The 10 stocks (plus wild card pick) below are those that I believe will perform well over the next 12 months.
Morgan Stanley (NYSE:MS) - Morgan Stanley stands to benefit from two trends. The first one is the recent bout of M&A that has surrounded Wall Street. In fact, just today, Credit Suisse increased teir price target on MS. Secondly, the company plans to spin off Discover sometime this fall. Considering how well Mastercard (NYSE:MA) and American Express (NYSE:AXP) have done, I would like to own Discover. Buying Morgan Stanley is one of the best ways to buy DFS as well. Throw in a cheap 10 times earnings multiple and earnings growth of almost 70% (although this will probably come down to a more consistent 25% once the M&A frenzy is over), and you have one of the easiest decisions you can make this year. I recommend buying Morgan Stanley
CVS Caremark (NYSE:CVS) - I didn't have a single CVS store in my area until about 8 months ago, when the local Savon Drugs stores started undergoing some serious face lift. Within a matter of weeks, these run down stores had been renovated with a clean new look, bright lights and friendlier staff. This happened to all of the 3 Savon's within a 5 mile radius. These were Savon stores that were being converted to CVS and part of the name change involved a face lift with brighter lights, more variety, better product placement and selection and a loyalty program.
Then, the marketing campaign kicked in, encouraging shoppers to sign up for the CVS reward card. Shoppers got 10% off their bill at checkout if they signed up for the ExtraCare Account, and 2% cash back on future purchases both in-store and online. I even received a $30 free gift card offer if I submitted a new prescription or transferred an existing one to CVS. One has to admit that even before the Caremark deal, CVS was much loved by the likes of Golman Sachs and UBS. And who can blame them? CVS is the largest chain of drugstores in the US and trades at a discount to its competitors. Indeed, CVS trades for a mere 15 times 2008 earnings, while competitor Walgreens (WAG) trades at a multiple of 20.
I won't even mention Rite Aid (NYSE:RAD), which trades at a P/E of 100 (35 times the most aggressive of estimates). For CVS, the stock has not kept up with the market for the last year - mostly due to the large acquisition of Caremark, but the earnings should improve once the true potential of the acquisition is realized through higher sales and lower costs. I recommend buying this stock here, as I did 3 points lower back in April.
Gamestop (NYSE:GME) - Everything is going for Gamestop. Nintendo DS is selling like hot cakes, while the Wii cannot be rolled off the production lines fast enough to meet demand. PS2 is selling well with the price drops in light of PS3, XBox 360 has also been selling well and the new Elite console, although pointless, might attract those that are attracted to aesthetics. Moreover, for those that have been patiently waiting to buy PS3 when the price drops, Sony's recent change in their money losing Playstation division's management might result in a much lower price. Now add Guitar Hero's huge success, the much anticipated release of GTA IV and a bunch of other hot releases, and you have a retail chain that keeps attracting traffic.
I was going to list Nintendo (OTCPK:NTDOY) as one of these 10 stocks, but then that stock is already up 25% from when I recommended it, and it's not made in the USA. So Gamestop was the next best thing. Perhaps the most overlooked part of Gamestop's business is their used games. Indeed with games selling for almost $70 for these new consoles, Gamestop can potentially sell a game for $200 (by selling it multiple times, each time cutting prices by $10 to $15). At 21 times earnings, Gamestop is a good stock to own. The recent pull back post earnings is a fantastic buying opportunity.
Garmin (NASDAQ:GRMN) - I have been bullish on this one for a long time. Their most recent quarter was nothing short of fantastic. According to Associated Press, net income grew 60 percent to $139.9 million, or 64 cents per share. The only negative thing here - the cheaper dollar inflated their EPS by 5 cents. Revenue increased 52 percent to $322.3 million as sales in the auto/mobile segment more than doubled to $316.6 million. Of course, this came at the expense of shrinking margins due to slashed prices on many of their older models. Consequently, the company missed revenue estimates by 1%.
However, going forward, newer products in the forthcoming quarters will boost margins. I also like the fact that demand is so high that Garmin is adding production lines at its Taiwan manufacturing plants and may buy a third plant. Navigation systems have just started to go mainstream. Even then, most people I know do not have one in their cars. I like this product and the growth cycle. I believe we are in the 4th inning with more than half the game to come.
Cheesecake Factory (NASDAQ:CAKE) - The lines outside these restaurants never cease to amaze me. On a Wednesday night, I had to wait 30 minutes at their Pasadena location to be seated. On Mother's Day, I waited over an hour at the Marina Del Rey Cheesecake Factory. I have been to at least 5 locations of Cheesecake Factory in Southern California (not including their Grand Lux Cafe chain). And there has not been a single instance when I did not have to wait in line. Over the last 8 months, the stock has based between $24 and $30 and failed to breakout above the $30 level.
However, there are two key demographic shifts that make CAKE a compelling case. The first is baby boomers. This is perhaps the wealthiest generation the US has ever seen and they like to spend on good food. CAKE should benefit from their wealth and spending. Secondly, dual income couples have no choice but to eat out. As the concept of dual income becomes more saturated, all restaurants stand to benefit. But CAKE has a distinct advantage over its competitors. It has only 133 locations, including 8 upscale locations (Grand Lux). So there is plenty of room for growth. Oh and did I mention the probability of a short squeeze with the 20% plus short interest?
Nucor Steel (NYSE:NUE) - After oil and gas, steel is the most widely-sought after commodity in the world. Flat rolled steel, which has been hot for a while, has seen demand slowing. However, long products like bar, rod and structural steel is still in high demand, with prices near record levels. Nucor is the price leader in such products, and is the largest producer of steel products domestically. The company has seen a compounded average growth rate of over of 20% annually every year since 2000. NUE has pulled back slightly from its recent highs and sits pretty, right at its 50-day average. Steel is strong and of all the domestic steel producers, I like Nucor the best.
Peabody Energy (NYSE:BTU) - Coal is coming back. Cramer is not the only one who has said that. In fact, coal provides over 50% of the total US power generation. Peabody not only has a lot of coal energy production under its belt, it owns some of the largest coal mines in the US. According to Businessweek:
Peabody's 10.2 billion-ton coal pile has nearly twice the energy content of Exxon's (NYSE:XOM) petroleum reserves. Its massive mines in Wyoming's Powder River Basin are among the most productive and technologically sophisticated in the world. And its well-timed acquisitions of properties in Australia have proved rewarding, forging a valuable path into fast-growing markets such as India and China. International business now contributes 30% of profits, up from under 1% in 2001.
The Energy Department predicts that overall demand for power will grow by 45% by 2030. Meanwhile coal-plants will grow by almost 10% to keep up with the increasing demand. Among all the different sources of energy, coal is the cheapest by far compared to nuclear, solar, wind and of course, oil. Finally, the spinoff of BTU's less profitable Appalachian and Illinois Basin coal assets (where most of BTU's unionized labor is concentrated) as Patriot Coal will reward shareholders by reducing long-term fixed costs and allowing them to focus on their faster growth western markets.
USG Corp. (NYSE:USG) - The effects of the 8 million share offering at $48.60 are finally wearing off. The stock offering was made to finance an acquisition that will allow USG to expand operations on the West coast. This is a good move for USG and it is clear that management is thinking more of the long-term than the short. They are also going to use their $1 billion tax return to pay down debt. The company makes and markets a wide range of building materials, primarily wallboard, where it boasts 30% of the market share. However, due to the housing downturn, USG has had to cut back on wallboard production. Meanwhile, they are diversifying their portfolio of by expanding into ceiling products, at the same time improving distribution and upgrading facilities to improve efficiency of production and lower costs.
Additionally, USG is investing in Mexico markets, where real estate is still strong. I have recommended this stock in the past at higher levels, and the pull back to sub-$50 levels is a prime opportunity to buy or add to existing positions. Warren Buffet himself owns 17% of this company and in the first quarter alone, value investors like Ariel Capital Management added 3.4 million shares, Third Avenue Management bought 1.7 million shares and Wallace R. Weitz & Co. purchased 1.3 million shares.The stock currently trades at 25 times earnings, but this should come down as the real estate market turns around over teh next 12 months.
Saks Inc. (NYSE:SKS) - I was going to write about Tiffany (NYSE:TIF) as part of my Top 10, but in light of the recent accent in TIF shares and the recent decline in SKS shares, I feel like SKS is oversold here. This is a top luxury brand retailer that has turned things around nicely over the last 3 quarters. Their most recent quarter was pretty good at 16% increase in revenues with same store sales up 14.4%. In light of their turn around, there are two things to consider. The first is that their previous quarters have seen one time benefits from sale of assets, and current quarter included one time restructuring costs. This is short-term noise for the stock and should be ignored. Secondly, turn-arounds take time. While the company has made great strides rebuilding the brand and shedding unwanted assets, margins need to improve and I believe we will start to see that by year end. The luxury retail is relatively unaffected by any potential slow-down in consumer spending, so this is one of my top retail picks.
Disney Inc. (NYSE:DIS) - The release of Pirates of the Carribean on Friday, followed by Ratatouille by Pixar next month, will add booty to Disney's earnings this year. The company is doing all the right things to cross-promote their movies at theme parks, theme parks on their television networks and DVDs on their website. Their ABC network is still going strong, and having Steve Jobs on the board of directors is the icing on the cake. The stock has been in a range for a while, but in light of huge market gains, Disney remains safe and strong.
Nymex (NMX) - This is my wild card pick. With exchanges bidding up and gobbling each other up for increased market share and lower cost of operations, it is becoming increasingly difficult to find cheap exchanges. Back in early April, I blogged about how I thought International Securities Exchange (ISE) was a good takeover play and I was proved right.
This time around, it is much more difficult to predict, but I think of the major ones, Nymex might be next. Potential suitors could be the New York Stock Exchange (NYSE:NYX) and perhaps even Nasdaq (NASDAQ:NDAQ). Nymex is a pure play on commodity options and futures. From oil to gold, corn to coffee, all commodities trade on the NMX. The company opened at $120 on its IPO date last November, and while it moved quickly to $152 intra-day the very same day, it has yet to close above $141.
Shares have been flat since inception while earnings have grown at over 65%, but with every good earnings the company reports, the stock is getting cheaper. The company plans to grow earnings by maturing as an electronic trading platform. Indeed electronic trading and clearing volume made up 45 percent of the first quarter total versus just 11 percent a year ago -- illustrating the rapid shift from the floor to the electronic medium. With 75% of the oil futures market share, as long as oil and other commodities remain hot, Nymex remains attractive.
Full Disclosure: I own shares of NYX, MS, GRMN, CVS, BTU, ISE and USG but my position can change anytime without notice.