It is time to break down our top investment ideas for the year and see how they are doing. Earlier this year, we published our top nine investment ideas. They were IBM (IBM), Apple (AAPL), Starbucks (SBUX), Panera Bread (PNRA), Monster Beverage (MNST), Wal-Mart (WMT), VF (VFC), Arctic Cat (ACAT), and M/I Homes (MHO).
Here is a breakdown of how those positions are doing so far this year:
1. International Business Machines
2013 Price Target: $285
Potential Gain: 45-50%
Analysis: The company is off to a fast start this year with some solid earnings reported in January, and we believe what these earnings say about the state of IBM will continue to be a catalyst for more upside for the year. Our main argument for 2013 was that the company was going to be able to make strong gains in its cloud systems and new software offerings. That claim is holding true so far. The latest quarter showed IBM forecasting 2013FY EPS at $16.7 versus $16.6 expectations from most analysts. The company commented that it continues to see strong growth in its software/cloud offerings, which offer better margins than hardware. Additionally, the quarter showed the company growing market share, according to Sterne Agee's Shaw Wu:
What we found impressive is the company was able to accomplish this despite services (51 percent of revenue) somewhat lagging and most competitors underperforming, indicating IBM gained (market) share.
Moving forward, we still are sticking with our $285 target. While this target is a best-case scenario, IBM is showing very strong growth in its cloud services, building on its hardware economic moat and business strategies and applying it to software. Further, software has drastically better margins as was seen by the 6% growth in earnings but flat sales growth as the makeup of sales pushed more towards cloud. The stock is still very cheap at a 10.9 future P/E, and we like buying above $200. One final note is that we believe that the company has attractive opportunities in emerging and frontier markets. Emerging markets will benefit from software while frontier markets can benefit from hardware infrastructure as well as software. We believe this catalyst and upside is often not mentioned by many but can play a large role in the company's growth in the next several years.
2013 Price Target: $850
Potential Gain: 55-60%
Analysis: It's been a tough start to the year for Apple as the company continues to be plagued by a duality of positives and negatives that are leaving investors with questions. The company has dominant market share in the phone (36% share in the U.S.) and tablet market (49% share), but many analysts/investors are complaining that the company lacks new innovation to maintain its current dominance. For each person that says Apple is undervalued with a sub-10 future P/E, another comments the company also holds a nearly 3.5 price/book level, which is typically seen as fairly valued. For now, we continue to see shares as a great value but likely sitting still until a catalyst arises. So, what can move Apple? There are a couple of developments we are watching that we believe can add $50-$100 to shares. First, a deal with China Mobile (CHL) will be very important for the company. It continues to lack market share dominance in China due to the fact that it is not with the country's top carrier. Despite its lack of a deal with CHL, it has done well there. That deal will put it over the edge. The latest development shows that the two sides are getting closer to a deal. Tim Cook, CEO of Apple, met with China Mobile in mid-January. At the same time, China Mobile is in no rush to take on Apple's strict requirements for being a carrier as the company reported 5.5M new 3G subscribers in December. With such strong success, CHL does not need AAPL as much as AAPL needs CHL. A deal is still unlikely to be taken up until at least late February or early March. Another potential catalyst for Apple is a new product. The new iPhone and iPad are not going to be available until the early summer, so what could it announce? We do not see anything expected, and that is why we see shares fairly muted right now. Look for upside to start in Q2 as we near new phone and tablets. For now...hold tight
2013 Price Target: $72
Potential Gain: 30-35%
Analysis: SBUX is off to a nice start in 2013, and we think that it will continue to be solid moving forward this year. The company had a strong January with earnings reported and some solid signs from the company's latest report. The company attributed a strong Q1 for 2013 to strong U.S. demand. The company reported earnings that met expectations of analysts at $0.57, which showed 14% growth. The company said that the quarter's success was due to a strong holiday season and success in U.S. cafes. Here were some highlights for the quarter. Net revenue grew 10% in Q1 with 7% growth in same-store sales. The company sold 150K Verismo brewers as well. Another great area of growth is China/Asia Pacific. That region saw 28% growth in revenue along with 11% growth in same-store sales in the latest quarter. Additionally, operating margin grew to 25.5% from 23.2% year/year due to lower costs as well. We continue to like the company's growth potential moving forward this year. Revenue growth over 10% should be expected as the company will benefit from a lot of new products like its Verismo brewers and pods that complement it, Evolution Fresh juices, and new coffee roasts. What's more, the company is spreading like wildfire. It is expected to launch 1300 new stores globally in 2013. We believe the company is clicking on all cylinders through the first month of 2013, and we see that $72 price target getting closer each day. Additionally, coffee prices continue to be low, and until those increase, we should see very solid margin expansion for SBUX.
4. Panera Bread
2013 Price Target: $200
Potential Gain: 20-25%
Analysis: Through the first month of 2013, our liking of Panera has only grown stronger. First off, it was another great quarter for PNRA. The company continues to show great earnings expansion, margin growth, and development at a steady pace that should attract investors. The company's latest quarter showed some very solid results that we believe are ones to take note of moving forward. First off, the company increased income 34% year/year as same-store sales jumped higher by 5%. The company, further, forecasted above expectations with a $1.62 - $1.66 EPS for Q1 of 2013. Expectations were for $1.58 - $1.62 from analysts. The company had flat check growth for the quarter in same stores, but check prices grew, which shows a solid growth in margins. As we noted in our first article about Panera, the company has the potential for 4000+ stores in the USA alone, and it has not even begun any international expansion. The company is expected to open around 120 new stores in 2013 to continue to add to its total. The company, further, continues to buy back shares as part of a $600M share buyback plan. PNRA continues to grow at very solid rates despite good competition and macroeconomic headwinds. What's the company's key to success? It offers a unique menu that continues to shift and offer premium food options at mid-level pricing. The continued shift to fast-casual dining away from fast food by American consumers is benefiting PNRA. Its value at 22 future P/E is strong, but we believe that it will stay very consistent with 20% EPS growth each year until they maximize its growth in the states.
5. Monster Beverage
2013 Price Target: $82
Potential Gain: 50-55%
Analysis: It has not been a good start to the year for MNST. The company is expected to release earnings sometime later this month, and expectations are not high. The company, as noted by Goldman Sachs last week, saw decelerated sales in the latest quarter. The reason? We believe it could be a hangover from the FDA news that came out last year linking MNST to health concerns. Despite the validity of the report being questioned, consumers still seem to have shown some fear in the energy drink. While we expected this to happen, we do believe a lot of that fear is priced into shares as the value on MNST shares has come down significantly. Shares are sitting at a 20 future P/E and 4x sales, which is one of the lowest levels it has been at in years. Right now, the company is likely to continue to struggle until it shows a catalyst for upside, which could come from earnings (expectations are low for the report). At the same time, we believe that MNST has great international opportunities and will be able to bounce back from this short-term blip. The recent struggles should be seen as a buying opportunity rather than a long-term issue. Other than that, January was a quiet month for the stock, and we will get earnings at some point this month. We would look for some decline off those earnings and allow for a great entry point. Over the next several years, we believe that MNST will continue to be attractive as a whole generation of energy drinkers continue to replace coffee drinkers.
Our update on WMT, VFC, ACAT, and MHO will be out soon!
Disclosure: I am long PNRA.