This article marks the fourth annual year of providing a top ten list on Seeking Alpha of stocks I believe will outperform the market. This year the picks are divided into three articles as the analysis is lengthier than before. I hope you enjoy the picks and can use the information to do further research or make a winning pick for 2012. Start prices are from January 3rd, 2012. Analysts estimates and price targets are from Yahoo Finance.
Over the past three years my return has been:
2009: 10 Winners 0 Losers, +999% Total Return, Average 99.9%, Three Double Baggers
2010: 8 Winners 2 Losers, +329% Total Return, Average 32.9%, One Double Bagger
2011: 2 Winners 8 Losers, -113% Total Return, Average -11.3%
Activision Blizzard (ATVI)
Industry: Video Games
2012 Predicted Earnings: $0.96
Price to Earnings: 12.8
Price Target: $20.00
Analysts Target: $15.71 (19 Analysts)
Top Three Reasons to Buy:
1. Release of Diablo 3
2. Strong 2012 Lineups from Both Activision and Blizzard Units
3. Increasing Dividend
Shares of Activision Blizzard traded as high as $14.40 over the last fifty two weeks. I picked the company on 2012’s list because I think shares are finally gaining respect after being pushed down due to increased competition from online games from Zynga (ZNGA) and Electronic Arts (EA). The competition from the new Star Wars MMORPG game is making shareholders worried about World of Warcraft’s subscription numbers. The game is beginning to hit the end of the road but Blizzard has a new game in development that should have more information released in 2012.
Today’s visit to Amazon’s (AMZN) Top 100 Best Selling Video Games list shows the following:
7. Call of Duty: Modern Warfare 3 (XBOX 360)
12. Call of Duty: Modern Warfare 3 (Playstation 3)
57. Skylanders Spyro’s Adventure Starter Pack (Wii)
63. Diablo III (PC) Pre-Sale
75. Sylanders Spyro’s Adventure Character Pack Cynder (Various)
79. Skylanders Spyro’s Adventure Triple Character Pack 6 (Various)
86. Skylanders Spyro’s Adventure Triple Character Pack Eruptor, Chop Chop, Bash (Various)
As you can see by the list, Modern Warfare 3 has had strong staying power on the list. A new release is expected in 2012 again and shares usually spike around November before the game is released. The Spyro franchise appears to have been reborn with a new focus on kids and an interactive world inside the game. The ability to sell starter packs and expansions through characters has increased revenue from the game.
In a recent article predicting the top ten selling games for 2012 I showcased Diablo III, Starcraft 2: Heart of the Swarm, World of Warcraft: Mists of Pandaria, and Prototype 2. I predicted sales of 4.25 million of Diablo 3, as this long overdue game has strong pre-orders and is a staple among hardcore computer gamers.
Activision is one of my two largest holdings in my real life portfolio. I have bought shares of Activision twice over the last two years.
In another recent article, I debated Jim Cramer’s sell recommendation of the stock as he said video games were hard to figure out.
The company began paying a dividend in 2010. That year it paid a one time $0.15 per share. In 2011, the company paid a dividend of $0.165 to shareholders. I think the dividend will be increased to around $0.20 in 2012 showcasing the company’s strong free cash flow.
Dreamworks Animation (DWA)
2012 Predicted Earnings: $1.23
Price to Earnings: 13.5
Price Target: $30.00
Analysts Target: $20.04 (12 Analysts)
Top Three Reasons to Buy:
1. New distribution deal
2. Licensing power
3. Shares at all time low
Dreamworks was on my list for 2011 and shares suffered a loss of 44% for the year. The company has a huge year in store for it with two movies being released in Madagascar 3 (June 2012) and new original movie Rise of the Guardians (November 2012). The company’s current slate of movies after 2012 looks like:
The Croods – March 2013
Turbo – July 2013
Me and My Shadow –November 2013
Mr. Peabody & Sharman – March 2014
How to Train Your Dragon 2 – June 2014
The lineup shows that 2012 could actually lead into a successful 2013. The following year will see Dreamworks Animation release three movies for the first time in a calendar year. All three movies will be non-sequel movies for the first time in several years for the company. As the Shrek franchise ended and Madagascar may be coming to a close with the third movie this year, Dreamworks Animation has to find some movie franchises that have staying power and can produce sequels. The company also signed a deal with Netflix (NFLX) to show its movie library for free on instant streaming.
Dreamworks Animation remains a strong brand and the company can continue to leverage its licensing power of characters from series like Shrek, Kung Fu Panda and Madagascar. In the past couple of years the company has signed deals for their characters on cruise ships, at theme parks, and on television specials. The penguins from the Madagascar movie series were turned into a television show on Nickelodeon. I think the company stated they would be doing the same with Kung Fu Panda and if not they should consider it. The company has expanded from movies to television, online games involving Kung Fu Panda and How to Train Your Dragon, and recently mobile games. The launch of a Shrek game on smart phones came in December. Shrek the Musical was not a huge success but has showed the value of the characters. The strong licensing potential has also led to strategic alliances with McDonald's (MCD), Hewlett Packard (HPQ), and Intel (INTC).
Exact Sciences (EXAS)
2012 Predicted Earnings: -$0.63
Price to Earnings: NA
Price Target: $10.50
Analysts Target: $11.67 (12 Analysts)
Top Three Reasons to Buy
1. 2012 FDA Submittal of Cologuard
2. Huge Unmet Market
3. Large Mutual Fund Holding
Exact Sciences is developing a test that would detect colon cancer from stool samples that could improve survival rates to 90% over five year periods. The Cologuard machines have a low rate of false positives meaning the machines could not only save a large number of men’s lives from the colon cancer they have, but also save men from having to get colonoscopies. The company’s shares are beginning to rise due to the increasing chance of the machines getting approved in 2012 and hitting the market in 2013. I pick this company for the list because I believe 2012 will be the year when everything is finally pieced together and the shares rise on potential sales from the machines.
In a presentation from Exact Sciences in September 2011, they recognize the market as $1.2 billion in the United States, at a 30% market penetration rate. Fourteen billion is spent each year on the treatment of colon cancer in the United States alone. The stool samples going through the Cologuard provide a much higher accuracy of locating pre-cancer cells that if treated early enough can dramatically increase survival odds. Colorectal-colon cancer is the second leading cause of death relating to cancer in the United States, and represents the largest death by a cancer from non-smokers.
The company is on track to file the Cologuard for FDA approval in 2012 and is fully prepared to begin selling the device in 2013 pending approval.
Jim Cramer has liked the stock for awhile and has included the company in many of his speculative stock showcased shows. He called the stock too early to buy back in October. I think a number of things could shoot the stock higher early in 2012 including new data from clinical studies, a FDA submittal date, and a buy recommendation from Jim Cramer. I think now is the time to get in on this long term growth stock before it is too late.
In December, Lazard Capital raised their price target of the company from $10 to $13, implying a 2012 gain of 60% at the end of the year price of $8.12.
The company has large institutional holdings with around 60% of the shares being held in mutual funds or the equivalent. Wasatch Advisors own 7.5% of the shares, with around 3.4% being held in the Wasatch Small Cap Growth Mutual Fund. Wells Fargo (WFC), State Street (STT), and Blackrock also own shares of the company.
Also of note is the company’s Senior Vice President of Sales and Marketing John M. Krayacich, who was part of the sales force behind Lipitor while a member of Warner-Lambert. Warner-Lambert eventually got acquired by Pfizer (PFE) and Lipitor went on to be the best selling drug of all time. Now, of course, Cologuard won’t become the best selling medical device of all time, but it is still nice as an investor to see sales leadership like this as part of the management team.