Top picks 2013: IBM, Wells Fargo

For the coming year, stick with these large cap, blue chip names in tech and banking.

By TheStockAdvisors Jan 8, 2013 11:58AM
Money and computer Tom Grill CorbisBy Peter Hughes, Steven Check's The Blue Chip Investor

International Business Machines (IBM), our aggressive pick for the coming year, is one of the world's most dominant technology companies, with annual revenues of $105 billion and net income of $16 billion.

Wells Fargo & Company (WFC), our conservative pick for 2013, is the fourth-largest bank in the U.S., with over $1.35 trillion in assets. The bank now has a deposit base of $895 billion, important since deposits are banks' lowest-cost source of funds.

International Business Machines
Although the company achieved prominence as a computer maker, over the past two decades it has transformed itself into a software-and-consulting powerhouse. IBM operates in 170 countries and derives 65% of its sales from outside the U.S.

The company spends more than $6 billion annually on research and development and has been granted more U.S. patents than any other company for 19 consecutive years. IBM's financial metrics are excellent, including a net profit margin of 16% and a return on capital (ROC) of 35%.

The company has consistently increased its margins over the past decade, both by increasing efficiency and by moving into higher-margin markets. IBM returns most of its substantial cash flow to shareholders.

Since 2009, 71% of reported net income has been used to repurchase stock. The stock also has a dividend yield of 1.8%.

At $192, IBM trades at a price-to-earnings ratio of 13 and shares have a free cash flow yield of almost 8%. The company has averaged earnings growth of 17% over the past five years and management has laid out a credible plan to increase earnings per share to $20 by 2015.

Wells Fargo & Company
Wells Fargo has long been a risk-averse lender, and the financial crisis proved the virtue of that conservatism. As rivals have collapsed, the bank's mortgage-origination market share has skyrocketed to 33%.

WFC's efficiency ratio is 57%, much better than any national peer. Unlike many competitors, WFC has limited foreign loans (just 5% of its portfolio), so the European debt crisis has little direct impact on it.

Wells Fargo is known for a strong management team and industry-beating financial metrics.

At $34, WFC trades at 10 times earnings and 1.25 times book value, giving the stock room for price appreciation. Furthermore, the dividend yield is 2.6% and is likely to increase substantially as credit quality improves and capital requirements are met.

Finally, regulators have given Wells Fargo the green light to repurchase stock, which (at current prices) should greatly increase per share intrinsic value.

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