A 5-Stock Growth Portfolio To Beat The Market In 2012

by: Frank J. Constantino

With 2011 coming to a close, many investors may be wondering with all of the sharp moves in the market in 2011, how is it that the market (as measured by the S&P 500) is going to end flat. Dividend investors, as a wrote in my last article, "A 5-Stock Dividend Portfolio To Beat Volatility In 2012," have finished much better. Investors that placed their bets on strong, exceptional brands with great management teams have also done very well this year. That is the goal of this article, to present five companies that with venerable brands that are finding growth and success in tough times.

Apple Inc. (NASDAQ:AAPL)

What would any growth portfolio be without Apple? Apple is in a unique situation where it could also be considered a value stock. 2012 should prove to be an exciting - and busy - year for Apple. Despite the death of its innovative leader, Steve Jobs, Apple is likely to introduce a slew of product upgrades and even a new product this year. Investors and Apple fans can expect to see the introduction of a third generation iPad, an iPhone 5, and maybe even a 'true' Apple TV.

Apple's stock continues to trade at a great discount, despite being near its 52 week high. Apple trades at a P/E ratio of 14.5 and a forward P/E ratio of 10.4. Apple's price-to-earnings growth (NYSE:PEG) ratio is a low 0.72. Apple pays no dividend, but with its huge cash hoard and a new leader, who knows what 2012 might bring.

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Activision Blizzard (NASDAQ:ATVI)

I'm excited about what Activision Blizzard is doing with its great game franchises. The company is the developer of the World of Warcraft, Starcraft, Call of Duty, and Skylander franchises. I wrote positively about the stock several weeks ago: "For Activision Blizzard, It's Game On." Activision Blizzard is developing a recurring revenue model for its Call of Duty lineup, as well as developing games for new platforms such as the iPad. I will continue to watch the decline in World of Warcraft subscribers. If the trend becomes troubling, I may re-evaluate my position. It's more likely this great company will continue developing recurring revenue models for its game franchises and continue shaping the gaming industry.

Activision Blizzard has a pristine balance sheet, which certainly helps it weather tough economic times. The company has no debt and pays shareholders a nice 1.4% dividend.

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Walt Disney Co. (NYSE:DIS)

The "House of Mouse" seems to be firing on all cylinders, as CEO, Robert Iger, has found his footing in leading this venerable brand. Disney may be called the House of Mouse, but it also houses the most popular cable brand in the United States, ESPN. ESPN may very well be the most exciting asset Disney has. The cable franchise commands the highest prices from cable providers of any cable network. Not to slight the Disney brand itself, Disney is well known for its own channels, movies, licensed products and of course, theme parks. Early reports show that the theme parks in Florida had a stellar holiday season.

Disney's stock had a rather lackluster year, despite its great corporate performance. The stock had a 2011 total return (including dividends) of 1.7%. 2012 may be much better for Disney. In fact, in the last three months the stock is up 25%. There seems to be no reason the performance can't continue, although I am closely watching the company's European performance. Disney trades at less than 15 times earnings and just over 11 times next year's estimate. The company has a price-to-earnings growth (PEG) ratio of 0.94.

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McDonald's Corp. (NYSE:MCD)

McDonald's is another one of those companies that doesn't fit neatly into just one category. McDonald's could also be in a dividend portfolio. In fact, with a 2.8% yield, I also included the stock in my "5-Stock Dividend Portfolio." The company is firing on all cylinders. McDonald's has found success in its line-up of high-margin coffee and specialty drinks. Of course, it still has its menu of value items that helped it power through the last recession. McDonald's has plenty of room to grow in China and other parts of Asia, so the future is exciting for the traditionally American brand. A crisis in Europe is always a fear, but as the company proved over the last several years, it knows how to beat a bad economy.

McDonald's stock isn't nearly as cheap as it began 2011. The stock was up 34% and was the Dow Jones Industrial Average's best performer in 2011. McDonald's has a P/E ratio of just less than 20 and forward P/E ratio of nearly 17.5. Management has done an excellent job of growing earnings over the last five years, an annualized rate of 17.7%.

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Starbucks Corp. (NASDAQ:SBUX)

Starbucks represents an affordable luxury for many people. The high-end coffee brand has been going gangbusters since a turnaround effort several years ago. High-end consumers, many of whom frequent their local Starbucks, haven't felt the same economic pinch that many middle-income consumers have experienced in the last few years. Not that Starbucks doesn't have appeal across income levels, it certainly does. However, its specialty drinks cost about twice the amount of McDonald's specialty drinks. That's not to say both companies can't be winners during these tough economic times. They have been, and likely will continue to be. Starbucks is also focusing a lot of effort on growth in China, as well as introducing their line of single-serve k-cups for Keurig brewers, expanding their grocery distribution, and offering their Seattle's Best brand across multiple fast-food platforms.

Starbuck's stock isn't cheap, it's up more than 40% in 2011. However, this company can continue to expand and find success across multiple markets. The stock trades at a P/E ratio of more than 28.5 and a forward P/E ratio of just under 21. It has increased earnings at an annualized rate of more than 17% over the last five years. This stock does overlap with McDonald's in this portfolio, so investors looking for more diversification may want to consider replacing one or the other.

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These five companies all represent great American brands that are quickly expanding around the world. Investors would have been richly rewarded for investing in these stocks at the beginning of 2011. The portfolio had a total return (including reinvested dividends) of 20.26% this year. The chart below compares these stocks with the SPDR S&P 500 ETF (NYSEARCA:SPY).

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There's no reason to think that these companies can't continue to find great success in 2012. Will they beat the market in 2012? No one really knows for sure, but I think these companies have a great shot at it. Investors should look for high quality, excellent brands with great management teams in these tough economic times. Brands like these should continue their winning ways in 2012.

Disclosure: I am long AAPL, ATVI, DIS, MCD. Mr. Constantino is a proprietary investor and does not provide individual financial advice. The stocks mentioned in this article do not represent individual buy or sell recommendations and should not be viewed as such. Individual investors should consider speaking with a professional investment advisor before making any investment decisions.

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