How come we feel so bad when we've got it so good? Even after a 12% gain in the S&P 500 index this year, uncertainty about the fiscal cliff, increased taxes, and still-high unemployment continue to wear down investors. Year to date, domestic equity funds have seen $110 billion in net outflows.
The new year could bring more of the same if economic uncertainty fails to lift, making the key question for investors not which way the market is headed in 2013, but which stocks are going to go up.
For the third year in a row, Barron's is taking a crack at that question, with our 10 Favorite Stocks for 2013, including blue-chips like Apple (ticker: AAPL), JPMorgan Chase (JPM), Royal Dutch Shell (RDSA), and Novartis (NVS), and smaller companies like Barnes & Noble (BKS) and disk-drive maker Western Digital (WDC), which appear sharply undervalued.
Many of this year's picks have been the subject of bullish articles in Barron'sduring the past year. Apple was featured in a recent cover story, while BlackRock(BLK), Barnes & Noble, and Viacom(VIAB) were profiled in recent months.
We're coming off a good year. Our 10 stocks for 2012 outpaced the market by four percentage points, gaining an average of 17% (see accompanying table). The two big winners were disk-drive maker Seagate Technology (STX) and cable operatorComcast (CMCSA), both up more than 60%. The worst performer was
10 Best Stocks to Invest in right now- Freeport-McMoRan Copper & Gold (FCX), which declined 22%, with nearly all of that drop coming last week amid negative investor reaction to its deal to buy two energy companies for $9 billion.
No matter which way the market goes, well-run companies should be able to deliver higher revenue and profits, even in a tough environment. All of our new favorites could produce 15% to 20% total returns (including dividends) next year. Here's a closer look:
10 Best Stocks to Invest in right now - APPLE is still going strong, even as the company's shares have traded down 23%, to around $540, from a September peak of $705. None of the recent investor concerns -- lower margins, supply constraints, management changes, iPad competition, and the iPhone 5 map fiasco -- are major. It's true that Apple's earnings growth has slowed to a 23% rate from more than 100% a year ago, but that's understandable, given the company's $156 billion in annual sales.
Veteran UBS tech analyst Steve Milunovich recently wrote that it's a "good time" to add to positions in Apple before year end, with the stock trading near its lowest price/earnings ratio in five years after two disappointing quarters. He carries a price target of $780. Apple trades for only 11 times projected profit of $49 a share in its current fiscal year, ending in September 2013. Strip out Apple's huge cash holding of $128 a share, and the effective P/E is just eight.
Even after implementing a dividend -- now providing a 1.9% yield -- and a modest buyback program, Apple should build cash at a rate of $40 billion annually. There's room for a higher dividend and a more aggressive share-repurchase program in 2013. Both could play well with investors.
10 Best Stocks to Invest in right now - BARNES & NOBLE'S bookstore division dominates the field, and the company's Nook e-reader unit is holding its own againstAmazon.com (AMZN) and Apple. These achievements aren't reflected in Barnes & Noble's depressed stock price, which is flat this year at around $14. The stores now control almost two-thirds of the country's retail shelf space for books and are expected to generate more than $300 million of pretax cash flow in the fiscal year ending in April. The stores could be worth the entire current stock price -- Barnes & Noble has an equity value of just $880 million.
The Nook division is losing money, but that reflects a market-share grab, as Barnes & Noble seeks to get its e-readers into the hands of as many consumers as possible and then sell them profitable digital content, including books and magazine subscriptions.Microsoft (MSFT) likes Nook, having invested $300 million this year for a 17.6% stake in the division. That implies that Barnes & Noble's 82.4% of Nook is worth $1.4 billion, or $24 a share. While this calculation likely overstates Nook's value, the division probably is worth a good deal more than its implied price of zero. One fan is media magnate John Malone, whose Liberty Media (LMCA) owns about $200 million of Barnes & Noble convertible preferred stock.
10 Best Stocks to Invest in right now - BLACKROCK received a big vote of confidence this fall when director James Grosfeld purchased nearly 500,000 shares of the investment manager in the open market for $94 million, one of the largest insider purchases in the past decade. Grosfeld, a former CEO of Pulte Homes, wouldn't comment, but he clearly sees value in BlackRock shares, which have lagged behind those of its peers this year.
BlackRock, at $193, is valued at 13 times projected 2013 profit of $15 a share, a slight discount to its rivals; it yields 3.1%. BlackRock is the No. 1 investment manager, overseeing $3.7 trillion in assets. Its iShares is the leading provider of exchange-traded funds, with half of the market.
The three main concerns about BlackRock are that it's too big to grow, that competitive pressure in ETFs from Vanguard will push down fees, and that longtime CEO Larry Fink, viewed as one of his industry's best executives, might leave for the top job at the U.S. Treasury Department. (See Feature "Madame Treasury Secretary?".)
Bulls such as Morgan Stanley analyst Matthew Kelley see double-digit earnings growth next year, driven by iShares. Fink has dismissed talk that he wants to succeed soon-to-retire Treasury Secretary Timothy Geithner. "I'm not leaving this job," Fink said last week. "I will be at BlackRock as long as my board wants me here."
10 Best Stocks to Invest in right now - GENERAL DYNAMICS is best known as a defense contractor, but unlike its peers, it has a valuable nondefense business that isn't reflected in its share price. Gulfstream, a leading maker of corporate jets, produces almost 30% of General Dynamics' profits, and that percentage should rise in the next few years, with deliveries of Gulfstream's new top-of-the-line plane, the G650, which sells for $60 million and can fly nonstop from New York to Tokyo.
10 Best Stocks to Invest in right now - General Dynamics, at around $67, looks inexpensive, trading under 10 times projected 2013 profits of $7.32 a share. Gulfstream is expected to generate more than $2 a share of that. Put a P/E multiple of 14 on that contribution, and the private-jet business could be worth $30 per General Dynamics share. This suggests that the defense business -- including tanks, other armored vehicles, and nuclear submarines -- is valued at just seven times forward earnings. Defense contractors face tighter Pentagon appropriations, but the industry probably will avoid draconian reductions in spending, assuming Congress and the president reach a budget deal.
Barclays analyst Carter Copeland argues that General Dynamics could be the only major defense contractor to show higher operating profits through 2015. Incoming CEO Phebe Novakovic, who takes the top job on Jan. 1, could be a positive catalyst. What could be in store? A higher dividend, more aggressive share buybacks, or even a Gulfstream spinoff. The company has rejected the spinoff idea, but some investors think Novakovic might reconsider. Copeland's price target: $87.
