b79bb1811abaadffa350a4229d.png" />

HSY data by YCharts

Well, that's it for me Santa!  Here's hoping you have a great 2012 run!

 

 


BAMcKenna has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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