An Analysis of Barron’s 10 Stocks for 2012
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the weekend Barron’s put out their 10 favorite stocks for 2012. I think it provided some good insight, but left a lot to be desired and I offer a few alternative names you should consider. I think Barron’s favors too many middle-of-the-road 3% dividend stocks with betas very close to 1.0. I believe a barbell strategy with five safe stocks and five slightly more risky stocks offers a better risk/return profile, especially since correlations go to 1.0 in bear markets. Investors should also position for a bit more upside given the generally attractive valuations afforded the market.
Barron’s first stock recommendation is Berkshire Hathaway (NYSE: BRK-A). This is a great call in my opinion. With this name it is all about valuation and you shouldn’t be sidetracked by other news. The stock trades at 1.2x book value, historically a great entry point. During the worst of the global financial crisis the shares traded down to 1.0x book value and have hovered between 1.0x and 1.5x during the recent recovery. In the first half of the decade, shares were trading between 1.5x and 2.0x book value. Berkshire recently committed to buying back stock below 1.1x book value and that should really help put a floor in the stock price.
Barron’s second recommendation is Metlife (NYSE: MET). I would disagree here and instead substitute Hartford Financial Services (NYSE: HIG). Metlife is the safer alternative, but Hartford has been beaten down 35% over the past year and appears to offer much more upside than Metlife. (The entire industry is significantly undervalued and you should have at least one life insurance stock in your portfolio.) Hartford is more exposed to the equity market with their annuity business contributing one-third of total earnings. Valuation is unbelievably cheap with shares trading at 0.35x book value, just above the worst recession levels, and discounting serious business fears. This is the cheapest ratio in the life insurance space and compares to 0.58x for Metlife. Hartford will likely be an outperforming stock in a rising market.
Barron’s choice in the health care sector in Sanofi SA ADR (NYSE: SNY). The French drug maker is one of several cheap pharmaceutical companies and I agree with Barron’s assessment here as well.
Barron’s picks Vodafone ADR (NASDAQ: VOD) as their stable, high-yield stock. The stock yields 5.4% and has a cheaper valuation than U.S. counterparts Verizon (NYSE: VZ) and AT&T (NYSE: T). If you want yield, I highly recommend Apollo Investment Corp (NASDAQ: AINV). AIC is structured as a Business Development Corporation and invests in senior secured, senior unsecured, and subordinated debt of large middle market companies. It is a high yield bond proxy and they have top-notch credit people that invest in quality credits, 60 to be exact, and dictate very favorable terms. They are very good at what they do and I would much rather own this than SPDR Barclays Capital High Yield Bond ETF that yield 8%. Apollo Investment Corp yields twice that at 16%. The company is generating current yields on their investments in the 10% to 12% range. That kind of return in this environment is pretty appealing. The stock yields more because it trades below book value, currently at 0.84x, the lowest ratio since 2009. There is a lot to like with this stock, but an investor must realize that the company marks their investments quarterly- creating significant volatility when credit spreads expand. The company managed through the global financial crisis with very limited non-performing loans, but because of market volatility the stock was whipsawed. If you can whether some volatility, which would be mitigated in a diversified portfolio, then this is a good stock choice for 2012.
Barron’s recommends Royal Dutch Shell plc ADR (NYSE: RDS-A) as their energy choice. It is one of the major integrated oil companies trading with a single-digit price-to-earnings ratio and a dividend yield in excess of the 30-year Treasury. It is a good choice, but I think Apache (NYSE: APA) is the large-cap name to own in the energy space. Apache is one of the largest U.S. exploration and production companies, but still has annual production growth above 10%. They have great diversity among gas/oil and international/domestic production. Upside looks significantly greater than what you would expect in the major integrated oil stocks. They have one of the cheapest valuations according to Citi Research with a Price/NAV (net asset value) of 0.57x compared to the E&P group average of 1.09x. Other more traditional valuation gauges are compelling. The price-to-earnings ratio is 8x compared to a ten-year average of 12x. If you take the average earnings over the last ten years, something that enables you to get a full cycle picture on a cyclical company, you end up with a similar story. The price-to-book sits at 1.34x, again a level only hit during the global financial crisis and after September 11th, 2001. This stock is compelling for long-term investors and should fare well in 2012 on a relative basis.
Tomorrow I will follow-up with the Barron's final five recommendations and my thoughts on each.
I have zero ownership interest in the names mentioned as of publication.
