By Larry Gellar
After a crazy week on Wall Street, many investors are ready to settle down and figure out what will make money in the future. 2012 may be when this economy starts to fully recover, so the question is which stocks will benefit the most from this. Here are 6 we like:
Intel Corporation (INTC) – Intel’s had its ups and downs this year, but there are a variety of reasons to start liking this stock. As discussed at another Seeking Alpha article, there are both fundamental and technical factors that could make this stock go up soon. Most importantly, the company’s sales are improving at the same time that it has been able to increase prices. As far as headlines in this industry are concerned, perhaps the most important has been Nvidia’s (NVDA) recent fluctuation. Although it posted a very strong earnings report, initial gains were wiped off as people began to question the viability of the company’s Tegra chip. On the other hand, concerns with Intel’s chips are far and few between. Statistically, Intel compares favorably to other competitors as well. With a price/earnings to growth ratio of 0.79, Intel is trading cheaper than Advanced Micro Devices (AMD) and Texas Instruments (TXN), which have price/earnings to growth ratios of 0.97 and 1.06 respectively. INTC also beats AMD and TXN on quarterly revenue growth, gross margin, and operating margin. Although Intel has had two straight quarters of negative cash flow, this is mostly due to stock repurchases, which are a good sign of the company’s confidence. If there is one thing to be concerned about though, it’s possible rumors that Apple (AAPL) may be losing interest in Intel’s chips.
General Electric Co. (GE) – GE has fallen quite a bit since 2011 highs of nearly $22, as this company is so reliant on the economy’s overall health. Recent headlines for the company have included plans to build a new refinery in England, although this probably will not have a huge impact on GE’s share price. Some market watchers believe that the project is doomed to fail after a similar one was previously shut down, but we believe that the move should give GE fairly normal returns. Regardless, some analysts seeing this stock going to $30 and with an upgrade earlier in the year by Argus, it’s not hard to see why GE is gaining popularity. General Electric also boasts a 36.32% gross margin, which is somewhat higher than other conglomerates like Siemens (SI). Additionally, price to earnings ratio and price/earnings to growth ratio are both reasonable for GE at 12.49 and 0.78 respectively. Cash flows have been great too – all of the 4 past quarters have seen tremendous cash inflows. In fact, $8.89 billion came in during the quarter ending June 30th. With cash per share of 8.59, GE’s problem – if any – seems to be a lack of profitable investment opportunities in an imperfect economy.
Merck & Co. Inc. (MRK) – MRK has been surprisingly volatile in 2011 as many investors question the leadership of new CEO Kenneth Frazier. Additionally, Merck has a number of patents set to expire soon. Regardless, with a yield of 5.1%, dividend investors will want to snap this stock up. Merck also boasts stronger quarterly revenue growth than competitors like Bayer (BAYRY.PK), GlaxoSmithKline (GSK), and Pfizer (PFE). While price to earnings ratio (33.77) and price/earnings to growth ratio (1.84) are somewhat high, the best companies simply trade at a premium. Note that this was also the case with Intel above. In fact, like Intel, Merck has also had all of the past 4 quarters' net cash inflows. As far as general pharmaceutical news goes, the industry may have taken a blow due to the recent striking down of Obama’s universal healthcare plan. Regardless, the fate of that law will probably be decided in the Supreme Court, so the fight is not over yet. Look for news regarding the constitutionality of mandated healthcare to definitely affect MRK stock but perhaps not as much as future company-specific events. Speaking of company-specific events, the lawsuit against Merck surrounding its Vioxx drug and possible fraud of investors continues to rage on.
SIRIUS XM Radio Inc. (SIRI) – SIRI has seen steady gains since September 2010, and the company continues to put out new and exciting channels for its satellite radio such as the latest one, Studio 54. Regardless, some investors have expressed caution regarding the company. This article, also from Seeking Alpha, brings up some great points that are certainly worth mentioning. In many ways, Sirius XM has not taken full advantage of traditional Internet or the mobile market. Even some users of the company’s technology readily admit that its Internet and mobile services aren’t great. Sirius’s use of advertising and reaching out to certain demographics has also been lacking. Despite all these important points though, the fact remains that competition in the radio industry is quite weak. Net income for Sirius’s most serious (no pun intended) competitor Pandora (P) has been negative for 2 straight quarters now. SIRI also beats P in some other statistics. Gross margin and operating margin for SIRI are both about 20 percentage points higher. Additionally, price to sale ratio for P is a whopping 11.69, while SIRI’s is a much more reasonable 2.39. While more traditional radio broadcasters like Cumuls Media (CMLS) and Westwood One (WWON) have the best price to sale ratios (0.43 and 0.37 respectively), it is quite clear that these companies are a dying breed.
Oshkosh Corporation (OSK) – This company has gotten shellacked lately as a reduced government budget could put a damper on future profits. Other factors are also weighing down on the stock as described here. For example, the company was able to win an important project from the government for armored vehicles but may actually be losing money due to higher than expected costs. Regardless, Oshkosh also sells some products commercially, most importantly trucks, so there’s still plenty of reason to like this company. Terex (TEX), whose business is reasonably similar to Oshkosh’s, lags in certain notable metrics. For instance, both gross margin and operating margin are lower. Additionally, 4 of the past 5 quarters have not been profitable for Terex, while Oshkosh brought in net income for all of those same quarters. OSK is also very attractive for its price/earnings growth and price to sales ratios, which are 0.78 and 0.22 respectively. Perhaps OSK’s best stat though is its price to book ratio of 1.01, which is pretty much a steal for any non-financial. Oshkosh’s cash flows are also reasonably strong, although debt levels are a bit worrisome. Regardless, with a beta of 2.50, look this stock to skyrocket once the economy recovers in 2012.
Apple Inc. (AAPL) – Temporarily becoming the most valuable company in the world last week, Apple has not been hurt very much by the recent bear market. In fact, for a great read about Apple’s story, consider taking a look at this article. With household names like iPad and iPhone, we all know that Apple is valuable … but the question is how valuable? Answering a question like that isn’t easy, but we believe the answer is up – way up. In fact, when compared to Google (GOOG)’s valuation metrics, this isn’t even that unreasonable. Apple’s price to earnings, price/earnings to growth, and price to sales ratios are 14.91, 0.61, and 3.45 respectively. Google’s numbers in these same categories are 20.34, 0.84, and 5.45 – all much higher. While competitors like Hewlett-Packard (HPQ) and Research in Motion (RIMM) may be a bargain for those hunting sub-8 price to earnings ratios, AAPL is still a good place to be. The most recent news affecting Apple has been Steve Jobs’s crazy new plans for company headquarters, but needless to say this will not have a huge impact on AAPL stock price. What will though is whether the company can keep up its knack for fresh technology that consumers love. While some may call this blind faith, we see it as an investment opportunity. The best time to buy AAPL stock is before their next biggest thing is announced – and that time is right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.