5 ‘Editor’s Picks’ for March

by Jeff Reeves | March 2, 2012 12:01 pm

[1]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.

So without further ado, here are my 5 Editor’s Picks for March: Alcoa (NYSE:AA[2]), Caterpillar (NYSE:CAT[3]), Intel (NASDAQ:INTC[4]), Microsoft (NASDAQ:MSFT[5]) and Apple (NASDAQ:AAPL[6]).

Alcoa

Alcoa was my individual pick for the 10 Best Stocks of 2012[7]. I’m retroactively putting it on this new Editor’s Picks feature, too.

My initial recommendation for Alcoa[8] 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[9]. 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.

Caterpillar

I  just wrote a column about three “triple threat” stocks[10] that have strong dividends, big share momentum and impressive growth ahead of them. Caterpillar was one of those picks, and after doing the research I remain convinced it’s one of the best long-term plays out there.

There are some fears that CAT stock is overbought. It’s up against a 52-week high and has logged a stunning 27% return year-to-date in 2012 vs. just 6% for the Dow and 9% for the S&P 500. In the long term, Caterpillar is equally impressive. Five-year returns top 72%, vs. just 7% for the Dow Jones and a loss of 1% for the S&P 500.

However, the P/E remains around 12 based on fiscal 2012 EPS forecasts of $9.65, showing there is room left to run.

On the growth side, revenue has almost doubled since recession-era lows, from $32.4 billion in 2009 to $60.1 billion last year. Earnings went from $1.43 in fiscal 2009 to $4.15 in 2010 — almost tripling. Then they went to $7.40 last year for another 80% gain. This year the expectation is for 30% growth based on EPS estimates of $9.65.

Caterpillar isn’t just a play on construction in the States. It’s got a big emerging market presence, including mining equipment in South America and China as well as heavy machinery in other global markets. This is a great long-term play for an eventual recovery, and CAT shares clearly have enough momentum to see investors through the short term if things get rocky.

The 1.6% dividend is also a plus.

Microsoft

Microsoft is a sleepy stock pick, to be sure. Shares have gone nowhere for about 10 years, and lots of investors think this tech stock’s best days are behind it.

But Microsoft has started 2012 with a bang — and there are many reasons to expect this pick to be a great long-term play.

A look at some great technical analysis from Greg Harmon[11] of Dragonfly Capital estimates a run in the stock’s price to $58 to $67 in the next five or six years. That’s a doubler from here, with 13% annual returns!

Don’t believe the charts? Well, consider the analysis of James Altucher as part of our

10 Best Stocks for 2012[12] feature:

• Back out the cash, and MSFT has a forward P/E of less than 10.
• Microsoft is the king of buybacks, with a $40 billion plan to boost earnings per share.
• It boasts more than $30 billion in cash in the bank, and predictable revenue from enterprise software sales.

That stability is very attractive and signals Microsoft could be a big bargain after a long period of underperformance. There are already hints MSFT stock is breaking out after a 24% surge to start 2012. I’m a little leery of a short-term pullback, but I believe the long-term potential is definitely there for this tech giant.

That’s because there are also glimmers of — dare I say it — growth for Microsoft. The Kinect controller for Xbox caught fire, and Microsoft’s Entertainment & Devices division is steadily becoming a bigger part of the bottom line even though it significantly lags legacy businesses.

And if you want to be pie in the sky, consider the mammoth potential of Microsoft’s $8.5 billion buyout[13] of the video conferencing and VoIP company Skype. This could easily be a big play into the enterprise space, integrating video conferencing to MS Office as a way to adapt to the 21st century business environment, but it could also be a way to get a foothold into the booming smartphone market.

Imagine if all those iPhones and Android devices allowed Skype calls. Instantly, you have made any mobile device a “telephone,” and created a huge potential customer base.

Just a daydream? Maybe. But even if you don’t want to bank on Microsoft’s innovation, bank on its bulletproof balance sheet and bargain valuation.

Intel

Another one of my recent “triple threat stocks with great a dividend, earnings and momentum[14] right now is chipmaker Intel.

Believe it or not, one of Intel’s biggest selling points is its impressive 3.1% dividend. That makes it one of the Top 10 Dow Dividend Stocks[15]. The chipmaker raised its dividend 15% in 2011 and has $15 billion in cash and short-term investments to back up reliable payouts.

As for shares, Intel stock has been booming with the rest of the tech sector. Looking back five years, INTC is up around 31% — that’s 10 times the 3% added by the Dow Jones Industrials in the same period. And despite this standout performance, INTC stock still boasts a relatively cheap P/E of about 10.8 based on 2012 earnings projections of $2.53 per share.

On the revenue side, Intel has seen its sales increase year-over-year in eight out of the past nine quarters, dating back to 2009. Profits are even more dramatic, with 16 straight quarters of year-over-year growth.

The risk, of course, is that Intel will have trouble transitioning as the technology business moves from desktop computers to mobile devices. The company has been making a big move into mobile, including a recent announcement that a new European telecom partner will begin offering a smartphone designed and powered by Intel chips[16]. But some question whether it will be enough.

I think there’s still plenty of time to figure that out. With a roughly 16% share of the entire semiconductor market — the largest in the world, blowing away the 9% held by No. 2 Samsung (PINK:SSNLF[17]) — it’s hardly like Intel is on life support.

It’s also unfair to compare Intel to companies like ARM Holdings (NASDAQ:ARMH[18]), which simply design the chips that now power many sexy consumer gadgets including the Apple iPhone. “Fabless” semiconductor companies are vastly different than Intel, which still designs and builds the chips in factories worldwide.

In fact, Intel’s foundry business is what provides such rock-solid stability to revenue, something I see as a plus. If Intel can figure out how to really get a foothold in the mobile market, it will be the best of both worlds. If not, you still have the power of its scale to provide incremental growth and a very nice dividend to pay you across the long term.

Apple

I know, I know. I’m not breaking any new ground here with an Apple recommendation. Its growth and the power of its brands are obvious — but I continue to expect it to outperform, and thus would recommend it for any investor’s portfolio. Reasons include:

• Stunning 118% earnings growth in Q1[19]. EPS growth has run about 60% annually since 2008.
• Revenue has tripled from 2008 to 2011, from $32.4 billion to $108.2 billion.
• All these results haven’t caused Apple to outrun its earnings, with a reasonable forward P/E of about 13.
• The iPad 3 is coming soon, and will probably put other results to shame.
• Even without Steve Jobs at the helm, the company remains at the pinnacle of tech.

You know the score by now. I just want to go on record with this buy for my Editor’s Picks list before Apple moves any higher.

Jeff Reeves[20] is the editor of InvestorPlace.com. Write him at editor@investorplace.com[21], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.

 

 

 

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