by Austin Smith
Each year, Fortune lists the 10 best stocks for the upcoming year. Of those 10 stocks, I have narrowed the list down to the 5 that appear to be most attractive. These stocks were selected based on a mixed criteria looking at dividend yields, value, and growth opportunities. Below are the 5 stocks that appear to be the most promising for 2012.
Caterpillar Inc. (CAT) – Although the stock is trading closer to its 52-week low around $70 than its high around $120, Caterpillar is a stock that looks to be a strong buy for investors in 2012. The company has a beta of 2.10, making it twice as volatile as the market. However, that should not cause investors to steer too far away from this stock.
Caterpillar currently offers a dividend of $1.84 or a 2% yield. The earnings per share of $6.54 gives Caterpillar a price to earnings ratio of 13.9. Although this is almost half of the S&P 500, it is right in line with the industry ratio. Looking at one of Caterpillar’s competitors in CNH Global NV (CNH), who has the lower earnings per share of 3.97, Caterpillar dominates when it comes to earnings-- with a net income of $4.35 billion compared to $955 million. Over the course of next year, analysts believe the stock will hit a mean price of $114.50. If the stock does indeed reach that level, it would be an increase of about 30%, making it look like a very good potential buy at its current levels.
The Goodyear Tire & Rubber Company (GT) – With a beta of 2.96, GT is one of the more volatile stocks on this list. Currently, the stock does not offer a dividend to investors. The earnings per share for Goodyear is $0.45, which gives the stock a price to earnings ratio of 32.1. Currently, this is considerably higher than the industry ratio-- which is in the mid 8’s. Based on these numbers, the stock seems overvalued. However, the company recently posted a record-breaking third quarter. For the first time in the company’s history, GT surpassed the $6 billion revenue mark.
Additionally, it was the third straight quarter the company registered a profit. This is primarily due to the company’s focus on its premium offerings. The revenue in the third quarter rose 22% helped by sales generated from the high-priced premium tires. Analysts have a mean target price of $18.56 for the stock. However, if Goodyear continues to post these types of profits, the stock could easily hit the high target price of $22.00 or more.
Intel Corp (INTC) – When a recession hits, one aspect of stocks that investors will look for are those that yield a nice dividend. Intel does just that with a yield of 3.60%, or about $0.84 annually. This stock is about as volatile as the market, with a beta of 0.95. The company’s price to earnings ratio of 10.2, based on earnings per share of $2.31, is slightly lower than the industry average with a ratio of 11.4.
Comparing Intel to competitors Advanced Micro Devices, Inc. (AMD) and Texas Instruments Inc. (TXN), Intel is the industry leader with a net income of $12.76 billion. The competition has reported net income of $1.04 billion and $2.84 billion respectively. The price to earnings growth is also the lowest of the three at 0.88. Looking to grow business, Intel announced it has formed a unit to focus on chips for both smartphones and tablets. If the company can capitalize on this earning potential, the stock will continue to grow.
Microsoft Corporation (MSFT) – Microsoft has products that everyone uses, from its operating system, office software, or even a web browser. However, it seems that the stock itself has been rather overlooked. The company has a beta of 0.98, making it about as equally volatile as the market. Additionally, the stock has a dividend yield over 3% as it provides investors $0.80 annually. The company’s earnings per share is $2.74, which gives Microsoft a price to earnings ratio of 9.4. The industry of Application Software is currently above 20 and the S&P 500 is over 25. Based on the ratio, it could be seen that Microsoft is undervalued. If the stock was to reach a price to earnings ratio more in line with the industry, the stock price would have more than doubled for investors.
When looking at Microsoft’s competitors Apple Inc. (AAPL) and Google Inc. (GOOG), there is much to compare between the three. AAPL has the highest net income of $25.92 billion, with Microsoft close behind with $23.48 billion and Google at $9.58 billion. Although, it should be noted that Microsoft does have the higher operating margin of the three at 38.78%. Microsoft also has the lowest price to earnings ratio, while Google has the highest at 21.07. To spark possible growth interest with Microsoft, the company has planned to create a 50-50 joint venture with General Electric Company’s (GE), to help healthcare organizations and professionals improve the overall healthcare quality and experience. Although MSFT has currently decided not to increase the dividend for 2012, the excess cash could be used to help this venture turn into additional profits.
Royal Bank of Canada (RY) – Although bank stocks are ones that investors have been staying away from lately, Royal Bank Of Canada offers some very good reasons to own it. Compared to other bank stocks, Royal Bank Of Canada is not as volatile with a beta of 1.38, although still higher than the market. The dividend yield is 4.50%, or $2.10 annually-- which is the highest yield of the stocks on this list. The earnings per share of $3.21 give Royal Bank Of Canada a price to earnings ratio of 10.9. This is only slightly higher than the industry average of other money center banks at 9.0.
Although the bank does have concern with the debt crisis in Europe affecting the financial stability of Canada, analysts still predict the price of the stock to rise. With a mean target price of $57, Royal Bank Of Canada would see an increase of almost 25% in a single year. Adding this information to the stock’s already attractive dividend yield make this bank one to consider.