The S&P 500, which had rallied from 1158 in late November to 1267 on December 7th, retreated 4% since on worries Europe's economic deceleration is taking a toll on companies on this side of the pond. And, while I covered these risks in more detail here, broad-based sell-offs offer opportunities for value investors putting together wish lists for 2012.
Choosing stocks in a down tape is tough. No one wants to catch a falling knife. Rather than buying a stock simply because it's beaten down, my team at E.B. Capital Markets, LLC crunched the numbers to find some great, cheap stocks for the coming year.
Out of more than 500 stocks with market caps greater than $5 billion, only 15 passed the test. Each has two things in common. First, they're trading at or near their 5 year PE low on future earnings expectations, which is a great way to find stocks where investors have disconnected with the story. Second, they've all beat the street in each of the preceding four quarters, which tells you the company is doing a great job executing.
A Global Slowdown Puts Quantitative Easing Back in Play.
The eclectic list includes AngloGold (AU), which is expected to see earnings climb 25% next year. Gold stocks have fallen out of favor recently as inflation has shifted to deflation risk. Rumors are circulating hedge funds are unwinding longs into year end. And, a bigger risk comes from any future selling of Sovereign gold reserves in Europe. But, a similar sell-off in gold occurred following Lehman's collapse. So, it's not unthinkable gold regains its luster again in 2012, particularly if sovereigns realize they need to match austerity on one hand with spending from the other. If gold does bounce back, expect Anglo's share price to climb.
Online Gaming Will Pick up Momentum again in 2012
The list of cheap stocks also includes gaming stock Electronic Arts (ERTS), which made a splash this year buying PopCap, well known for its Facebook games including Bejeweled. Electronic Arts is trading 17.6x next year estimates, well below its 5 year PE low of 21. One of the biggest trends driving 2012 will be growth from wireless, Internet and advertising supported sales, which jumped to $234 million last quarter from $161 million last year. Investors can also expect the company to continue to buy back its own shares. Back in February, Electronic Arts board approved a $600 million buyback and through September they had spent $247 million repurchasing 12 million shares.
Worries Over Credit Card Regulation will Abate
Visa (V) makes the cut with expected EPS growth of 16% next year and a future PE of just above 14. Worries spending pattern shifts and regulation would knock Visa earnings lower haven't panned out. In Visa's most recent 10-Q, the company lists a grocery list of revenue risks tied to debit fee regulation before guiding investors to high single to low double digit revenue growth in FY2012, followed by an acceleration in 2013. As a result, despite reform, the Street expects Visa to grow earnings per share by 16% next year, following 17% growth this year. With the rate of deceleration in U.S. revolving credit slowing, any improvement in consumer confidence or spending - including today's upped National Retail Federation holiday sales forecast - offers upside for Visa in 2012.
Healthcare Utilization Returns to Growth
A number of healthcare stocks also pass the test, including St Jude (STJ), Baxter (BAX), Abbott (ABT), Davita (DVA) , Labcorp (LH) and Amgen (AMGN). The basket remains unloved post healthcare insurance reform, despite solid earnings growth. Next year, the street expects this group to grow earnings by 9.6% on average, and this amid lackluster utilization since 2008.
Despite a 2.5% dividend yield and double digit top line growth, St Jude is trading less than its 5 year PE low on next year's 9% expected earnings per share growth. Baxter pays a similarly competitive 2.8% yield and is expected to see top and bottom line growth of 8%. I've written previously of Abbott's (ABT) robust pipeline and upcoming drug unit spin-off. The company pays a 3.5% yield and is likely to see greater media coverage of its pipeline next year. Davita, which operates kidney dialysis centers and which I discussed back in June, and Labcorp, which provides lab testing for physicians, are both growing near or at double digits. Finally, Amgen, which has gone sideways since 2009 appears ready to break out of its range and head higher. If investors simply return to valuing Amgen's earnings per share at the middle of its 5 year PE range, it would represent a 32.6% share price gain.
Mobile Devices are Mass Market in 2012
Outside of Electronic Arts, there are other opportunities in technology. Despite risk tied to decelerating demand in Europe, Activision (ATVI), Broadcom (BRCM), Qualcomm (QCOM) and Cisco (CSCO) all appear cheap despite their history of beating the street. Broadcom boosted its guidance this week, citing chip demand, which is likely being driven by smart phones and tablets where the company counts high profile device makers, including Apple (AAPL), as customers.
In an iPhone 4S teardown report reported by EEtimes in mid October, Broadcom's newer chipset was being used, which is good for Broadcom margins. Broadcom's products are also nicely sprinkled throughout the iPad 2. And, given Broadcom supplier Taiwan semi (TSM) reported a major rush order at the end of Q3, it's conceivable Broadcom will find itself in the iPad 3 next year. Broadcom also supplies its wifi/bluetooth/fm chip for Apple's TV hobby too. So, expansion of this platform bodes well for Broadcom in 2012.
Qualcomm (QCOM), which won Apple iPhone's baseband supplier business from Infineon this year, also looks good. The company remains a market share powerhouse in smart phones, with its Snapdragon processors. Its Snapdragon S4 product will likely show up in a lot of next generation smart phones and tablets next year. But, the real scale comes as smart phones enter the mass-market device camp. Its S1 chips could power a great number of the entry level smart phones sold in emerging markets.
The market is likely to go far lower than comfortable, so timing entries will be important. But, armed with a list of good cheap stocks helps insulate some of the risk. Investors looking to spread risk further can dabble into these names a little each month, rather than going all in and getting caught by an overnight European bank failure.
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