12/27/2011 9:45 PM ET|
12 stock picks for '12 from top pros
You may not know their names, but some investing newsletter writers produce returns that many investors would envy. Here are the outlooks -- and favorite picks -- of 6 of the best.
To help you get a leg up on your investing in 2012, I'd like to introduce you to a few Rodney Dangerfields of the stock market.
Compared with celebrity money managers like Warren Buffett or George Soros, stock investment newsletter writers get no respect. Yet they regularly produce results that are as good as -- or better than -- the stars.
Take John Buckingham, who edits a stock letter called The Prudent Speculator. Compared with Buffett, he's a nobody. But his stock picking has helped produce a 14.6% annualized return over the past 13 years. That's far better than the 8% to 10% average annual return experts believe is the best that you can do in stocks in the long run.
I'd like to introduce you to a few of these unsung stock sages, to help you boost your portfolio returns in 2012. To find the best of the best, as I do at the end of every year, I turned to the Hulbert Financial Digest, a stock-letter tip sheet that tirelessly tracks the picks of these largely unknown market experts and ranks their performance.
Below, you'll find the cream of the crop, according to Hulbert. The six stock letters featured here have produced annualized returns of 9.3% or better over the past 13 years. That's pretty darn good, because that time frame covers at least three bear markets. Anyone can do well for a while in a bull market. But to keep those gains and produce consistently good returns through both bull and bear market cycles takes talent. And deserves respect.
So sit back, take a moment and consider what these market Dangerfields have to say. Each editor offers a big-picture market outlook when available, and two favored stock picks. The listed annualized returns are from the end of August 1998, through the end of November 2011.
The Prudent Speculator
Annualized return: 14.6%
Investing style: Seeks cheap, out-of-favor companies that have reasonable prospects and financial strength.
Market outlook: John Buckingham, the editor of the Prudent Speculator, expects 12% gains for the Standard & Poor's 500 Index ($INX) in 2012, albeit with continued volatility. He cites historically strong market performance in the fourth year of a presidential cycle. And he thinks stocks look cheap in spite of decent strength in the economy and strong corporate earnings. "The market has priced in a tremendous amount of bad news," he says.
Two favorite stocks: A favorite pick for 2012 is ManpowerGroup (MAN), the third-largest staffing company in the world. The stock is down about 50% from April highs to about $36 recently, a typical trajectory of a stock before a value investor like Buckingham buys it. Down here, it looks pretty darn cheap, trading just above book value, basically the value of its assets. Manpower will do well next year if hiring continues to pick up. It has a solid temporary staffing division which should see solid demand as skittish companies maintain flexibility by hiring temp workers, believes Buckingham. The company pays a 2.3% dividend yield.
Next, he likes Ship Finance International (SFL), a shipping company whose shares are down more than 50% this year to trade recently at $9.50. Shipping companies borrow lots of money to buy fleets. So when a slowdown and fears of recession hit shipping rates, these stocks get hammered. Likewise, these stocks can roar back when sentiment improves. The key is to invest in the survivors, and Ship Finance will be one, says Buckingham. Investors have been worried about the fate of Frontline (FRO), an oil tanker company that charters lots of boats from Ship Finance. But Frontline is restructuring, and it will survive -- which means the fears about Ship Finance are overblown, believes Buckingham, so its stock is unlikely to sink to the bottom of the sea.
Investor Advisory Service
Annualized return: 11.4%
Investing style: Looks for companies with strong revenue and earnings growth, stable profit margins and reasonable valuations.
Market outlook: Daniel Boyle of Investor Advisory Service is bullish on stocks for 2012, citing recent signs of strength in the economy, such as improvements in the auto sector.
Two favorite stocks: One is Coach (COH), which sells luxury goods. In addition to Coach's 5% store growth in North America, Boyle also likes the solid and loyal demand for the brand's products in China, where consumers adore Coach handbags so much they pay 60% more than U.S. consumers do. "The Chinese absolutely love Coach," says Boyle. "They can't keep the products on the shelves." There's plenty of room for growth in China, where there are more than 100 cities with populations of more than 1 million. Coach is also expanding in Europe. And back home in the U.S. it's growing by selling more leather goods to men. Solid cash flow supports a 1.6% yield and share buybacks.
Another favorite pick for 2012 is FactSet Research Systems (FDS), which provides financial data, news and analytical tools to professional money managers. FactSet Research has a loyal customer base, which means predictable, recurring revenue. It also means the company can regularly raise prices. "Once you get hooked on the system, you don't really want to learn another one. It's pretty sticky," says Boyle. FactSet has been growing by purchasing data suppliers and introducing new products. Boyle also likes the prospects for growth in emerging markets, where money managers need the right tools to manage all that emerging wealth.
Annualized return: 11.2%
Investing style: Looks for turnaround situations, or beaten-down, deep value plays with decent prospects and financial strength.
Market outlook: Turnaround Letter editor George Putnam is bullish on stocks for 2012. "I think valuations look very cheap," he says. "I'm optimistic that the Europeans will get their act together. I think the U.S. economy is probably stronger than people think."
Two favorite stocks: A favorite 2012 pick is MetroPCS Communications (PCS), the wireless phone company. The stock got crushed last summer when it disappointed on earnings. Part of the challenge was that MetroPCS had less competitive smartphone offerings, a problem the company has been fixing. MetroPCS is also strong in prepaid phones, a robust segment of the wireless sector. "We believe the market has significantly overreacted in pummeling MetroPCS stock," says Putnam.
Another favorite is OfficeMax (OMX), the office supply store. The stock has also gotten crushed this year, partly on fears about a double-dip recession. It has fallen to around $4.50 from above $18. Down here it looks dirt cheap compared with competitors. So any success in growth initiatives -- like expanding overseas, improving online sales or developing document-management services for business -- could move this stock up significantly, believes Putnam. One problem is that OfficeMax appears to have a lot of debt. But this might be faking out prospective buyers of this stock, because much of the debt is "non-recourse," which means the company isn't ultimately responsible for paying it back. So it's not likely to tilt OfficeMax into bankruptcy.
Annualized return: 11%
Investing style: Looks for out-of-favor, deep value and contrarian plays.
Market outlook: Sound Advice doesn't offer an overall market outlook, which is not uncommon for value investors.
Two favorite stocks: The newsletter is very bullish on Transocean (RIG), a global oil and gas well-drilling company that's extremely out of favor. Transocean's stock has been cut in half since April, trading recently at $40. The stock has been hit by a host of concerns, including fears about recession, concerns that it overpaid for an acquisition and worries about how long it is taking to upgrade its rigs. The company also faces potential risks from a lawsuit in Brazil related to an offshore leak at a well Transocean was involved in.
But fears about the lawsuit are overblown, because Chevron (CVX), the company developing the well, has said it will cover costs related to the problem, says Steve Horwitz, the managing editor of Sound Advice. And worries about the other problems are exaggerated, too, he believes. His evidence: The book value of Transocean's equipment is $60 a share, yet the stock trades at $40. "At this point I can't see this stock not having a very strong recovery," says Horwitz.
Another favorite of Sound Advice is Paychex (PAYX), a payroll-processing company. Paychex typically helps smaller companies, which often grow rapidly as the economy expands. So if economic growth picks up in 2012, as I expect, this company will benefit a lot. And if growth brings higher interest rates, which is often the case, that will help Paychex as well. It temporarily holds large amounts of cash for clients before sending out paychecks. So it can make more money off this cash if interest rates go up. The company also looks cheap, and it has a 4.2% dividend yield.
The Oberweis Report
Annualized return: 10.2%
Investing style: Seeks small and lightly followed companies that have solid growth and reasonable valuations.
Market outlook: Jim Oberweis, of the Oberweis Report, expects stocks will do well in 2012 as fears and risk aversion among investors recede. "Valuations are very low, the second-lowest in my career," he says. The lowest was during the panic of 2008-09.
Two favorite stocks: One of his favorite stocks for 2012 is Acacia Research (ACTG), which partners with patent owners and then licenses patents to companies or files lawsuits to challenge unauthorized use of patents. The company is involved in a lot of lawsuits related to technology inside smartphones, and Oberweis expects a "significant settlement in 2012 with at least one company" in this area.
Oberweis also likes Kenexa (KNXA), which sells software that helps companies recruit and retain employees. Oberweis expects rapid sales growth at this company to continue in 2012, and drive this stock higher.
The Buyback Letter
Annualized return: 9.3%
Investing style: Favors companies that look cheap and are repurchasing their own stock in large amounts, a sign management sees value in the stock and expects better times ahead.
Market outlook: David Fried, of the Buyback Letter, doesn't offer overall market forecasts.
Two favorite stocks: Fried particularly likes two stocks for 2012, based on cheap valuations and recent stock buybacks, among other factors. First is O'Reilly Automotive (ORLY), which runs auto parts stores. The retail chain deployed its prodigious cash flow to buy back 8% of its stock over the past 12 months, which Fried takes as a bullish sign. O'Reilly Automotive is one of three dominant players in the space, which gives it clout and staying power, believes Fried.
Another favorite is SkyWest (SKYW) , a regional airline that looks dirt cheap because it trades for less than its cash levels if you ignore the debt, which is backed by assets like planes. This stock trades for half of its book value, which is commonly used as a measure of a company's net assets. Here's another sign that the stock is cheap: recent stock buybacks. SkyWest rarely buys back its own stock. But the last time it did so, the stock was a great performer. So Fried takes SkyWest's repurchase of about 6% of its own stock over the past six months as a sign that this airline stock could take off and help lift your portfolio into the skies in 2012.
At the time of publication, Michael Brush owned shares of the Al Frank Fund(VALUX), which is managed by Buckingham, editor of The Prudent Speculator.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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