2012 Portfolio Picks For Growth, Income And Speculative Investors

|
Includes: AFL, APA, AT, BIP, BNS, BRK.B, CME, DMLP, EGAS, EPD, EXC, GSFVF, HAL, JCI, JNJ, LNC, MO, MQBKY, NOV, PAYX, PNG, RICK, SU, SYK, T, UTX, VOD
by: George Fisher

The international yacht racing business is getting a bit more complicated these days. In order to keep the boats and crew safe, the 2011-2012 Volvo Ocean Race, a 39,000-mile jaunt around the globe, has decided to take the unprecedented step of loading the yachts onto armed ships and transporting them through the pirate-infested waters around Somalia. With the race currently in progress, it is not an easy task, as these racing boats weigh 15 tons with stepped-mast heights exceeding 60 feet, and are valued at over $10 million each.

Just as the Volvo Ocean Race organizers identified a real risk to the well-being of their participants and drastically altered their plan accordingly, investors should do the same when reviewing their portfolios for 2012. Several political and economic trends will influence share prices over the next 12 months.

The euro crisis and its impact on US equities has been dissected almost ad nauseum. However, investors should continue to monitor the short-term gyrations of eurozone economic issues. It is almost a given there will be an economic contraction in the eurozone in 2012. The major uncertainty is: How severe?

China will have slower economic growth due to reduced exports to Europe, relieving a bit of pressure on its growing demand for commodities. But will growth be above or below 5%?

China keeps moving away from the US dollar as its major trading currency, demonstrated by its recent agreement with Japan concerning trade settlements. The euro problems will keep a lid on the EUR/USD exchange rate, but the Asian currencies will continue to climb relative to the US dollar. When the economic climate improves in Europe, expect the USD to continue its long-term decline.

Commodities will have a wild ride in 2012, similar to 2011. Soft demand in Asia and a strengthening USD in the first 6 months will keep a lid on pulp and metals such as copper. Oil will bounce around from $90 to $100, absent political shocks. Natural gas will continue to be in oversupply, but prices will firm to the $4.00 to $4.25 range.

The US economy will continue its “stealth” expansion, slogging along for the first half with growth back end loaded for the year. The Feds will keep interest rates at historic lows, but market rates will drift higher as the year progresses. The flights to relative safety that will strengthen the USD in the first half will also help keep rates low. However, the same forces that will keep the dollar strong will also negatively influence US exports for major multi-nationals.

The prudent portfolio management approach may be a more cautious first half with an eye for safety, income, and capital preservation followed by adding risk and growth as the year progresses.

Income Portfolios:

Investors are getting weary of low cash returns. However, the first rule of income investing is to acknowledge the importance of capital preservation and to act accordingly. With low rates, finding the right trade-off between invested capital risk and current income becomes a challenge. Bond funds are going to cause much heartache as interest rates begin to increase and their NAV declines.

Individual bond prices will likewise take their hit. There is probably more interest rate risk in bonds than income equities as stocks have the potential to increase earnings and distributions to help offset market declines due to interest rate risk. There should be greater interest rate risk developing in the second half of 2012 than the first.

For those seeking income, higher yielding stocks along with MLPs can be cobbled together to generate a 5%+ overall cash return. With 10-year Treasuries hovering around 1.9% yield and 30-year around 2.9%, the following equities may be competitive for investors looking for current income:

  • Vodafone (NASDAQ:VOD) – Large-cap international telecom based in Europe with a 3.5% yield and an 8.7% anticipated eps growth rate, S&P Equity Ranking for 10-yr consistency in earnings and dividend growth NR, 24-month price target $34;
  • AT&T (NYSE:T) – Large-cap telecom with a 5.9% yield and a 3.9% anticipated eps growth rate, S&P Equity Ranking B+, target price $32;
  • Paychex (NASDAQ:PAYX) – Mid-cap business services with a 4.2% yield and a 10.0% anticipated eps growth rate, S&P Equity Ranking A, target price $32;
  • Altria – (NYSE:MO) – Large-cap tobacco firm with a 5.5% yield and an 8.2% anticipated eps growth rate, S&P Equity Ranking A, target price $31;
  • Johnson and Johnson (NYSE:JNJ) - Large-cap healthcare firm with a 3.5% yield and a 6.1% anticipated eps growth rate, S&P Equity Ranking A+, target price $72;
  • Bank of Nova Scotia (NYSE:BNS) – Large-cap Canadian financial firm with a 4.1% yield and a 9.2% anticipated eps growth rate, S&P Equity Ranking NR, target price $63;
  • Exelon (NYSE:EXC) – Large-cap electric utility with a 4.9% yield and a 3.0% anticipated eps growth rate, S&P Equity Ranking B+, target price $55;
  • Gabelli Utility Fund (MUTF:GABUX) – Utility mutual fund focused on mid-cap value with the potential for acquisitions offering a yield of 13.9% (including ROC) and an anticipated eps growth rate of 6%;
  • Enterprise Partners (NYSE:EPD) – Large-cap energy pipeline and mid-stream natural gas processor MLP with a 5.4% yield and a 7.7% anticipated eps growth rate, S&P Equity Ranking B+, target price $53;
  • Brookfield Infrastructure (NYSE:BIP) – Small-cap MLP with international capital assets including port terminals, electric generation facilities, and timber with an 5.4% yield and a 6.1% anticipated eps growth rate, S&P Equity Ranking NR, target price $32.

Traditional Growth and Income Portfolios:

With the potential for continued uneasiness in the first half followed by a bit better sailing in the second half of 2012, investors would find it prudent to review the above names for income ideas. More speculative opportunities on the income side could also include:

  • Atlantic Power (NYSE:AT) – Small-cap alternative fuel merchant power producer with an 8.0% yield paid monthly and a 2.0% anticipated eps growth rate, S&P Equity Ranking NR, target price $17;
  • Gas Natural (NYSEMKT:EGAS) – Small-cap regulated gas utility with interests in 168 producing wells, 20,000 acres in North-Central Montana and two small pipelines with a 4.9% yield and a 7.5% anticipated eps growth rate, S&P Equity Ranking NR, target price $14;
  • Dorchester Minerals (NASDAQ:DMLP) – Small-cap oil and natural gas MLP with an 8.1% yield and a 7.7% anticipated eps growth rate, S&P Equity Ranking NR, target price $30;
  • PAA Natural Gas Storage (NYSE:PNG) – Natural gas storage MLP with an 8.3% yield and an 11.4% anticipated eps growth rate, S&P Equity Ranking NR, target price $23.

For the growth portion of the portfolio, it would be prudent to buy energy, financials, and industrials during anticipated dips in the market during the first half of the year as the second half should see improvement in earnings-driven share prices. Investors could look to accumulate the following companies over the next few months:

  • Suncor (NYSE:SU) – Large-cap Canadian oil company with exposure to the oil sands offering a 1.6% yield and a 20.0% anticipated eps growth rate, S&P Equity Ranking A, target price $42;
  • Apache (NYSE:APA) – Large-cap oil company with a 0.7% yield and a 11.2% anticipated eps growth rate, S&P Equity Ranking A-, target price $135;
  • Halliburton (NYSE:HAL) – Large-cap oil services firm with a 1.1% yield and a 24.5% anticipated eps growth rate, S&P Equity Ranking A-, target price $54;
  • National Oilwell (NYSE:NOV) – Large-cap manufacturer of oil and gas drilling equipment with a 0.7% yield and a 16.1% anticipated eps growth rate, S&P Equity Ranking B+, target price $90.
  • AFLAC (NYSE:AFL) – Large-cap specialty insurance firm with a 2.8% yield and an 11.0% anticipated eps growth rate, S&P Equity Ranking A, target price $54;
  • Macquarie Group (OTCPK:MQBKY) - Mid-cap Australian bank with a 6.5% yield and a 10.0% anticipated eps growth rate, S&P Equity Ranking NR, target price $32;
  • Stryker (NYSE:SYK) – Mid-cap health care firm with a 1.7% yield and a 11.0% anticipated eps growth rate, S&P Equity Ranking A+, target price $62;
  • Johnson Controls (NYSE:JCI) – Large-cap industrial firm with a 2.2% yield and a 16.5% anticipated eps growth rate, S&P Equity Ranking A, target price $42;
  • United Technologies (NYSE:UTX) – Large-cap industrial/technology firm with a 2.6% yield and an 11.0% anticipated eps growth rate, S&P Equity Ranking A+, target price $89.
  • Berkshire Hathaway (BKR.B) – Large-cap conglomerate with a 0.0% yield and a 7.0% anticipated eps growth rate, S&P Equity Ranking B+, target price $90.

Special Situations

Investors who have a higher speculative tolerance and are willing to take on additional risk in an attempt to generate outsized rewards may want to review these for additions during the first half of 2012. Some of these companies have not had a successful 2011, but whose prospects for 2012 are improving:

  • GasFrac (OTC:GSFVF) – Small-cap Canadian drilling services firm utilizing new fracing technology with no yield and a 25% anticipated eps growth rate, S&P Equity Ranking NR, target price $12;
  • Rick’s Cabaret (NASDAQ:RICK) – Small-cap adult entertainment restaurants with a 0.0% yield and a 25% anticipated eps growth rate, S&P Equity Ranking NR, target price $15;
  • CME Group (NASDAQ:CME) – Large-cap financial firm that operates several major futures exchanges with a 2.3% yield and a 13.0% anticipated eps growth rate, S&P Equity Ranking B+, target price $325;
  • Lincoln National (NYSE:LNC) – Small-cap specialty insurance firm with a 1.1% yield and a 11.0% anticipated eps growth rate, S&P Equity Ranking B, target price $27.

There is too much at stake for a total collapse of the euro, and there appears to be a slow realization that even backdoor ECB involvement, with the tacit approval of the EU governments, is needed. With the eurozone sliding into negative economic growth, share prices of major European companies have been hammered over the past 6 months. While it may be a bit early, there are compelling values in many European firms, especially those with large non-European businesses or have the ability to increase exports due to a falling euro currency. It could be prudent to have a few on investor’s radar screen.

While there are financial pirate-infested waters ahead, prudent investors should be able to generate positive total stock returns for 2012.

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situations.

Disclosure: I am long APA, BRK.B, CME, DMLP, EGAS, EPD, EXC, GABUX, GSFVF.PK, HAL, JCI, MQBKY.PK, RICK, SUAPA, BRK.B, CME, DMLP, EGAS, EPD, EXC, GABUX, GSFVF.PK, HAL, JCI, MQBKY.PK, RICK, SU.