Investors frequently write asking for the best stock picks and advice on how to build a strong investment portfolio. And though I frequently pen columns about areas of opportunity and risk, I’ve never truly embraced the “stock picker” label and offered a portfolio of investments that I recommend and follow for the long term.
That’s about to change. Starting in March, I will be offering a free list of “editor’s picks” — stock recommendations I will follow over the long term. This will provide an opportunity to track these picks, proving out (or in some cases, disproving) my original investment thesis. Though I don’t expect to blow away the stock market with my returns, I do hope at the very least to render an honest look at how I approach the market and what motivates my writing.
Alcoa was my individual pick for the 10 Best Stocks of 2012. I’m retroactively putting it on this new Editor’s Picks feature, too.
My initial recommendation for Alcoa included the following points, which I still strongly believe in.
- Improving earnings: Alcoa saw year-over-year profit increases across eight quarters before one-time charges caused a hiccup in January. Full-year 2011 profits were nearly triple Alcoa’s 2010 numbers, and 2012 forecasts for 2012 include even more improvement in both sales and profit numbers.
- Bargain stock: Alcoa has a forward P/E of about 12.5 right now, pretty fairly valued based on full-year 2012 numbers. But the company consistently beats expectations, and the market continues to rally and favor higher valuations for select stocks. If AA posts 90 cents in earnings — a less than 10% surprise over expectations — and gets to a P/E of 15, you’re at $13.50. That’s over 35% profits from here.
- Dividend potential: Alcoa has a fairly meager yield of about 1.1%, based on a quarterly payout of three cents. That payment has been stagnant since March 2009, too, after it was cut from 17 cents quarterly. Now that profits are up, that’s a mere 22% payout ratio — and it has to increase.
- Right-sized for recovery: One-time charges have weighed on the stock as Alcoa has slashed output — and costs. That will help not only boost the bottom line, but will prop up falling aluminum prices as Alcoa throttles off supplies.
I conservatively estimate Alcoa will get to $13 by year-end. I’m also expecting a significant dividend hike — though the yield will likely remain fairly lackluster.
Buy-and-hold investors looking for tax-efficient gains will benefit nicely from this pick.