Buffett's Favorite Stocks For 2011

Earnings of Dow stocks Procter & Gamble, Kraft and Johnson & Johnson will be scoured the most by billionaire investor Warren Buffett, whose Berkshire Hathaway is among the top four shareholders of each.

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Those three companies, and the other Dow consumer-goods stock McDonald's, will start reporting earnings Jan. 24.

Procter & Gamble, Kraft, Johnson & Johnson and McDonald's had virtually flat earnings last year, according to analysts' estimates.

Nevertheless, Buffett has made a fortune by buying large and steady companies. (He also owns Coca-Cola [KO 62.96 --- UNCH (0) ] .) As the economy rebounds this year, not only growth stocks such as Apple [AAPL 341.40 --- UNCH (0) ] and Netflix [NFLX 186.74 --- UNCH (0) ] may outpace the S&P 500 Index, but also laggards including Dow Jones Industrial Average top stocks for 2011.

The 2010 share-price returns of the four Dow consumer stocks are led by McDonald's, at 27%, and bracketed by Johnson & Johnson, with a decline of 0.7%. Dow stocks gained 11% last year, while the S&P 500 rose 15%. The Dow industrials have advanced a mere 7% over the past decade, trailing small- and mid-cap stocks.

But large-cap stocks are considered undervalued, based on current price-to-earnings ratios versus historical norms, and are overdue for a breakout, according to fund managers including Bruce Berkowitz of the Fairholme Fund and Donald Yacktman of the Yacktman Fund. So these companies could soon shine, especially as inflation quickens when they can pass on rising costs to customers.

Among the challenges faced by food-industry firms McDonald's and Kraft [KFT 31.18 --- UNCH (0) ] is rising agricultural commodity prices, which put pressure on profits in the fourth quarter. They are expected to bump up prices because of that.

Another common issue is the push for a bigger geographic footprint. Johnson & Johnson and Procter & Gamble are long-standing international forces. Kraft bought the U.K.'s Cadbury, a candy maker, about a year ago to boost its international business. And McDonald's is pinning much of its growth prospects on China, where business is booming.

Buffett's investing philosophy includes buying high-dividend-paying stocks with strong fundamentals and some sort of "moat" such as a strong brand name, market dominance and industry leadership.

And each of those companies has those characteristics.

Buffett is also known as a buy-and-hold investor. As evidence of that, the three companies were also among the top seven holdings of Berkshire Hathaway at the end of 2008.

What follows are the fourth-quarter earnings expectations of four companies in the Dow's consumer-products sector, arranged by reporting dates, starting with McDonald's.

Buffett's Favorite Stocks For 2011: McDonald's [MCD 75.48 --- UNCH (0) ] , the fast-food giant, reports earnings Jan. 24. Wall Street analysts surveyed by Thomson Reuters expect earnings of $1.16 per share on revenue of $6.2 billion. For the same period a year earlier, profit was $1.11 per share on $6 billion in revenue.

Business from China was a big contributor to fourth-quarter earnings, and the earnings outlook from analysts increased 3.5% over the period because of that. China is expected to be the growth driver in coming years, and the company plans to boost capital spending there by 40% this year.

The consensus analysts' estimate from Thomson Reuters calls for 2010 earnings of $4.60 per share, rising to $5.02 in 2011. It said analysts' consensus price target over the next 12 months is $85.40, a 15% premium to its current price.

Shares of McDonald’s gained 27% in 2010 versus the 35% increase of the restaurant sector tracked by Morningstar. Its shares are down 2% this year. They have a dividend yield of 3.3%.

At the end of the third quarter, Capital World Investors was the largest shareholder, with a 6% stake, despite selling 7 million shares in the period. Fidelity was the second-largest shareholder, and bought 3 million shares to grow its stake to 4% in the third quarter.

Analysts have eight "strong buy" ratings, seven "buy" ratings, 10 "holds," and one "reduce" on its shares, according to Thomson Reuters.

Buffett's Favorite Stocks For 2011:Johnson & Johnson [JNJ 61.08 --- UNCH (0) ] will release its fourth-quarter earnings Jan. 25. Analysts expect it to report $1.03 per share, versus $1.02 last year, according to Thomson Reuters. In the third quarter it earned $1.23. That would bring 2010 earnings to $4.75. It earned $4.63 in 2009.

The company's quarterly earnings have been relatively flat over the past three years. Analysts expect its earnings to grow 5% to $4.97 per share in 2011. Projected 2010 revenue is $62 billion, flat to 2009.

Johnson & Johnson is one of the world's largest and most diverse health-care companies, with three divisions: pharmaceutical, medical devices and diagnostics, and consumer products.

Johnson & Johnson also has been one of the most respected brands in its various fields, but that is being undermined by a series of recalls, the most recent about a week ago.

On Jan. 14, it announced the recall of nearly 47 million units of over-the-counter medicines including bottles of certain Tylenol, Benadryl, Sudafed and Sinutab products distributed in the U.S., the Caribbean and Brazil.

The company faces challenges on other fronts as well. The patent rights of two of its big sellers — the antipsychotic Risperdal and the neuroscience drug Topamax — expired recently, which will hurt revenue.

But its fundamentals are solid, including a diverse revenue base (each business represents about a third of annual revenue), protected markets, because of its many patents and huge cash flow that it uses to fund its research pipeline and make acquisitions.

Johnson & Johnson's shares gained 11% in 2009, lost 0.7% in 2010 and are up 1% this year. It shares have a dividend yield of 3.49%. The company announced a $10 billion share-repurchase program late last year, which should help boost prices.

A poll of 17 analysts by Thomson Reuters gives it a 12-month price target of $67.70, or an 8.2% premium to the current price. Those same analysts give its shares three "buy" ratings, 10 "buy," and 11 "hold."

At the end of the third quarter, State Street was the biggest shareholder, with 5% of outstanding shares, about the same as over the course of the previous year. Berkshire Hathaway is the fourth-largest shareholder, at 1.6%, and the number of shares owned was up by over 30% in the first three quarters of 2010.

Buffett's Favorite Stocks For 2011:Procter & Gamble [PG 66.70 --- UNCH (0) ] , the international household-products conglomerate, is expected to report earnings of $1.10 per share on Jan. 27 for its second fiscal quarter, down from last year's $1.49 per share. In the previous quarter, its first fiscal quarter, which ended Sept. 30, it earned $1.02 per share. Analysts expect 2010 earnings of $3.98 per share down from $4.11 in 2010.

Among P&G's well-known branded products are Tide detergent, Dawn dishwashing liquid, Bounty paper towels, Pringles snack chips, Gillette shavers and Duracell batteries. The firm offers multiple products in a category and often more than one brand and regularly comes out with improvements to retain customers.

The mean consensus 12-month share-price target of 18 analysts is $71.60, a 9.3% premium to the current price, according to Thomson Reuters. It has a dividend yield of 2.9%. A healthy 9.5% dividend increase in fiscal 2010 and planned share buybacks of $6 billion help make its share s more attractive.

The stock has underperformed the broader market over the past two years, gaining 9% in 2010 and about 1% in 2009. Shares are up 1.6% this year and hit a 52-week high Jan. 18. Berkshire Hathaway is third-largest shareholder, at 2.7%. Its share holdings were down slightly in the third quarter, the latest period for which such information is available.

Kraft Foods will release its fourth-quarter results Feb. 10. Analysts expect earnings, on average, of 46.5 cents per share, versus 48 cents last year. In the third quarter, it reported 47 cents per share. Kraft's quarterly earnings have hovered around 50 cents per share for the past four years. Earnings for 2010 are pegged at $2.03 per share on revenue of $49 billion, and are seen rising to $2.32 per share in 2011.

Kraft acquired U.K. candy company Cadbury early last year in a $19 billion deal and is still in the process of restructuring to integrate it into its other businesses. Cadbury's brands and distribution capabilities worldwide are expected to leverage sales of Kraft's products. The company manufactures and markets packaged food products, including snacks, beverages and packaged grocery products.

Kraft has operations in more than 70 countries. Its brands include Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee and Nabisco cookies and crackers.

Shares gained 20% last year and 5.6% in 2009. They are down 1% this year. They have a dividend yield of 3.7%. Kraft's shares are seen as cheap, given its 14.1 forward price-to-earnings ratio.

According to Thomson Reuters, analysts give Kraft shares seven "strong buy" ratings, eight "buys" and six "holds." Their current 12-month share-price target is $35.10, a 2.3% premium to the current price. Berkshire Hathaway [BRK.A 124680.0 --- UNCH (0) ] is the largest shareholder in Kraft, at 6% of outstanding shares, which is almost 7% of Berkshire Hathaway's assets. That stake is down about 24% from the beginning of 2010. Kraft shares were up 20% in 2010 and are down 1% this year.

Best Small Stocks To Buy For 2011

Despite economic challenges, the United States remains as a compelling hotbed of innovation. So many items in everyday use -- especially in the field of medicine -- got their start here. [In fact, Andy Obermueller recently revealed his favorite game-changing medical picks in the latest issue of Game-Changing Stocks]

The quest is always on to develop devices, drugs and services that help save money and boost the user's experience. And investors who get in early can be richly rewarded.

Of course, the path from idea to large-scale revenue can be excruciatingly slow at times. And up until now, these three companies were better known for consuming capital. But each of them has hit upon novel, potentially game-changing technologies that may eventually shower investors with riches.

Best Small Stocks To Buy For 2011: BioLase Technologies (Nasdaq: BLTI)


Nobody likes going to the dentist. Memories of a metal drill boring into our gums linger long, and it's often a reason why people don't go to the dentist as often as they should. But Biolase has an alternative: Lasers that can cut dental tissue in a very precise fashion. As you know, the use of a drill usually requires that a patient be injected with Novocain since drilling and grinding can be quite painful. Lasers cause no pain and require no anesthetic. This shortens the amount of time a patient is in the dental chair, allowing dentists to see more patients in any given day. It also leads to much happier patients, making them more likely to maintain regular dental visits.

Yet the set-up can be expensive for dentists, which explains why only a minority have gone the laser route. In the first half of the past decade, sales grew sharply, hitting $67 million by 2007. Sales have since cooled and most recently outright plunged as the company was unable to see its products gain traction with key dental distributors such as Henry Schein (Nasdaq: HSIN). Shares of Biolase, which hit $18 in 2004, have lost 90% of their value.

Despite appearances, laser-based dentistry wasn't a bust. Instead, the company has been forced to re-think designs, remove costs from the manufacturing process, and alter sales incentive programs with distributors. The outlook for 2011 is perking up, setting the stage for the first year of sales growth since 2006.

Among the positive recent developments: Biolase has recently signed a second major U.S. distributor, Benco, that augments an existing relationship with Henry Schein. In addition, the company is rolling out new portable devices such as the iLase, which is off to an impressive start. The company is also now expanding into Asia.

Needham's Dalton Chandler sees 2011 sales rebounding more than 50% to $40 million, but even more modest sales growth at half that rate would likely put like put this former hot stock back on investors' radars. Shares of this microcap trade for around $1.50, but Needham predicts they'll double in 2011.



Best Small Stocks To Buy For 2011: Research Frontiers (Nasdaq: REFR)


This company has led many investors to chuckle. Most of its press releases involve yet another round of capital-raising. The company has cracked the $1 million sales mark just once and has never come close to making a profit. But Research Frontiers may have the last laugh in 2011. The company's specialized glass technology, which automatically adjusts to filter out sunlight at times of high air-conditioning loads, has caught the attention of major construction firms, some of which are expected to use the glass in 2011.

But it's the auto market that has captured a great deal of recent buzz, pushing shares from $4 to $7 in the last three months. Mercedes apparently intends to use Research Technology's "Smart Glass" in an upcoming line of cars. Some suggest the technology will be adopted for the whole car line, and the company's most bullish supporters expect other auto makers to make similar moves in 2011 as well.

The rising stock price implies those rumors may have merit. But the company's history should give you pause. Research Frontiers has been oh-so-close to success many times before but thus far has been unable to capitalize on the opportunity. How big an opportunity does the company face? The automotive glass industry likely tops $5 billion and the architectural glass biz is similarly-sized. If only a small portion of auto makers and architects utilized the technology and Research Frontiers was able to secure a small percent of royalties, then the company may be looking at tens of millions in revenue, most of which would flow to the bottom line. Not bad for a company valued at just $122 million.

Sooner than later, we'll know if the Mercedes rumors are true. Several months from now, shares will either be well higher than current levels or they'll fall all the way back toward the $4 mark.

Best Small Stocks To Buy For 2011: BSD Medical (Nasdaq: BSDM)


BSD's systems are used to treat certain tumors with heat (hyperthermia) while increasing the effectiveness of other therapies such as radiation therapy. Cancer cells can be killed at just 108 degrees, a lower temperature than other cells. As the body senses the heat in the treated area, it also moves to generate other benefits such as increased blood flow, which raises oxygen levels, which raises the effectiveness of radiation therapy. The clinical data in support of BSD's devices have been quite strong.

This is another company that has been long on promise but short on results. Sales cracked $5 million in 2008, but have been falling since. Shares, which hit $7 in late 2007, fell all the way to $1 this past summer before a recent rebound back to almost $5. The rebound comes from rising hopes that BSD's novel cancer treatment, which has proven to be effective, could soon win more converts as the company signs up a growing roster of distributors.

At this point, BSD must figure out ways to get the many customers that have been testing the system to make a purchase. Or the company needs to partner with -- or sell to -- a larger medical device firm that is better-equipped to tackle this "missionary" type sales effort. There's lot of promise here, but investors will need to see better sales traction in 2011.

These stocks should never constitute core holdings in a portfolio. But if you have some discretionary funds that can be tapped to swing for the fences, these stocks may turn out to be tidy additions. I like the basket approach: A small position in several speculative plays. One home run can more than offset losers elsewhere.