Chris Katje's Annual Top Ten Stock Picks For 2013 Part II

by: Chris Katje

Here is the second part of my top ten stock picks for 2013. You can view Part I here.

Since 2009, I have been providing readers on Seeking Alpha with my annual top ten stock picks list. The list began with a huge 99.9% return in 2009 through several multi-baggers. In 2012, I once again turned out double digit gains after a rough 2011 year. My 2012 picks can be seen here and a follow up article will be posted soon. Here is a look at my annual returns:

  • 2009: +99.9%
  • 2010: +32.9%
  • 2011: -11.3%
  • 2012: +17.6%

After posting my first loss in this annual tradition, my picks rebounded in 2012 to post a 17.6% gain. A portfolio of $10,000 equally weighted each year in my picks would now be worth $27,712 after a compounded annual growth rate of 44.3%.

Share prices on the picks are from December 31st, 2012. All earnings estimates are taken from Yahoo Finance.

LeapFrog Enterprises (NYSE:LF)

  • Share Price: $8.63
  • Dividend Yield: N/A
  • 52 Week Range: $5.30-$12.28

Top Three Reasons

1. LeapPad 2 Sales

2. Fourth Quarter Earnings

3. Acquisition Target

Barron's recently recommended buying shares of LeapFrog due to strong Christmas sales. I have to agree with them and believe that strong sales of the company's $100 LeapPad 2 can send shares higher.

The LeapPad 2 is aimed at the 3-9 age demographic. Kids can run apps and games on the device and as I found out on Christmas, kids can even take pictures with the children's tablet. The device went on sale in August and has seen steady demand since that time. Toy sites and retailers like Toys "R" Us (TOYS), Wal-Mart (NYSE:WMT), and Amazon (NASDAQ:AMZN) have had to limit sales of the device due to demand. LeapFrog's own site allows customers to purchase only two LeapPads due to popular demand.

Despite the attention from analysts and the article in Barron's, shares have been beaten down recently. The company reported great third quarter earnings, but then watched shares fall over 20% in the last three trading months of 2012.

In 2013, analysts on Yahoo Finance predict LeapFrog will earn $0.84 per share, giving a price to earnings ratio of just over 10 at today's share price. The company will report fourth quarter earnings from fiscal 2012 on February 5th. Analysts are expecting earnings per share of $0.47 from the holiday quarter. For the other three quarters of 2012, LeapFrog beat analysts by over 30% each time. Look for impressive results and a surging share price.

Analysts also provide the bearish side of the story. LeapFrog will now be counted on to provide a new device next year to wow consumers and investors. However, I think this is less the case for LeapFrog as with other technology companies. I think LeapFrog will get bought out by a larger company in 2013 or 2014. Potential acquirers include toy makers like Hasbro (NASDAQ:HAS) or Mattel (NASDAQ:MAT), and also tablet makers like Amazon and Barnes and Noble (NYSE:BKS).

Onyx Pharmaceuticals (NASDAQ:ONXX)

  • Share Price: $75.53
  • Dividend Yield: N/A
  • 52 Week Range: $35.73-$93.18

Top Three Reasons

1. Sales of Kyprolis

2. Buyout Target

3. Pipeline

Onyx Pharmaceutical shares are undervalued, even after a total 2012 return of 76%. Shares actually doubled on the year before cooling down, which is why they are recommended here. The company saw a key drug approved half way through 2012 and only has reported one full quarter of sales, leaving analysts guessing on what the potential of the drug is.

Kyprolis was approved in the middle of 2012 to treat myeloma. At the time of the drug's approval, six analysts on Bloomberg saw sales of the drug hitting $683 million in 2016. However, several of the analysts saw the company becoming a $1-$2 billion drug by that time. In the third quarter of 2012, the drug has sales of $18.6 million, significantly ahead of targets that ranged in the $10-$12 million range. The company also reported that it had a 10% market share of third-line multiple myeloma treatment. Onyx will not issue sales guidance on the new drug.

The American Cancer Society projects that 10,710 people died in 2012 from myeloma. Kyprolis is critical to the treatment of myeloma as it serves as a backup to the other drugs currently on the market. However, Onyx is also working on getting the drug approved to treat the disease earlier in the process.

Nexavera, a drug owned by Onyx and Bayer Healthcare, has already been approved in 100 countries. The drug saw sales of $208.2 million in the third quarter of 2012. Onyx shares revenue and profits from the drug with the larger pharma company. The drug is used to treat liver and kidney cancer. Stivarga, a drug used to treat colon cancer, is owned and marketed by Bayer. Onyx receives a 20% royalty on sales of the drug from Bayer.

In the company's pipeline includes:

  • Phase III trials for Nexavar to be used for breast cancer
  • Sorafenib-thyroid cancer
  • Carfilzomib-myeloma in earlier stages
  • PD0332991-collaboration with Pfizer (NYSE:PFE), currently in Phase II trials to treat hematologic malignancies

With a market capitalization of around $5 billion, Onyx has been thrown out by many as an acquisition target. The company offers large pharma companies key new drugs that could be blockbusters and also have the potential to treat other areas. With shares now trading down from 2012 highs, big pharma companies should be sniffing out Onyx and willing to pay a large premium. Even $100 a share would offer a 25% premium to today's share price. Bayer may seem like the most logical acquirer with several partnerships already in place. With a market capitalization of over $75 billion, Bayer has the position to make a play on Onyx.

Onyx has low debt with just under $200 million and has enough cash on hand to cover that. The royalties from Bayer through joint and collaborative agreements are expected to fund the company's research and development costs.

Shares of Onyx shot up to $76.38 on the approval of Kyprolis. As analysts weighed in on the potential of the drug, shares approached triple digits topping out at $93.18 on the year. As 2013 approaches, you now have the chance to purchase shares at prices cheaper than the prior period to Kyprolis approval. On January 7th, the company will present at the J.P. Morgan healthcare Conference and could gain some new activity from analysts.

I would not be surprised if shares saw triple digits at some point in 2013. The most likely cause for this would be strong results from Nexavar Phase III results in other cancers, or a buyout from a large pharma company.


  • Share Price: $25.08
  • Dividend Yield: 3.8%
  • 52 Week Range: $20.75-$26.09

Top Three Reasons

1. Spin Off of Zoetis in IPO

2. Dividend Yield/Share Buybacks

3. Drug Approval of Eliquis

In 2013, Pfizer will spin-off its animal health operations via an initial price offering. The company will be called Zoetis and a $4 billion IPO will take place, giving the company a valuation of $20 billion. Pfizer will sell 20% in the IPO and distribute the remaining 80% ownership to shareholders. In the company's third quarter, animal health grew 4% (adjusted for foreign exchange rates). Through the first nine months of 2012, Zoetis is responsible for $3.13 billion in sales.

Through the first nine months of 2012, Pfizer has purchased $5.9 billion worth of its own stock. That number will jump soon, after the completion of the sale of Pfizer Nutrition to Nestle (OTCPK:NSRGY). Pfizer sold off this non-core asset to Nestle for $11.85 billion. Pfizer will now be beginning a new $10 billion repurchasing program. That along with a growing dividend offers a great return to shareholders.

Pfizer just recently received U.S. FDA approval of Eliquis, a drug co-owned with Bristol Myers Squibb (NYSE:BMY). The drug is an anticoagulant used to help prevent strokes and heart attacks. The drug will compete with Pradaxa, from Boehringer Ingelheim in Germany, and Xarelto, a drug from Johnson and Johnson (NYSE:JNJ) and Bayer. In the first half of 2012, Pradaxa posted sales of $615 million. Eliquis has the potential to be a blockbuster drug, with annual sales hitting over $1 billion. Some analysts are even saying the drug could top $5 billion annually. The drug is another example of how Pfizer's strong pipeline will help make up for the loss of Lipitor from patent.

Take Two Interactive (NASDAQ:TTWO)

  • Share Price: $11.01
  • Dividend Yield: N/A
  • 52 Week Range: $7.37-$16.99

Top Three Reasons

1. New Grand Theft Auto and Bioshock Games

2. Carl Icahn and Others Investments

3. Acquisition Target

I first recommended shares of Take Two in May of 2012. The biggest reason for the recommendation at the time still holds true today. Take Two will have a blockbuster year in 2013 with the releases of Bioshock: Infinite and Grand Theft Auto V.

  • BioShock Infinite (March 26) - The game is fourteen weeks away from launch and already has over 380,000 pre-orders (VGChartz).
  • Grand Theft Auto V (Spring 2013) - The highly anticipated Grand Theft Auto V game will come out in 2013. Analysts are predicting the game to sell 20-25 million copies during the year. The game currently has over 270,000 pre-orders (VGChartz).

I own shares of video game maker Activision Blizzard (NASDAQ:ATVI), who continues to put out hit games in the Call of Duty, World of Warcraft, and Diablo series. However, the stock hardly moves, because it has blockbuster games every year. A couple of hit games at $1 billion valued Take Two could provide a much needed impact for shareholders. Analysts are pretty bullish on Take Two's 2013 financials as well. After estimating the company to earn $0.18 in the current fiscal year, analysts bump earnings estimates up to $2.29 per share in 2013.

Famed activist investor Carl Icahn has been attracted to Take Two shares throughout 2012. He made several purchases of shares throughout the year and ended 2012 with around 13% of shares owned. I have mentioned Icahn's stake as a positive in prior articles. I'm guessing that Carl sees unlocked value and wants to sell off assets or the entire company to get the most value for shareholders.

In December, hedge fund Citadel upped its stake in Take Two to just over 6%. It was another series of purchases by hedge funds that believe the shares of Take Two are undervalued or could go higher on a buyout.

Take Two continues to be a great acquisition target. The company will not sell itself before it enjoys the results of Grand Theft Auto V, but after that all offers could be on the table. An acquirer would gain the rights to Grand Theft Auto, Bioshock, Borderlands, Civilization, Duke Nukem, and the 2K Sports franchise. With rumors swirling over a Grand Theft Auto MMORPG or all cities game, other video game studios have got to see the dollar signs in their eyes with one franchise alone.

Titan Machinery (NASDAQ:TITN)

  • Share Price: $24.70
  • Dividend Yield: N/A
  • 52 Week Range: $19.07-$36.92

Top Three Reasons

1. Valuation

2. Acquisitions and Expansion

3. Demand in Key Areas

It might not come as any surprise to my readers that I am recommending shares of Titan Machinery. In 2012, I recommended buying shares on three separate occasions (April, August, December). I continue to recommend shares of the large agriculture and construction equipment dealership operator.

Titan Machinery operates retail outlets that sell agriculture and construction equipment made by Case New Holland (NYSE:CNH). The company has over 100 outlets located in the following areas:

  • Arizona
  • Colorado
  • Iowa
  • Minnesota
  • Montana
  • Nebraska
  • North Dakota
  • South Dakota
  • Wisconsin
  • Wyoming
  • Bulgaria
  • Romania

As you can see, Titan has a strong presence in the Midwest region of the United States. This is one of the key reasons that the company is seeing growth. Strong agriculture growth through farming is leading to new purchases by farmers in the Midwest. New oil production in regions like the Bakken formation also offers key reasons for companies in the Midwest to buy construction equipment as they look to catch in on the oil boom in the area. North Dakota, where Titan has a strong presence recently became the second largest oil producer in the United States.

In December, I recommended buying shares after revenue and earnings beats in the third quarter of 2013. Titan beat revenue estimates by $70 million and earnings per share estimates by $0.01. Shares were up only modestly on the news and still traded at a compelling value. In the third quarter, the company posted revenue of $582.1 million. Over the course of the first nine months of 2012, Titan has now generated $1.41 billion in sales.

Titan continues to expand its retail base by buying out small dealerships in current or bordering states. In 2012, the company made purchases of companies in Arizona, Nebraska, and Europe. Despite a weak European market, Titan continues to invest in areas with strong agriculture presences. Titan also announced its intent to create dealerships in Ukraine.

For fiscal 2014, analysts on Yahoo Finance are forecasting earnings per share of $2.63. At today's share price, the forward price to earnings ratio is only 9.4. After forecasting revenue growth of 26.5% in fiscal 2013, analysts have toned back their projections. Analysts see 2014 fiscal revenue growing only 8.1%, which I think is extremely conservative.

Titan will see strong sales of its product in all regions and will also be expanding its store count once again. Both of these will lead to double digit revenue increases on the year. Look for investors to start looking at Titan as a play on farming and construction and give the shares a better valuation.

That's a look at my top ten picks for the year. I will try and update important events throughout the year and provide quarterly updates as well on the entire portfolio.

Disclosure: I am long ATVI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.