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Here’s one way to make a lot of money in the stock market: Get in front of good news.

This strategy presupposes that you’re able to identify favorable news before the market does (I’m here to help with that, beginning with the stock pick below). And, too, it presupposes that the positive news is not yet baked into the price of the stock.

Last, but not least, there is your level of conviction. Just how certain are you that the favorable event will actually occur? It’s one thing to buy when you’re guessing a positive development is right around the corner; it’s another thing to buy when you know – with a high degree of certainty – that good news is imminent.

The latter makes for an exceedingly attractive buying opportunity. And that’s what we have with the latest addition to my Top Ten list for 2012, detailed below. If you’d like to get up to speed on my three earlier picks (GE, Terex, Manitowoc), check out Part 1 and Part 2 of this ongoing series of columns.

Buy: WHIRLPOOL (NYSE:WHR)

Whirlpool, the world’s #1 appliance maker, does business in 130 countries and generates over $18 billion in annual revenue. At $49 per share (down from $92 earlier this year) and with a 3.8% dividend yield, this stock is a safe bet to generate at least a 50% return for investors over the next 18 to 24 months. Note that a 50% return is my base case. If I’m right about the margin leverage embedded in this particular model, buyers of Whirlpool stock should anticipate much higher returns.

Here is the upcoming good news for Whirlpool, news that’s not currently priced into the stock: The disappointing earnings experience of 2011 is going to be followed by a much higher earnings stream. To understand why, we have to take a closer look at current year’s results.

Earlier this year, the market was pricing in an earnings stream of $7.25 to 8.25 per share, and the stock traded as high as $92 (implying a 12 P/E on the mid-point earnings range). Earnings expectations for 2011 were lowered to about $5 in October, and now the stock is trading at $49, or about ten times current year earnings.

Implicit in the current Whirlpool quote, at $49, is that today’s subnormal profitability will continue for the foreseeable future. The market is not discounting a return to normal for Whirlpool. But that’s exactly what’s going to happen. As a higher earnings stream becomes evident by the third or fourth quarter of 2012, Whirlpool stock will likely rebound to the $70s or $80s. Longer-term (by 2014 or 2015), I expect the model’s margin leverage will be unlocked, and we’ll see net margins of 4 to 4.5%. This implies annual earnings of $14 to 15 per share, and a $150 stock price, or three times the current quote.

The path to improved margins at Whirlpool was disclosed by the company in October. It involves taking $400 million of excess costs (through workforce reductions and capacity adjustments, among other things) out of the operating structure, one-half of which will happen in 2012, with the balance in 2013. End-market demand (much of which is leveraged to new home construction) is at recessionary levels for Whirlpool. That means there are two levers set to drive Whirlpool earnings (and the stock) to much higher levels: the revenue lever (higher sales) and the margin lever (higher net margins).

It is important to understand that nothing heroic is required for Whirlpool to realize 4% to 4.5% net margins in three or four years time. My analysis of Whirlpool operating metrics, in comparison to their peer group, suggest that 4% to 4.5% is not only achievable, but it’s at the low end of this particular model’s potential.

Though it’s the primary reason I’ve been buying the stock, it’s worth nothing that Whirlpool has a lot more going for it than margin expansion potential. The company is enjoying rapid growth in emerging markets, which will soon (by next year) account for one-third of total company sales (up from 16% just three years ago). And the company is not only diversified geographically, but across brands and product lines as well. In fact, the company has six different brands (such as Maytag and Kitchen Aid) that generate $1 billion in sales per year.

A word on General Electric

My first pick for my Top Ten list, General Electric (NYSE:GE), has enjoyed a decent rally in recent days. Last week the company announced a quarterly dividend increase, from 15 cents to 17 cents. The stock should continue to move higher on this news. As of this writing (Sunday afternoon), the new dividend payout rate results in a 4% yield with the stock at $16.84.

This is just the beginning for GE shareholders, as I expect the dividend will be raised at least two more times by the end of next year. Look for next column, to be posted in the next day or so, when I’ll reveal two more picks for my Top Ten List for 2012.

Disclosure: I am long WHR, GE, TEX, MTW.

Continue to Part IV >>

Source: My Top Picks For The Coming Decade Of Stocks, Part III