An Analysis of Barron’s 10 Stocks for 2012- Part II
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yesterday I highlighted five of Barron’s ten stocks for 2012 and whether you should follow their advice or swap into a different stock. Today I will go over their last five recommendations.
Freeport-McMoRan Copper and Gold (NYSE: FCX) made their recommendation list. Investors should avoid this sector in 2012. Inflation is unlikely next year, especially with Europe in a recession and continued austerity to ensure no growth. Copper techincals are not good with support lines being taken out. I am not a technical analysis expert, but I trust certain sources and their impact is very significant in the short run. While technical indicators are subject to change, they must be respected within the commodity complex where prices can collapse in short order. Freeport generates 80% of sales from copper and 20% from gold. Gold is also one of the most over-crowded trades out there. When these assets break down, they fall very hard. Gold is not an Armageddon hedge; it will fall in a global bear market just like in 2008. If a bear market hits and hedge funds face strains, they sell their winners first and gold would fall. Copper would get hit even harder than gold in a bear market. Freeport has more appeal in the lower $20’s than upper $30’s.
I would opt for Starwood Property Trust (NYSE: STWD), which is a commercial mortgage REIT. Banks are pulling away from their commercial lending and that leaves a giant void for financing to commercial property owners. This is where Starwood Property Trust steps in and they can do it on favorable terms with limited competition. The stock yield 9.45%, it is run by one of the greatest business minds- Berry Sternlicht, and trades at book value. This is the turtle in the race that should make for a good core holding versus the riskier, crowed trade in Freeport-McMoRan.
Barron’s technology choice is Seagate Technology (NASDAQ: STX). I love this recommendation. Seagate Technologies and Western Digital (NASDAQ: WDC) basically operate a duopoly in the global disk-drive business and this industry has long-term appear from a demand perspective. Pricing concerns should now be mitigated with limited competition. Either one of these stocks is a good choice, but beware that volatility will be pervasive!
Barron’s gives praise to Comcast (NASDAQ: CMCSA) and cites a favorable competitive position and solid free cash flow. Free cash flow being defined as operating cash flow less capital expenditures was just north of $6.2 billion in 2010. Comparing that against an enterprise value of $118 billion nets out to a FCF yield of 5%, which is pretty good. The price-to-earnings ratio is 16x and not that inspiring, but that can be adversely affected by large amounts of depreciation. I think the industry is in a secular downtrend with an outlook worse than analyst’s expectations, thus the stock and valuation will remain depressed.
My recommendation for a stable cash company would be General Dynamics (NYSE: GD), which is getting negative press related to politics, but has solid long-term appeal. General Dynamics is a key military contractor and operates in segments such as tanks, munitions, submarines, military communications, and aerospace via its Gulfstream brand. I am not worried about the political hammer on defense, albeit a negative at the margin. The growth rate will remain positive even if the slope flattens out on budget cutbacks. With this company you get very stable cash flows, but my favorite part of the company is the upside the Gulfstream brand provides. Time is a critical resource for the super wealthy and business jets should have strong global demand going forward as the rising elite seek to maximize the one resource they can’t buy more of. The valuation story is compelling with a FCF yield of 10%, twice the level of Comcast and a price-to-earnings ratio of 9x.
Procter & Gamble (NYSE: PG) gets the nod from Barron’s, but I just don’t see it. Shares trade at 16x price-to-earnings, which is just on par with the three-year average. The FCF yield is only ok at 4.75%. Sure there is a dividend of 3% and the company is buying back stock, but organic growth continues to hover in the low-single digits. Share buybacks are nice, but you shouldn’t expect multiple expansion with that being the main driver of EPS growth as the market usually attaches a low P/E to such sources of growth. I think there are better industries to invest in with most consumer products and food companies trading at a full valuation and facing limited growth opportunities.
This would be a good spot for you as smart, independent thinker to insert your best non-U.S. equity idea. Maybe you like emerging markets. If so, I recommend iShares MSCI Taiwan Index ETF (NYSEMKT: EWT) or iShares MSCI Hong Kong Index ETF (NYSEMKT: EWH) as good entry points into countries with long-term appeal. The reason I cite these two countries is demographics, an under-utilized tool that when combined with valuation is the main driver of long-term returns for a given market. According to Ned Davis Research, stocks generally outperform when the middle aged to young people ratio is high. This is because as working individuals near retirement age, they are more inclined to save and put additional income into asset markets and drive up prices. Hong Kong is one of the highest emerging market countries right now with a ratio of 1.34. Taiwan is expected to have one of the highest growth rates in this ratio between 2011 and 2020 and should help put a tailwind into that country’s equity market as well.
Barron’s last recommendation is Daimler AG (NASDAQOTH:DDAIF.PK). Here they cite the luxury goods market as having positive appeal. I agree with that claim and think luxury good stocks should fare well. They note a cheap valuation and a 6% dividend yield which you can’t argue with. Daimler may pan out, but I think Lear (NYSE: LEA) is the stock to own for automotive exposure. Lear has come out of bankruptcy with a strong balance sheet and a positive net cash position. They are in a favorable duopoly position in electrical power management systems and seating systems- both core automotive applications. Competitive pricing pressure will be mitigated, although they will have some commodity cost fluctuations over a business cycle. Annualized seasonally adjusted U.S. sales are running in the 13 million range compared to $16 million in 2007. Despite the new normal and thanks to bankruptcy eliminating much of the pension debt, Lear is doing well. They earned $4.42 per share in fiscal 2010 and that is expected top $5.00 in 2011. The company is quite profitable off this lower base, something that can’t be said for the housing industry or finance industry. Valuation is compelling with a single-digit price-to-earnings ratio and a FCF yield of 13.7%. Lear has been overlooked, but is poised to be a winner heading into 2012.
I have no ownership in the stock mentioned at the time of publication.
