Paul Tracy is out again with a similar ad to one he shared a year ago, teasing his top ten stocks for next year — and, like last year, there’s a lot of interest among the Gumshoe readership … so let’s see if we can name those hinted-at picks for you.
The basic idea is a perfectly reasonable one, even though it may seem a bit old-fashioned in these days of hyper trading: holding profitable, dividend-paying stocks that have done very well and are reasonably priced is a good idea, even if you have to hold these investments for longer than a few weeks to reap your returns. I won’t go so far as to say that these “top stocks for 2013” are pitched as just a plain vanilla “buy and hold” portfolio, since they’re not clear on that in the ads, but they have in the past pitched similar ideas as “forever stocks” and most of the talk of great long-term performance revolves around compounding returns and beating the S&P by just a bit without taking massive risks.
Of course, that’s what many of the newsletters “really” recommend to their subscribers, since most newsletters are far more nuanced and conservative than their teaser ads would have you to believe — but the StreetAuthority folks are actually “selling” this idea instead of promising a 100% gain in 2013, so that’s a bit noteworthy.
What, then, are these “top ten stocks for 2013?” I’m not sure we’ll have enough clues to name them all, but we’ll do our best … starting with …
Well, they actually name #1 and #2 for us to whet the appetite … so we can keep the Thinkolator in the garage for the moment:
“I’ve picked Enterprise Products Partners (NYSE: EPD) as my first Top 10 Stock for 2013.
“Enterprise Products Partners’ business is vital to day-to-day life. The partnership owns 50,000 miles of oil and gas pipelines — enough to circle the planet twice — that move these resources around the country. Our lives would be drastically different without the commodities EPD ships through its network.
“That means EPD sees steady demand for its services, just like a utility. And the cash the partnership generates is just as steady….
“Today the stock yields 5%. Meanwhile, the partnership has increased its dividend more than 40 times since going public in 1998… and 33 consecutive times going back to 2004.”
OK, so we don’t have to do any work to find number one, that’s a freebie. And yes, EPD is right at the top of the list if you’re looking for a big, sturdy energy infrastructure MLP — I can’t tell you whether EPD will do better than Kinder Morgan Partners (KMP) or Magellan Midstream Partners (MMP) or any of the other big pipeline and midstream partnerships, they tend to trade as a group most of the time based on energy consumption rates (ie, how much energy will the economy use, which depends on pricing and other factors), tax policy, and interest rates (these are income investments, so if other income investments become more appealing money moves around). You can also go with the ETFs or ETNs or CEFs that follow the MLP space, like the Alerian Index offerings (AMLP or AMJ) and get a similar 5-6% yield, though with those you generally give up much of the tax advantage in exchange for your easy diversification.
There are a lot of folks talking up MLPs for next year, both because the dividend tax hike wouldn’t hit them and because the fear of other tax changes has helped bring many of these shares down (ie, concern about whether MLPs might lose some of their tax advantage as part of any kind of “grand bargain” to avoid the fiscal cliff). And, of course, if you think the economy is going to collapse next year then folks will use less gas and gasoline and volume would drop for these companies — they’re sensitive to the economy, though generally not abruptly so … there is, after all, a baseline energy production and consumption dynamic that doesn’t go away just because the economy grows or shrinks by 1-2% for any given period.
And number two is free, too, and one they’ve recommended for a while now … here’s that one:
“Brookfield Infrastructure (NYSE: BIP) — that lets you own stakes in dozens of infrastructure monopolies across the entire world, and in addition to capital gains, it pays investors a 4.5% dividend each year to own it.
“In total, 78% of the partnership’s revenues are under contracts or are regulated. Meanwhile, those practically guaranteed revenues are coming from one of the most compelling portfolios I’ve ever seen.
“The partnership has a stake in electric grids in Chile. It holds railroads in Australia… toll roads in South America… and timberland in the United States and Canada.
“I can only think of one, maybe two, other places where you can invest in a stable group of monopolistic holdings this broad from all over the planet.”
This is also a publicly traded partnership, with Brookfield (the big asset management company) as the general partner, and will face the same broad concerns and benefits as most of the energy MLPs, but the underlying businesses are quite different. BIP owns utility transmission and distribution assets, ports, toll roads, railroads and the like and collects pretty steady revenue from those long-lived assets, and pays out much of the “funds from operations” of those assets as a dividend — they say that the payout ratio is only 66%, so that’s gives some flexibility, though like most of these partnerships they also carry quite a bit of debt so they’re sensitive to interest rates in two ways (if rates go up, safer investments get more appealing … and borrowers like BIP should see their interest costs rise). Rates don’t seem like they’re going up anytime soon, but that’s one underlying concern. This has been one that I’ve followed for a long time and often get interested in, they do own some great assets, but with infrastructure being a really popular asset class among big investors lately it always feels just a hair too expensive. Which means I’ve missed a nice long-term run since the 2009 bottom … and the shares have flattened out over the last three months, so perhaps there will be a nice “bad news” buying opportunity for these kinds of infrastructure assets.
So those are the freebies to get you going — both relatively high-yielding partnerships that are, broadly speaking, in the “infrastructure owning” business. How about the “secret” stocks for 2013?
“Top 10 Stock #3 is one of the most dominant companies I’ve ever seen. This company sells its product in 180 countries and owns 7 of the world’s top 15 brands in its market.”
This is one he also pitched as a “Forever Stock” back in the Summer of 2011, Philip Morris International (PM) … it’s up about 20-25% since then, similar to the broader S&P performance, and does pay a solid dividend of almost 4%. I don’t like tobacco stocks personally and haven’t owned it, but tobacco has been one of the all-time best long-term investments for the last century and this is the owner of most of the important brands — particularly Marlboro, the global number one brand in cigarettes by a wide margin.
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“Top 10 Stock #4 is a special “toll” company with nearly a billion users around the world… and more than $3.5 trillion in transactions per year.
“Although the company was founded in 1966, investors couldn’t buy a stake until about five years ago.
“Since it’s gone public, the stock is up 810% thanks to its seemingly unstoppable growth. Maybe that’s what attracted the world’s greatest investor — Warren Buffett — and his investment team. His giant investment firm, Berkshire Hathaway (NYSE: BRK-B), bought a 216,000 share stake in this company last year. And then Berkshire ‘doubled down’ — buying 189,000 more shares a few months later.”
That’s another of those “Forever” stocks from last year, Mastercard (MA). And yes, one of my great regrets as an investor is that I didn’t pile into Mastercard and Visa (V) when they went public in recent years, both are incredible high-margin companies with incredible domination of the global market and beneficiaries of the global trend away from cash transactions. There have surely been stumbles at each, and antitrust issues come and go with these two, but they’ve been great investments and it frustrates me that I didn’t buy them when I first looked at them. Which in turn makes it hard for me to buy them now — because I remember looking at MA at $50-100 and not buying, so I struggle to convince myself to buy at almost $500. Still, even at $500 an objective viewer would probably say that they’re fairly priced — they don’t have to spend much, they’ll grow revenue at 5-10% a year at a minimum, probably, and costs do not climb as quick as revenue so their earnings will probably grow by at least 10% (analysts are predicting 18% growth for the next five years), which makes the current PE ratio, which is high, seem reasonable. I’d still buy MA before buying a traditional big bank if I were buying a financial services company, but if I were buying today I do think that V would probably edge out MA in my book (a little bigger, a little cheaper, pays a more meaningful — though still tiny — dividend).
“Top 10 Stock #5 has bought back $19 billion worth of its own stock in the past two years and has increased its dividend 463% since 2004. It’s little wonder why every $100 invested in this company in 1972 would be worth $165,000 today.
“And one more thing… right now the shares trade at a dirt-cheap price, making it perhaps the best time to buy the stock in the past decade.
“I call it my biggest ‘no-brainer’ investment for 2013. When it comes to the three characteristics I look for in the “perfect” stock — enormous competitive advantages, strong dividends, and massive share buybacks, this company is second to none.”
Well, again not a particular surprise — this is another of the picks that he pegged as a “Forever” stock in 2011, Intel (INTC). Which I own. And which is indeed getting more “dirt cheap” by the day after a big drop over the last 3-4 months (from $26 or so down to $19). Intel is a story stock on the downside at the moment, with the story being that they “missed” mobile and are losing out to Qualcomm and ARM Holdings and the others … that has hit the stocks more in recent months as the decline in PCs got more pronounced and their big and profitable business in chips for servers has not taken up all the slack.
I still think Intel will do absolutely fine — they’re borrowing money to buy back stock, which is oddly easy because Intel can borrow money for four years at 1.35% and stockholders earn about 4.5% in dividends for owning the stock, a dividend that will likely continue to rise every year (they pay out less than half their earnings as dividends, so even if earnings stagnate for a year, as analysts expect, the dividend should be fine). Intel is indeed faced with challenges as they try to compete in mobile low power chips, but they are competing and their products are getting at least a little traction … and they have the most advanced small-scale chip architecture out there, as well as the most incredible manufacturing ability and capacity, so they will, I am certain, come out fine even if they do not immediately pose a huge threat to Qualcomm. I’ve held Intel from $19 or so up to $27 and back down again, letting my dividends reinvest and compound (the shares are not far above where I bought them in 2011, but thanks to compounding my share count has gone up by 6% in a year and a half), and although my account would certainly be better off if I were nimble enough to know to sell at $27 and buy back at $19, well, that’s not going to happen very often — I’m neither particularly nimble nor reliably prescient, I just want to let a great company compound earnings … and I see challenges but not failure in Intel’s results so far, so I’m staying steady on this one.
Which I guess puts me in the same camp as Paul Tracy for INTC, since he and the StreetAuthority folks were likewise calling it a “Forever” pick back near the time that I first bought shares. Your opinion might certainly differ, but I don’t like to sell a successful, highly profitable 4.5% yielder without a good reason and I don’t think I’ve seen a good reason yet.
“Top 10 Stock #6 is one of the safest stocks on the planet, thanks to its enormous profitability and its giant cash horde.
“With annual net income of $8 billion, this company is more profitable than such well-known success stories as Goldman Sachs (NYSE: GS), McDonald’s (NYSE: MCD), and Disney (NYSE: DIS)… just to name a few. And at last count, this company held more than $48 billion in cash on its books. That amounts to over $9.00 per share… yet the stock trades for less than $20.
“If you’re wondering what might happen next, the company just gave a big hint when it raised its dividend 133% in 2012.”
This one, sez the Thinkolator, is Cisco Systems (CSCO), which is also a stock that Tracy has teased before — though it was one of the “no brainers for 2012“, not one of the “forever stocks.”
And like Intel to some degree, Cisco is a dominant, cash-rich company with a strong market position … but with competition that’s increasing and worrying investors. CSCO does have almost $9 in cash, though they do also have a debt position so the net cash is a little lower, but they are undeniably also cheap. Maybe cheap for a reason, depending on whose arguments you believe, but definitely cheap — trading for less than 10X next year’s earnings estimate, and with a dividend that has increased 133% over the past year (in two increases, it has gone from six cents to 14 cents/quarter) and currently gives them a yield of just under 3%, not as good as other tech dinosaurs like INTC or MSFT but still above the market average.
I sold Cisco about a year and a half ago to buy more Apple, and would still buy Apple over CSCO or INTC today, but I’d bet that CSCO will be a less bumpy ride than Apple given the extraordinary level of attention AAPL gets and their dependence on innovation and product cycles. As you can imagine, I’d also buy INTC over CSCO, since I own the former but not the latter, but the basic reason to buy both is the same: they still dominate their core markets, their business and core markets may not have sexy growth in the near term but they aren’t going away, they’re facing competition but they’re cheap and have the cash and capacity to compete aggressively. I haven’t followed CSCO closely since selling the stock personally, so if you’ve got reasons to own (or not to own) that one feel free to let us know with a comment below.
I wonder if all of these will turn out to be picks he’s made in the past? Hmmm …
“Top 10 Stock #7 is an electric utility based in Chile… a country where dividends are required by law. Chilean public companies are required by law to pay at least 30% of their net income to shareholders.
“Meanwhile, electric demand is growing like wildfire in Chile — up to six times faster in the past decade than in the United States.
“And with this investment, not only do you capture a solid yield and stable growth from one of the world’s best utilities, but you don’t even have to leave the U.S. markets to do so.
“That’s because these shares trade right here on the New York Stock Exchange.”
There are two electric utilities you can easily buy into in Chile, to the best of my knowledge, Endesa (EOC) and Enersis (ENI), and the two are related (Endesa is the parent). Both yield about 3%, both are large (better than $10 billion market cap), and I have no idea which one Paul Tracy might be teasing since he didn’t provide any clues. Feel free to check them out and see if one of them suits your fancy — and let us know if so. If you want broader Chilean exposure, which brings with it a lot of exposure to natural resources as well as exposure to arguably the most advanced Latin American consumer and financial economy, there are also a couple exchange traded funds — the iShares ECH for broad Chile exposure, and the closed end Chile Fund (CH) which trades at a discount and yields about 10% right now (though some of that is return of capital) … both have Enersis in their top ten holdings, though only the indexed ECH has a large Endesa position as of the last report.
Starting to get a bit tired here, but we’ll press on … another, please!
“Top 10 Stock #8 owns energy pipelines in nearly 20 states. You simply don’t find many investments with the mixture of high yield and growth seen by this company.
“It pays a yield of 4.5% and has never cut its dividend — going all the way back to 1994. It’s also expanding rapidly to take advantage of the recent oil and gas boom in the United States. In total, it plans to spend $6 billion for expansion projects in the next three years (about 50% of its current market cap).
“That’s one reason why the company plans to grow its distributions up to 15% per year through 2015.”
You can squeeze this to come close to matching other companies, but the Thinkolator sez our best match here is: ONEOK Partners (OKS) — OKS is indeed targeting 10-15% growth in the distribution and $6 billion for expansion, largely in the hot shale areas like North Dakota, and they do have a market cap right around $12 billion, putting them in the top tier of MLPs even if they’re far smaller than giants like EPD (that was #1 way up at the top, remember?). ONEOK is an admired MLP, they have a strong mid-continent presence, including some important natural gas liquids (NGL) pipelines, and, well, that’s about all I know. The general partner, ONEOK, is also publicly traded at ticker OKE and will probably continue to have a dividend that grows faster thanks to bonus GP incentives, but it’s lower (3% yield).
“Top 10 Stock #9 serves more than 60 million customers each week. It sells its products at premium prices. The company dominates its competition. And it doesn’t worry about government regulation, even though it sells an addictive product.
“The company also sells a product that’s loved in countries around the world, including the United States, China, Japan, Germany, England, and more.
“Because of that, there is tremendous opportunity for growth. Even with more than 17,000 locations, this restaurant still has plenty of room to DOUBLE its store count in the coming years.
“That’s likely to cause profits to surge. Right now the company is on track to grow earnings per share 75% by 2015… and it just raised the dividend 24%.”
This one, interestingly enough, looks to be Starbucks (SBUX) — one of the pricey, fast-growing food retailing stocks I would like to own (the other is Whole Foods, WFM), but haven’t bought for whatever reason … I almost bought Starbucks when their shares dipped a bit following the announcement of the Teavana acquisition, but I do keep holding out hope that they’ll get cheaper again, there have been plenty of opportunities to buy Starbucks when news is “less good” over the last few years and I’ve missed them … but yes, I can certainly see the argument for buying Starbucks in chunks when you can since it’s hard to pick the best price — they are a dominant brand, they’re growing very well in China and elsewhere as well as still growing in the US, and they get a great profit margin even without aggressively franchising.
And finally …
“Top 10 Stock #10 sells its recession-proof products in dozens of countries around the world. Pension funds in the United States and Canada own millions of dollars in this stock. It’s also owned by some of the largest money managers in the world. As we go to press, Fidelity owns nearly 6 million shares worth nearly $470 million, and Morgan Stanley owns about 2 million shares worth $140 million.
“It’s obvious why they like the stock. In just the past three years the shares have returned 137%… more than triple the S&P’s 39% gain.”
And, well, we close on a low note