By Robert Gordon
With the new year, I wanted to set up a concentrated hypothetical formula of stocks I feel will outperform the market in 2012. Be it growth, income, market conditions, or geographic focus, each of these companies have the potential to make substantial advances in the next year or two. I plan to periodically update this list through the year to see how it does. There are no sure things or guarantees, but I urge you to look carefully at the following companies for your own portfolios.
Owens Corning (OC)
Owens went through painful bankruptcy that while filed in 2000 was not discharged for six long years. The bankruptcy was occasioned by asbestos litigation. Upon the bankruptcy court discharge, the company adopted "fresh start" accounting, wiped all shareholders out, and went public again in a new stock offering. One of the largest current shareholders in the new Owens Corning is The Owens Corning/Fibreboard Asbestos Injury Trust, with 11% of the new Owens Corning stock.
Owens Corning was trading recently at about $32 per share. Its 52-week range is from $38.94 to $18.67, and it has a market capitalization of $3.9 billion. It is trading at a price to earnings ratio of 34.3, and has not paid a dividend since being recapitalized. In its third quarter of 2011, Owens reported revenues up 27% year over year to $1.5 billion. Profits rose by more than double, to $110 million, or $0.90 per share.
Owens is hitting on most cylinders. Of particular interest is its new "EcoTouch" insulation material, made of 70% recycled materials. It is the first such product ever approved by the U.S. Department of Agriculture. Owens has been a member of the Dow Jones Sustainability Index the past two years.
Owens has a great deal of earnings momentum on its side, and a mean analyst rating of a positive 1.8. It also caries limited debt, amounting to just 31% of capital. I urge you to take a look, as I see the stock perhaps tripling in price out to mid decade.
Xerox, Inc (XRX)
Xerox, that high-flying copier company from the 1970's, has reemerged as a new and better company. Its stock was trading recently at about $8.50 per share. Its 52 week range is from $11.73 to $6.75, and it has a market capitalization of about $11.7 billion. It trades at a price to earnings ratio of 7.5, and pays a dividend of $0.17 annually, for a yield of 2.3%.
The seminal recent event for Xerox in the recent past was its 2010, $6.5 billion acquisition of Affiliate Computer Services, the nation's largest outsourcing company. Not only did this purchase help to diversify Xerox from its core business. It also lends tremendous synergy possibilities between the company's hardware and personnel units. In its third quarter of 2011, Xerox reported earnings per share of $0.26, up 18% on a year over year basis. Revenues were up only 3%, and there was strengthening of operating margins from 9.2% in the second quarter of the year, to 9.6% in the third quarter. This is being accomplished as more and more of Xerox' revenue comes from consultancy, service and personnel.
Xerox is aggressively buying back shares, and its balance sheet is in fine shape with debt of $7.1 billion, representing 35% of capital. Barring an international economic meltdown, I look for Xerox stock to double in the next 24 months.
Energysolutions is a leading provider of services to nuclear energy companies in the United States and Great Britain. Its stock was trading recently at about $3.50 per share, near the low end of its 52 week range of from $7.23 to $2.76. It has a market capitalization of $315 million, and has neither a trailing price to earnings ratio, nor pays a dividend due to recent losses.
Energysolutions stock is down 35% year to date, and down by over 50% since March, 2011. As a leader in the service and clean up of government and civilian nuclear facilities, when the Japanese tsunami related disaster hit, so did the Street's expectations for Energysolutions. Over half of America's 104 nuclear reactors are over 30 years old. They cannot last forever, and Energysolutions has unique expertise in decommissioning and clean up of reactor sites. In the here and now, nuclear power operators are under pressure from many sources to find better ways to dispose of spent fuel rods.
I see Energysolutions, particularly at this price point, as a tremendous opportunity. I would disappointed not to see the stock price double during the coming 12 months, particularly if demonstrates a quarterly profit in its fourth quarter of 2011, which will be announced in early February.
Phillip Morris International Inc. (PM)
Phillip Morris was spun off from Altria Group (MO) in 2007 in a bid to give the overseas tobacco business freedom to grow and operate without the hassles of declining market share and increasing legal hurdles in the U.S. Phillip Morris stock was trading recently at a little over $74 per share. Its 52 week range is from $79.96 to $56.25, and it has a market capitalization of nearly $130 billion. It trades at a price to earnings ratio of 15.8, and raised recently its quarterly dividend to $0.77 per share, for an annual yield of 4.1%.
Phillip Morris' most recent quarterly report in the third quarter of 2011 contained nothing but happy news. Revenues and profit net were up 26% and 31%, respectively. The mean analyst projection is fourth quarter earnings up 13% year over year to $1.09 per share. I expect 2012 profit comparisons will suffer a bit due to a stronger U.S. dollar than was the case through most of 2011.
Phillip Morris does not have the short term price appreciation potential as the other companies in this article. But to me, it offers an unbeatable combination of stability, long term growth and growing income potential. If you are an investor, and not a speculator, take a good look.
Caterpillar, Inc. (CAT)
Caterpillar is a worldwide, heavy equipment producer, servicer and seller catering to such industries as construction, mining and energy production. Its ubiquitous yellow painted equipment is known virtually worldwide. After bottoming out at about $23 per share early in 2009, its stock has bounced back sharply, and was trading recently at about $105 per share. Its 52-week range is from $116.55 to $67.54, and it has a market capitalization $68.3 billion. It is trading at a price to earnings ratio of 16.1, and pays a quarterly dividend of $0.46 per share, for an annual yield of 1.7%.
Caterpillar has been riding a wave of pent up demand during the recessionary years, along with development in growing markets outside the United States. Some two-thirds of Caterpillar's sales are outside the U.S. In its most recent reported quarter, the third quarter of 2011, CAT's revenues and profits were up 41% and 44%, respectively. Wall Street profit estimates for the fourth quarter of 2011 are for $1.73 per share, which would represent an 18% increase from fourth quarter 2010.
Going forward, there is little reason to doubt management's vision of 15% - 20% annual revenue growth. And, while earnings in 2012 may take a hit due to a strong dollar, benefits from Caterpillar's late 2010 purchase of Bucyrus, Inc., a leading mining equipment manufacturer, will more than offset currency fluctuation charges.
Caterpillar is a premier U.S. franchise with has even better days ahead of it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.