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The holiday mood permeates the air and the new year is just around the corner. It's the time when many stock analysts and financial writers begin to present their stock picks, and so do I.

As I expect the turbulent market to continue into 2012, at least the first half of it, portfolio volatility remains a concern. The market whipsawing up and down almost daily just from the European headlines has investors shell shocked. Many analysts have sounded the alarms about huge risks from the eurozone crisis. What if France's AAA sovereign credit rating is cut? On Dec. 16 Fitch Ratings lowered its outlook on the rating to negative. The consequences of a cut would reverberate throughout the world financial markets.

Many have drawn a scary picture of worst case scenarios. But how much of this doom and gloom has already been baked into the investors' psyche? How much of it has already been reflected in stock prices? Some investors won't touch any stocks until the market calms down. The trouble is by then most easy gains have been reaped and disappeared.

That is not to say because of the scary scenarios all stocks have been hit equally and all have become cheap. Not at all. In fact, some sectors have surged, as they are, or perceived to be defensive. For example, in the last 12 months, the Dow Jones pharmaceutical Index is up 16.1%, The utilities SPDR index is up 14.8%, and the Consumer Staples SPDR index is up 9.6%. On the other hand, the Dow Jones Broker Dealers index is down 27.5% and the Banks SPDR index is down 22.3%.

Stocks with the best potential for higher gains often come from the beaten down sectors. With the U.S. job market and domestic economy showing some glimmer of hope lately, the relentless European headlines may begin to have less and less impact on the markets, particularly in the latter parts of next year.

It is a very difficult market to make much intelligent forecasts, but I believe the eight stocks below collectively should do fine in the next year or two. I see all of these stocks as great holdings for the long term as well. However, I wouldn't rush to buy them since I believe there will be opportunities to buy them at lower prices.

1. Freeport-McMoRan Copper & Gold (FCX)

Freeport-McMoRan Copper & Gold is the world’s largest listed copper company. The 3-month strike at its Indonesian subsidiary by workers demanding higher wages at the huge Grasberg Mine ended on December 14. The agreement is more favorable to Freeport than initially anticipated and is expected to increase costs at the mine by an average of only 3% through 2013.

Freeport reported an 11% drop in profits for the third quarter, primarily due to the strikes. The Grasberg Mine has the largest recoverable copper reserves and the single largest gold reserve in the world. Freeport-McMoRan owns 90.6% of the mine through its subsidiary, PT Freeport Indonesia.

Copper fell almost 3% on December 14 because of renewed eurozone worries and risk of a European recession as well as worries of a weakening Chinese economy reducing commodity demand. Furthermore, risk aversion has been pushing up the U.S. dollar, perceived as a safe-haven asset, putting additional pressure on industrial metals prices. On top of that, gold has also lost some of its shine lately due to assumptions that sovereign countries will have to start selling from their reserves to raise cash.

Most of these concerns should already be reflected in the stock price. It has plummeted from its 52-week high of $61.35 to Wednesday's close of $36.31. At current valuations Freeport might even become a takeover target. The company expects to return to full operations at the mine by early 2012. At a trailing P/E ratio of 6.7, no debt, and a strong balance sheet I believe the stock is undervalued and could produce above market returns by the end of 2012 and beyond.

2. BlackRock, Inc. (BLK)

BlackRock, Inc. is the world's largest investment management and financial services firm. The company offers a variety of investment products to institutional and individual investors globally. It also offers a variety of risk management services to large institutional fixed income investors.

BlackRock entered the exchange-traded funds (ETF) business with its December 2009 acquisition of Barclays Global Investors and its San Francisco-based iShares unit. When the purchase was announce BlackRock Chairman and CEO Laurence Fink said he deal was in part to help the company reach Main Street investors. Thanks to iShares brand, the world's largest family of ETFs, BlackRock is now the largest provider of ETFs.

With the increasing popularity of ETFs and with a moderate chance of a rising stock market, BlackRock is positioned to do well in 2012 and beyond. Also, assets allocated to equities vs. fixed income as a percentage of total assets under management (AUM) has been growing, which suggests a higher margin since earnings from equities are higher despite a smaller total AUM. This gradual shift could help BlackRock earn higher investment advisory fees.

In its latest 10-Q form for the nine months ending September 30, 2011, BlackRock reported a total revenue of $6.8 billion, up 12% from the same period in the prior year. In the 2011 Fortune 500 list it moved up from #441 to #282. Its annualized 10-year return has been 17.1% a year. BlackRock's current dividend yield is 3.12% with a five-year dividend growth rate of 27.2%.

Because of BlackRock's fast growth, its stock has historically commanded a higher P/E ratio than most other asset managers. But right now the stock is fairly cheap with a forward P/E of 13.9 vs. its five-year average P/E of 29.3.

3. CenturyLink, Inc. (CTL)

With the acquisition of Qwest on April 1, 2011 CenturyLink became the third largest telecommunications company in the U.S., behind AT&T (T) and Verizon (VZ).

CenturyLink, together with its subsidiaries, is an integrated communications company engaged in providing a range of communications services, including local and long distance voice, wholesale local network access, high-speed Internet access, fiber transport, competitive local exchange carrier service, security monitoring, and other data and video services.

The synergies realized and expected from the Embarq, Qwest, and Savvis acquisitions are starting to pay off. In the quarter and nine months ending September 30, 2011 operating revenues more than doubled compared to previous year. Even though the acquisitions have increased the company's operating cost and debt, going forward the synergies will enhance the company's financial standing as well as boosting its competitive position.

CenturyLink is also moving in the right direction by continuing to invest in its primary growth drivers - broadband expansion, fiber to the tower and to the neighborhood initiatives, managed hosting, cloud services, and Prism TV.

With a current dividend yield of 7.9% and a good chance of maintaining it for the near future, CTL is an attractive stock to own in these rocky markets.

4. UnitedHealth Group, Inc. (UNH)

UnitedHealth Group is a diversified health and well-being company. It is one of the largest health insurance providers with more than 75 million subscribers worldwide. Through its UnitedHealthcare and Optum business units it provides a wide range of products, including health insurance plans to individuals, public sector employers, and businesses of all sizes. It provides products and services for more than 9 million seniors -- one in five Medicare beneficiaries. It also provides dental, vision, life, and disability insurance, pharmacy benefits, disease management, technology services, information analysis, and consulting services.

In its latest 10-Q form for the nine months ending September 30, 2011 the company reported total revenues of $75.9 billion, an increase of 8%, and net earnings per share of $3.56, an increase of 13% compared to the same period 2010. Even with the recent price run up it trades at a trailing P/E of 11.4. Its huge revenue stream puts it at a price to sales ratio of only 0.57. Its projected earnings per share (EPS) growth for the next five years is over 11%.

With its wide breath of products and services and its geographical reach UnitedHealth has a sizeable competitive advantage. Furthermore, with the need for healthcare services in a constant upward trajectory, it is well positioned to benefit from the growth now and in the years to come.

5. CNOOC Limited (CEO)

CNOOC is China’s largest producer of crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world. CNOOC has four major producing areas in offshore China: Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. The company also has oil and gas assets in Indonesia, Australia, Nigeria, Argentina, the U.S. and some other countries. CNOOC stock is a member of the NYSE Composite Index and the NYSE International 100 Index.

China could face the risk of a hard landing if the Europe and the U.S. economies slow more than expected. However, according to the World Bank the risk is low since domestic consumption, which is increasingly a driver of China's economy, will remain strong.

The World Bank has lowered its forecast for China's gross domestic product (GDP) growth to 9.1% for 2011 and 8.4% for 2012. Furthermore, during the 11th China Economic Forum, which was kicked off on December 24, 2011 in Beijing, Wei Jianguo, secretary general of the China Center for International Economic Exchanges estimated that China's GDP growth could drop to 8% in 2012.

Despite the slowdown, China, as the world's second largest fuel user, is estimated to have about 600,000 barrels per day (bpd) of incremental oil use in 2012, where as the demand growth for the U.S., the world's number one oil user, is expected to be only 80,000 bpd of incremental oil use in 2012. However, this demand is sufficient to support global crude prices at current levels and provide CNOOC with a healthy cash flow in the near term and gradually a faster growth as the energy demand is bound to resume its upward trend.

6. Microsoft Corporation (MSFT)

There is no doubt that Microsoft has lost its eminence as a vibrant growth company for many years now, and as a mature company, that stature will probably not be coming back. However, there are recent developments that could pull it out of its doldrums. Here are some of the reasons I like Microsoft.

A Three-Horse Race - In February 2011 Microsoft and Nokia (NOK) announced a partnership in which Windows Phone would become the primary smart phone operating system for Nokia phones. Nokia's new CEO Stephen Elop pronounced, "It is now a three-horse race," referring to competition with Google's (GOOG) Android and Apple's (AAPL) iOS in the fast growing smart phone market. Whether this turns out to be a desperate attempt or an effective strategy remains to be seen.

Windows Phone 7 in mainland China - Although the company did not make the December 31st deadline, the phones with its new WP7 Tango operating system are expected to hit the Chinese huge mobile market in the first half of 2012. The phones will be most likely made by Nokia, Huawei, or ZTE and may come with a fresh new O/S version code named Tango, which may be renamed WP8 to harmonize with Windows 8.

Windows 8 - The latest version of Microsoft’s O/S is expected to be released in the Fall of 2012. It will include many new features aimed at PC, tablet, and smart phone users. If it gets an even mildly enthusiastic reception, it will have a significant positive impact on Microsoft's revenues.

There is also speculation that Microsoft is partnering with the Chinese electronics retail giant Suning for distribution and promotion of WP7 Tango as well as Windows 8. This will be significant for Microsoft earnings.

In the meantime, as a solid and safe value company, Microsoft pays you to wait with a 3.1% dividend yield and an 11.4% average dividend growth rate.

7. Citigroup, Inc. (C)

The financial sector has been the worst performing sector in 2011 with a decline of 18.3%. Investors have been avoiding most financial stocks, especially the banks, in the past three years. While the risk still remains, I believe the downside risk for some financials is not as severe as some analysts predict. For instance, Citigroup, priced at less than half of book value is one of the cheapest stocks, having been pummeled more harshly than most other stocks in the banking sector.

Citigroup has already made substantial improvements to its financial standing, such as its Tier 1 Capital Ratio and common equity, and has restructured globally to shed non-core business units, cut costs, and execute more efficiently. Furthermore, any improvement in the job market and hence housing, will dramatically change things for the banks.

With respect to the European sovereign debt crisis, of the top three U.S. banks Citigroup does have the highest exposure to the troubled GIIPS countries (Greece, Italy, Ireland, Portugal, Spain). The estimated exposure is: Citigroup, $31.7b; Bank of America (BAC): $16.7b, and JP Morgan (JPM): $14.0b. But the European risk is much less significant compared to the domestic real estate mortgage problem, and in that respect, Citigroup has the least exposure.

With regards to the housing crisis and non-performing real estate loans, Citigroup has the lowest exposure among the big four U.S. banks. From highest to lowest according to their estimated total loan portfolios: Wells Fargo (WFC), Bank of America, JP Morgan, and Citigroup, respectively: $1,858b, $1,571b, $925b, and $431b. The estimated percentage in foreclosures, respectively: 2.04%, 5.59%, 7.33%, and 2.14%. Additionally, their Tier 1 Capital Ratio as of the end of September 2011, respectively: 9.4%, 8.7%, 9.9%, and 11.7%. In each case Citigroup is in a better position than its competitors. And by the way, note that all of these Tier 1 Ratios are well above the Basel III requirement of 6%.

In its latest 10-Q for the quarter ending September 30, 2011, Citigroup reported net income of $3.7b vs. $2.1b for the same period prior year, a 73.9% increase. The provision for loan losses was $3.0b vs. $5.6b for the same period prior year, a decrease of 46.1%. For the quarter, the diluted earnings per share from continuing operations was $1.23 vs. $0.83, an increase of 48.2%. The report shows that these and most other metrics, including cash flow, have also improved for the nine months ending September 30, 2011 vs. the same period in the prior year.

All of this clearly shows that Citigroup is steadily improving its financial condition. With its limited exposure to the domestic real estate debacle, its manageable risk in the European debt crisis, and its established and growing global banking prominence, I believe Citigroup is on track to weather the current inclement operating environment and come out more robust than before.

8. Banco Santander (STD)

As if Citigroup wasn't controversial enough, my next pick is an even more despised bank -- a trashed one from Spain.

Banco Santander is the largest bank in the eurozone with the current market capitalization of more than $65 billion. The bank is headquartered in Spain, although currently less than 30% of its earnings come from its home country. Beside Spain, Santander has major operations in many European countries, Brazil and other Latin American countries, and the U.S.

The fear of anything European and financial has caused Santander's stock to plummet from its 12 month high of $12.72 to its Wednesday close of $7.33, a precipitous 42% drop. Investors are justifiably concerned about Santander's exposure to the collapsed Spanish real estate market and to its home country's sovereign debt as the eurozone crisis drags on.

Santander has smartly taken advantage of depressed valuations due to the crisis and has acquired many foreign assets. Some of these acquisitions include, buying back the 24.9% stake in its Mexican arm, Grupo Financiero Santander for $2.5b from Bank of America in June 2010; 318 branches from Royal Bank of Scotland Group (RBS) in August 2010 for £1.65b; and Bank Zachodni WBK (OTC:BKZHF), the third largest bank in Poland for €4.1b in March 2011.

In its latest earnings report for the nine months ending September 30, 2011, Santander reported gross income of €33.2b, an increase of 5.8% vs. the same period prior year; A net operating income after provisions of €10.7b, an increase of 6.6%; an earnings per share of €0.5981 for a decrease of 14.7%; Tier 1 Ratio of 10.74 vs. 9.72, an increase of 10.5%; a book value of €8.91 vs. €8.49, an increase of 4.9%; and a P/E ratio of 7.81.

The European Banking Authority (EBA) has identified a capital shortfall of €6.5b or €15b if a convertible bond is not taken into account. But Santander's formidable foreign assets, especially in Brazil and the rest of Latin America have allowed the bank to weather and manage the Euro crisis better than most other European banks. I believe it will be able to meet its capital requirements without cutting its hefty dividend by much, if at all. Looking past the next year or two, I think Santander should be rewarding the shareholders nicely.

The Potency Score System

The last column of the table below provides you with the Potency Score. If you have been following my articles you have a good idea what it is, but for those unfamiliar with it, please see the original article in which I first introduced the system, here. It would be helpful to also see its successive improvements and enhancements in articles here and here. But I'll give you a brief description now:

The Potency Score encapsulates the most important metrics about a company's long term dividend return potential into a single rating, allowing easy comparison between companies. A good way to get a feel for the Potency Score is to view it as a forecast of a stock's 7-year yield-on-cost.

The scores listed in this table were produced by the Version 4.0 System.

8 Stock Picks For 2012

Data as of close Wednesday 12/28/2011

Symbol

Name

Price

P/E

(Fwd)

% Yield

(Fwd)

Potency

Score

FCX

Freeport-McMoRan

36.31

7.67

2.75

n/a

BLK

BlackRock

176.44

13.76

3.12

20.24

CTL

CenturyTel

36.67

14.37

7.91

25.10

UNH

UnitedHealth

50.71

10.63

1.28

23.95

CEO

CNOOC

173.12

7.57

3.34

29.83

MSFT

Microsoft

25.82

8.43

3.10

22.27

C

Citigroup

26.13

6.02

0.15

n/a

STD

Banco Santander

7.33

6.16

8.37

n/a

Source: 8 Stock Picks For 2012