An Analysis of Barron’s 10 Stocks for 2013- 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.
Barron’s 10 picks for 2013 has been published and now it is time to dive in and see where they are likely to be proven correct and where potential pitfalls lie. Yesterday I highlighted the first five picks and now it is time to analyze the remaining selections. As a reminder, it is important that investors realize a few characteristics behind Barron’s picks. They generally seek out some diversity across sectors and appear to seek a group beta that isn’t too far from the S&P 500. A risky pick is generally followed by a safer blue-chip. I agreed with 3 of their picks in the first posting- Apple, Blackrock, and JPMorgan Chase. So where will the agreements and disagreements fall as we analyze the final five picks?
Barron’s sixth pick is that of Marathon Petroleum (NYSE: MPC). They cite favorable industry dynamics propelling an already surging stock to even higher highs in 2013. The stock has exploded and returned 91% year-to-date and 66% since I penned a bullish thesis in June! I applaud Barron’s for picking a stock with such strong performance in the previous year. Marathon Petroleum remains on my top 10 list for sure and I agree completely with this selection. I don’t own shares only because I favor the newly created master limited partnership, MPLX, even more.
Barron’s makes a second pick in the consumer discretionary space with Viacom. The owner of MTV, Nickelodeon, and Paramount movie studios has lagged peers with a total return of just 3% year-to-date. I agree with Barron’s assessment that the shares are cheap with a price-to-earnings ratio of just 12x against consensus earnings-per-share growth of 13% in each of the next two years. I would also add that the company has been able to grow margins in recent years and generates a good deal of cash. The free cash flow yield of 6.7% indicates upside potential. Barron’s real kicker is that the company is buying back a substantial amount of shares that steadily pushes it toward becoming private. I agree this is a pretty good recommendation, but I think a better play in reference to M&A would be Beam (NYSE: BEAM).
I have been pounding the table on Beam all year and a recent rally has pushed shares to a 21% year-to-date return, more than 4% better than the S&P 500. I would expect even better performance in 2013. The fourth largest spirits company in the world and second largest in the United States offers stable results and consistent mid-single digit organic growth opportunities behind key brands Jim Beam, Maker’s Mark, Suaza, Skinnygirl, and recently acquired Pinnacle Vodka. The real appeal lies with the potential for Diageo or Pernod-Ricard SA, the number one and number two spirit companies in the world, to acquire the company and add to their only missing weapon- Bourbon. The recent move in the stock was based on reports that Diageo and Suntory will make a joint bid for the company. It appears as if this process is heating up and I would expect a good bidding war before a final resolution is reached.
The stock currently trades at what appears to be a rich 16.7x EV/EBITDA; however, the last big spirit deal was the 2008 acquisition of Vin & Spirit, owner of the Absolut brand, for $8.8 billion by Pernod-Ricard. That price equated to 20.8x EV/EBITDA. Early this year, Diageo acquired a stake in India’s largest spirits company, United Spirits Limited, that valued it at 20x EBITDA. Beam is a much more sought after commodity than United Spirits Limited. Putting a 20.8x multiple on Beam is easily plausible given their leading Bourbon position and equates to a takeout price of $83 per share- 35% higher than the current quotation. In case this doesn’t transpire in 2013 and gets pushed out to a later year, investors can realize EBITDA growth of 8-10% from a relatively low risk stock. All told, Beam offers a very favorable risk/reward outlook in 2013.
Barron’s then adds a second technology pick with their recommendation of Western Digital (NASDAQ: WDC). This comes after they made a great call this year with Seagate; a pick I endorsed with strong conviction. Seagate has returned 90% year-to-date versus ONLY 37% for Western Digital. Despite lagging Seagate, it was still not a bad year for WDC shareholders. The shares are super cheap with a price-to-earnings ratio of 5x and a free cash flow yield at a stunning 30%. Yes, the company issued awful guidance following quarterly results due to weak PC demand in both the consumer and enterprise segments and faces consistent deflationary pricing environment. Still, I don’t see an imminent decline in the business. Growth will be muted in the coming years, but the valuation more than reflects this in my opinion. The company can make smart capital allocation decisions with dividends and buybacks that can support shares. And I agree with Barron’s that a leveraged buyout is plausible with an enterprise value of just $8 billion. I agree with the selection, but would caution investors that there might be a great deal of volatility in the name as the year progresses.
Barron’s makes Royal Dutch Shell their second energy selection. This is a carryover pick from 2012 where shares have declined modestly year-to-date. The valuation case is pretty easy with a price-to-earnings ratio of 8x and fat dividend yield of almost 5%. Secular trends are also favorable in the LNG space where RDS is a major player. I think this pick has merit, especially relative to other asset classes such as fixed income. I think the stock market could see strong gains in 2013 and in such a scenario the energy majors can often times be “stuck in the mud” as equity indices rise. My recommendation in the commodity complex would be to stick with the one segment that remains in a clear secular bull market- GOLD. The SPDR Gold Trust ETF (NYSEMKT: GLD) is the most liquid option. Gold has been in a secular bull market for more than a decade and this looks poised to continue for one key reason- negative real interest rates. Since 1968, gold prices have averaged a 21% annual gain when real interest rates are negative. This year has thus far only produced a 4% gain under such a scenario. I think it sets the base for a strong upward move in 2013.
Barron’s last pick is Novartis AG (NYSE: NVS) and their sole health care pick. This is a great pick from my perspective. It is a core holding that more risk-averse accounts can see good upside without taking a lot of risk. The company is facing their main patent cliff problem, Diovan, right now. This is good because as the year progresses investors will start to look at the forward earnings growth outlook, which will likely be in the 8-10% range. They will be one of the fastest growing pharmaceuticals companies as we approach 2014 and beyond. This should help propel shares higher to go along with a 3.9% dividend yield. I agreed with Barron’s recommendation on Sanofi a year ago and I will do the same with Novartis here.
In summation, I again agreed on three of Barron’s recommendations- Novartis, Western Digital, and Marathon Petroleum. This goes along with Apple, Blackrock, and JPMorgan Chase from the first half. In all, six picks versus three a year ago. I think Barron’s has put together a solid list this time around. They doubled up picks in the Energy, Financial, Technology, and Consumer Discretionary space which should position them to outperform in a rising market. Consumer Staples, Materials, Telecommunications, and Utilities were all omitted, and correctly so in my opinion.
market8 owns shares in MPLX. The Motley Fool owns shares of Western Digital. Motley Fool newsletter services recommend Beam. 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!