Last week Barron’s came out with its “10 Favorite Stocks For 2013” to help investors pick stocks that are ‘most likely to appreciate in value.’ Barron’s list will be helpful to investors, especially when they are worried about the economic uncertainties, the looming fiscal cliff, rather high unemployment rates and increased taxes. Investor sentiment is clearly reflected by the fact that they have withdrawn $110 billion from domestic equity funds year-to-date. Value investors (rightfully) tend to shy away from ‘expert’ predictions, but we think Barron’s list might have some merit, as we explain below. Contrarians like to do the opposite of the crowd, but we will be contrarian in that respect, and explain why contrarians might want to at least consider these picks.
Barron’s list for 2012 outperformed S&P 500 (S&P Indices:.INX) Index by over 4 percent so far, yielding 17 percent returns compared to 12.6 percent of S&P 500. So their picks were not too bad last year. Barron’s picks for 2013 include blue chips like Apple Inc. (NASDAQ:AAPL), JPMorgan Chase & Co. (NYSE:JPM), Royal Dutch Shell Plc. (NYSE:RDS.A) (NYSE:RDS.B) and ‘some smaller’ companies like Western Digital Corp. (NASDAQ:WDC) and Barnes & Noble Inc. (NYSE:BKS).
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Barron’s confidence in its picks is reflected by the statement, “All of our new favorites could produce 15% to 20% total returns (including dividends) next year.” Of course, well-run companies often deliver better results, even in tough environments, if the valuations are not too frothy. After some analysis, you may find that most of the Barron’s favorite stocks, including the beleaguered Barnes & Noble, can be the favorites of value and dividend investors.
Apple Inc. (NASDAQ:AAPL), the top choice of Barron’s has plunged 23 percent from September peak of $705. The perceived drop is due to recent investor concerns like management changes, supply constraints, lower margins, iPad competition and of course, the iPhone 5 map blunder. But the author of the article, Andrew Bary, argues that none of these concerns are major. And slowed earnings growth is understandable, given the company’s size with $156 billion annual sales.
Steve Milunovich, a veteran tech analyst at UBS, recently said that it’s good time to add Apple to your portfolio. After two “not-so-strong” quarters, shares of Apple are trading near their lowest price/earnings ratio in five years. Steve carries a price target of $780 for Apple. Investor concerns for Apple’s future seem overblown.
The beleaguered book retailer Barnes & Noble, Inc (NYSE:BKS)’s addition into Barron’s 10 Favorite Stocks for 2013 surprised many investors. The company’s depressed stock prices have been almost flat throughout 2012 at around $14. However, the company’s stores are dominating the field with about 66 percent market share. Its Nook e-reader is also holding up well against Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN). But the stock price don’t really reflect these achievements.
Though the Nook division hasn’t been profitable, it is heavily undervalued. Barnes & Noble Inc. (NYSE:BKS) is currently trying to sell e-readers to as many consumers as possible, before it starts selling their more profitable digital content such as magazines and books. Recently Microsoft Corporation (NASDAQ:MSFT) paid $300 million for 17.6% stake in Nook division. Based on Microsoft’s investment, Nook is currently worth $1.4 billion or $24 per share.
BlackRock Inc. (NYSE:BLK), is the world’s largest investment manager. Shares of the investment giant are lagging this year behind those of its peers. Investors have three main concerns about BlackRock. First, with $3.7 trillion in assets it is too big to grow. Second, fierce competition from Vanguard in ETFs can force BlackRock Inc. (NYSE:BLK) to reduce fees. Third, BlackRock’s longtime chief executive Larry Fink, considered one of the best chief executives in the industry, might leave his post to lead U.S. Treasury Department.
However, the stock still has upside potential to go above $195 per share. BlackRock Inc. (NYSE:BLK) yields 3.1 percent and, over the past seven years, it has quintupled its dividend payout. Additionally, BlackRock Inc. (NYSE:BLK) shares are trading at the bottom of its five year valuation based on P/B, P/CF and P/E. Recently, a BlackRock director and former chief of Putle Homes, James Grosfeld, purchased 500,000 BLK shares for $94 million in open market. What’s more, the company has been beating analysts’ estimates for the past six quarters. BLK is currently valued at 13x forward earnings of $15 a share, much lower than the five year average (18x).
Another financial stock, JPMorgan Chase & Co. (NYSE:JPM), sells at 8x forward earnings, lower than its five year average (11.7x). The consensus earnings estimates for FY13 have increased nicely over the past three months. Credit Suisse holds an “Outperform” rating with $50 price target for JPMorgan Chase. Did you know that Berkshire Hathaway Inc. (BRK.A) (BRK.B) Chairman and CEO Warren Buffett has a personal stake in JPMorgan Chase?
We will not go through all the stocks, but they all share a reasonable valuation, some have strong moats, and are trading at low valuation levels relative to comps, historic valuation, and/or cheap in their own right!