10 Stocks for 2013 - #8 and #9

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

At Fastball Financial, we've compiled a portfolio of 10 Stocks great for 2013 that provide:

  1. Diversification across industries and market caps
  2. Growth in some of the hottest themes and industries
  3. Sufficient stability and dividends to offset potential market losses

Thus far, we've named these seven stocks to the portfolio:

  • Intuitive Surgical
  • Apple
  • F5 Networks
  • Starbucks
  • Chipotle
  • Lululemon
  • Kinder Morgan Energy

Let's go back to the consumer and look at online retail for our 8th pick, eBay (NASDAQ: EBAY).  eBay had quite a run in 2012, as evidenced by the chart below.  eBay's stock rise caught up with its 2011 revenue growth.  Despite gross margins shrinking by a couple of basis points, the business remains strong with excellent prospects for continued revenue growth. 

<img src="http://media.ycharts.com/charts/282ef7be71989912206da8c79c9890c4.png" />

eBay is generating growth in both its merchandising and payments segments.  Its merchandising net transaction revenue rose from $1.3 billion in Q4 2010 to $1.7 billion in Q4 2012.  Its payment segments net transaction revenue rose from $0.9 billion in Q4 2010 to $1.4 billion in Q4 2012.  Many companies would love to have that growth.

eBay has a great combination of organic growth from its home-grown merchandising business and new growth from its acquired businesses in the payment segment, particularly PayPal.  The eBay site itself has been counted out many times before as something whose growth is finished or whose customers are unhappy with its changes / policies.  We've seen eBay prove those doubters wrong plenty of times before.  The eBay site remains strong as a standard for online retail.

Paypal is now providing eBay with an additional and significant revenue growth source.  It's a great help to eBay because it provides an easy and convenient way to complete online payment transactions.  Now, PayPal is venturing into transactions that are not the traditional online payment transactions.  They're focused heavily on growing their presence right alongside the growth in cell phones.  Not only that, but they reached an agreement with Discover last year, whereby certain stores will accept PayPal payments using Discover's network.  All of this is focused on growing PayPal as the standard in payment transactions.

The future of eBay is bright with both of it's main segments going strong.  However, like most any stock right now, you should probably wait for a pullback to buy.

Alternate: Amazon (AMZN)

While we're on the subject of online standards, we can't leave out Amazon (NASDAQ: AMZN).  This is a great alternate to the eBay selection to our 10 stock portfolio.  It's a riskier stock, but could also provide huge returns if it can execute on its long-term strategy. 

<img src="http://media.ycharts.com/charts/bc4efa77fcc4e4e89d800c4e3683dc38.png" />
 

Amazon's revenue has clearly been growing tremendously, but what the doubters will point to is the lack of profit growth.  Amazon has intentionally taken their profit potential and thrown it into future growth, with the intent to dominate all retail.   The best example of that currently is their investment of distribution centers that will provide faster shipments by having inventory all over the world.  The intent is obvious: provide same-day shipping, or as close to that as possible, for all customers.  People wouldn't have to leave their homes, but could still get their product in a day or two.

Time will tell whether or not all of their investments will pay off, but if you're patient and not afraid to take some risk Amazon could provide excellent returns for you.

#9 - Bank of the Ozarks

Now we add a name that is familiar to our Fastball Financial readers for our #9 selection.  We bring in the financial sector with a favorite bank stock: Bank of the Ozarks (NASDAQ: OZRK).  Why do we like Bank of the Ozarks so much?  Two reasons: cheap growth and net interest margin.

Historically, Bank of the Ozarks has focused on organic growth a steady pace, preferring to let good operations drive much of the consistent growth.  Now, because of the financial crisis, Bank of the Ozarks has the opportunity to acquire failed banks at relatively little cost.  When banks fail to remain in good standing, the FDIC (Federal Deposit Insurance Corporation) takes action.  The failing bank is closed and its assets are given to a bank whose balance sheet and operations are strong.  What’s more, the acquiring bank not only gets the assets of the failed banks, but the FDIC will also share in much of the losses that the failed bank produces.  The exact details of the FDIC loss share can be found in Bank of the Ozarks' 10-K filing, but in very simple terms the FDIC will take roughly 80% of any losses incurred on assets transferred to Bank of the Ozarks.  That provides the company with great low-risk growth.

If the growth itself isn’t enough for you, how about a projected 5.8% net interest margin for Q4 2012? That's down from 6% in Q4 2011, but it's still an outstanding margin.   Bank of the Ozarks management itself likes to celebrate this fact, and they should.  Net interest margin is the difference between what yield the bank earns on its assets and the interest that the bank pays out on deposits and other funding sources.  That is a sign of excellent management of its assets.   

<img src="http://media.ycharts.com/charts/a9f2eaa4349d9e1eab1b99844186115a.png" />

Bank of the Ozarks is a small company that most investors don't pay attention to.  However, it provides a great combinations of cheap growth with solid operations that all investors should love.

Alternate: Mastercard

If you don't want a traditional bank, but still want financial exposure, I offer Mastercard (NYSE: MA) as the best alternative.  Mastercard is a well-known, world-wide payment solutions and transaction processing company.  I like Mastercard for its revenue growth, consistency and return-on-equity. 

As you can see below, Mastercard has shown consistent revenue growth over the past several years as the volume of transaction processing and use of their cards in general has increased around the world.  This has led to steady growth and earnings year after year.

<img src="http://media.ycharts.com/charts/39214d7667eac9ea665a6c6c1119eaab.png" />

What else shows their strength of earnings?  Return on Equity (ROE).  ROE calculates the profit that the company earned and  compared to its Shareholder’s Equity.  This metric is important to monitor because some companies can show good earnings growth, but if all they are doing is sitting on that earnings growth, the returns on their accumulated equity will start to decrease.  As you can see in the chart above, Mastercard is generating a 34.6% ROE.  That is outstanding!

Mastercard provides a great long-term buy and should hold-up very well in 2013.

Bottom Line

All four of these companys (eBay, Amazon, Bank of the Ozarks, and Mastercard) provide lots of growth potential.  Which one you select for your portfolio is a matter of personal preference and your risk profile.  If you want lower risk, eBay, Bank of the Ozarks, and Mastercard are for you.  If you want more risk with a big reward potential, then go with Amazon.

Thanks for reading!  Be on the lookout for our 10th and final stock for 2013.


Zaegs owns shares in Bank of the Ozarks. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com, eBay, and MasterCard. 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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