Chris Katje's Annual Top Ten Stock Picks For 2013 Part I

Includes: AFL, BX, CNQR, DFS, HEI
by: Chris Katje

Since 2009, I have been providing readers on Seeking Alpha with my annual top ten stock picks list. The list began with a huge 99.9% return in 2009 through several multi-baggers. In 2012, I once again turned out double digit gains after a rough 2011 year. My 2012 picks can be seen here and a follow up article will be posted soon. Here is a look at my annual returns:

  • 2009: +99.9%
  • 2010: +32.9%
  • 2011: -11.3%
  • 2012: +17.6%

After posting my first loss in this annual tradition, my picks rebounded in 2012 to post a 17.6% gain. A portfolio of $10,000 equally weighted each year in my picks would now be worth $27,712 after a compounded annual growth rate of 44.3%.

Share prices on the picks are from December 31st, 2012. All earnings estimates are taken from Yahoo Finance.

Aflac (NYSE:AFL)

  • Share Price: $53.12
  • Dividend Yield: 2.6%
  • 52 Week Range: $38.13-$54.93

Top Three Reasons

1. Valuation

2. Dividend Yield

3. Aflac Japan

During the 2012 Financial Briefing, Aflac CEO Daniel P. Amos had this to say, "So my message to you is: Don't underestimate Aflac and its management team." Well, I'm going to make sure I do just that for 2013 as Aflac makes the list of ten stocks to buy for the year.

Many are familiar of Aflac due to the company's commercials that feature a duck that quacks "Aflac" on television. Did you know that the creation of that marketing campaign actually helped double sales in a three year span and increase Aflac's market share lead?

Also mentioned during the company's analyst presentation, CEO Amos pointed out that he was not happy with the valuation and earnings multiple given to his shares by Wall Street in comparison with his peers. Amos is right on this, as shares trade at under ten times next year's earnings. Analysts on Yahoo expect the company to post earnings per share of $6.88 for fiscal 2013. Today, shares are trading at 7.7 times those earnings estimates for next year. Shares should trade for at least ten times earnings estimates, representing a price target of $68.80. This would represent a 2013 return of 30% at today's share price.

For the 30th straight year, Aflac increased its dividend payout. The shares now yield 2.6% after an 18% increase in 2012's price took the yield down from 3%. The company will raise its dividend in 2013 and could be inclined to push the yield north of 3% to get investors more interested in the company.

With over three quarters of the company's sales, Aflac Japan is an important piece for investors. The company continues to grow in Japan. Much of the recent gains are from the company's WAYS product. WAYS allows policyholders to convert a portion of their life insurance to medical benefits, nursing care, or annuity payments at a certain age. In the company's third quarter, revenue for Aflac Japan was up 10% and hit an all time record for annualized premium sales. This marked five quarters in a row of record revenue for that particular segment.

If you're looking for dividend consistency or a safe company to invest in, Aflac shares are worth a look. That duck on television might be on to something.

Blackstone Group (NYSE:BX)

  • Share Price: $15.59
  • Dividend Yield: 3.3%
  • 52 Week Range: $11.13-$17.25

Top Three Reasons

1. Potential 2013 IPOs

2. Strong Real Estate Portfolio

3. Valuation

In 2013, Blackstone will be busy selling off several companies in its portfolio via initial price offerings. Just last week, Blackstone announced it would sell a partial stake in SeaWorld Entertainment, the owner of SeaWorld and Busch Gardens theme parks. The small $100 million IPO will see large demand on the stock market as a well known name. You can read my full preview on the SeaWorld IPO here.

Other companies owned by Blackstone that could IPO in 2013 include:

  • Michael's - Largest arts and craft store, bought in 2006 for $6 billion
  • The Weather Channel - largest weather related television channel
  • Merlin Entertainment Group - bought in 2005, owns Legoland, Madame Tussauds, has 87 attractions in 19 countries. Blackstone owns 34%, along with KIRKBI (36%) and CVC Capital (28%). Blackstone reduced its stake in 2010 at a then valuation of $3.7 billion. A strong SeaWorld IPO could be the precursor to a $5 billion valuation or more on Merlin and an IPO announcement by Blackstone.
  • Pinnacle Foods - Owner of Hungry Man, Aunt Jemima, Duncan Hines, Vlasic, Mrs. Butterworths, and Bird's Eye. Blackstone purchased Pinnacle for $2.2 billion five years ago and combined with its already Bird's Eye years later. A current valuation is around $5 billion and Blackstone is planning a 2013 IPO.

Analysts on Yahoo Finance expect Blackstone to post earnings per share of $2.09 in fiscal 2013. This represents a forward price to earnings yield of 7.5. A simple move to 10x earnings would represent a 34% increase for 2013. However, I believe the company could beat earnings estimates for the year, as it has in the last four quarters. Private equity is still hard to value and earnings can be hard to predict, leading to swings. For the year, investors in Blackstone should be nicely rewarded.

Concur Technologies (NASDAQ:CNQR)

  • Share Price: $67.52
  • Dividend Yield: N/A

52 Week Range: $47.00-$76.15

Top Three Reasons

1. Growing Revenue

2. Share Price Decline

3. TripIt

Concur Technologies is a company I came across recently that I believe has the potential to see big gains once again in 2013. Shares of the company were up 33% in 2012. The company is responsible for helping companies and individuals with business expenses and travel management. Here is a look at products the company offers:

  • Travel & Expense - Travel, Expense, Reimburse, Analyze, Business Travel Booking
  • Invoice - Capture Invoices, Match to Purchase Order, Route for Approval, Auto-Pay, Report & Analyze
  • Concur Connect Platform - Cloud Based Management
  • Individuals - TripIt

Here is a look at annual revenue (in $millions):

  • 2007: $129.1
  • 2008: $215.5
  • 2009: $247.6
  • 2010: $292.9
  • 2011: $349.5
  • 2012: $439.8
  • 2013: $549.5 (estimated on Yahoo Finance)

Two years ago, Concur purchased TripIt, a leader in travel itinerary planning. TripIt helps businesses and individuals manage their flights, hotel reservations, and car reservations all through the internet and mobile applications. A 30 day free trial is offered to customers before the subscription based model kicks in. For individuals, the service is an annual $49 fee. The business side of TripIt is how Concur makes its money. The company charges companies $29-$159 a month depending on the number of employees that will be using the software.

Consolidation of travel assets in the industry could be good for Concur. In 2012, Expedia (NASDAQ:EXPE) bought Trivago, a German based hotel search company, for $632 million. Priceline (PCLN) acquired Kayak for $1.8 billion. Google (NASDAQ:GOOG) also purchased Frommer's to further its expansion into its own travel platform. The TripIt platform could be worth spinning off or could be acquired by another large company. Perhaps, Concur would consider keeping the business end of the application and sell the individual platform to a travel site.

Concur has partnerships with several leading companies including: American Express, ADP, Salesforce, and Intuit. The company continues to help companies large and small increase their productivity and helps other service companies offer new products and technologies.

If you haven't ever heard of Concur, it could be time to check out this $3 billion company.

Discover Financial Services (NYSE:DFS)

  • Share Price: $38.55
  • Dividend Yield: 1.5%
  • 52 Week Range: $23.75-$42.08

Top Three Reasons

1. Valuation

2. itCard

3. Acquisitions and Expansion

The first thing that jumps out when discussing Discover is its extremely low valuation. Here is a look at how Discover stacks up against its credit card rivals:

Share Price 2013 EPS estimate Price to Earnings
Discover $38.55 $4.37 8.8
American Express (NYSE:AXP) $57.28 $4.73 12.1
Visa (NYSE:V) $151.58 $7.25 20.9
Mastercard (NYSE:MA) $491.28 $25.54 19.2

As you can see, Discover's competitors trade at an average price to earnings valuation of 17.4. If Discover traded at this range, shares would trade at $76.04. This represents an increase of 97%. Now I don't think Discover shares will double in 2013, but they should closer to in line with their peers.

To begin 2013, Discover launched a brand new credit card and is now promoting it heavily, including during college football bowl games on ESPN. The Discover it card offers no annual fee and a promise not to raise rates for late payments. The card also offers rewards and cash back options. Discover has ranked first in customer service amongst credit card companies for 16 straight years and this card should help, while also boosting revenue as customers make the switch to Discover.

Discover continues to diversify itself through acquisitions and expansion. Here are some highlights of recent events.

  • Expanding private student loans program - was added to 50 schools approved list, makes grand total over 1300 schools
  • Discover Home Loans - acquired Home Loan Center assets for $56 million and has turned that into a direct to consumer loan program.
  • Diners Club continues international expansion - recently signed deals with the largest credit card company in China (ICBC), largest credit card issuer in Russia (Russian Standard Bank), and the largest issuer of credit cards in India (HDFC Bank)
  • Relationship with Paypal (NASDAQ:EBAY) to bring the global payment to stores and merchants.

Discover reached all time highs in 2012 at over $40 a share. With strong earnings and further expansion, shares should hit new highs and could be approaching $50 by the end of the year.

Heico Corp. (NYSE:HEI)

  • Share Price: $44.76
  • Dividend Yield: 0.2%
  • 52 Week Range: $34.01-$47.97

Top Three Reasons

1. Bullish Aerospace Cycle

2. Growing Technology Division

3. Rebound Year

Heico Corp operates in two divisions: flight support and electronic technologies group. The flight support division is 20% owned by Lufthansa and is the world's largest provider of replacement parts for aircraft approved by the FAA. The company is involved in the following markets: aircraft, spacecraft, defense equipment, medical equipment and telecommunications.

In the third quarter, Heico reported a 15% increase in net sales to $226.0 million. Net income also grew 13% to $23.1 million. Both of these numbers marked records for the company and followed a trend of ten consecutive quarters of net sales growth. In the quarter, the flight support division saw sales of $140.8 million.

During the third quarter, the electronic technologies group saw sales increase 51% to $86.5 million. Heico continues to expand through acquisitions, particularly related to new technologies in this division. In August, two subsidiaries of this division were supplied parts for NASA's Curiosity, which was used on Mars. Technologies are used to help make CT scanners, satellites and laser rangefinders, amongst other products.

In December, Heico extended its credit facility through 2017. A total of $670 million can now be borrowed and the company plans on using this leverage along with its free cash flow to acquire more companies in its existing markets.

Here is a look at annual revenue for Heico:

  • 2009: $538.3 million
  • 2010: $617.0 million
  • 2011: $764.9 million
  • 2012: $897.4 million
  • 2013: $963.1 million (Yahoo Finance analysts' estimate)

As you can see, analysts are currently predicting Heico will post $963 million in sales for fiscal 2013. Analysts also see the company earning $1.74 for the next fiscal year. However, with a new credit line, Heico will likely make a couple of small purchases that start the 2013 fiscal year off. I'm predicting Heico gets to the $1 billion milestone in sales and pushes that earnings estimate higher each reported quarter.

The company offers a small dividend, which has increased over time. In 2012, Heico also paid out a special dividend of $2.20. Also to note is the company performed a 5:4 stock split in April of 2010, 2011, and 2012.

Shares of Heico were down 3.3% in 2012. The company saw strong growth in its technology niche markets. New acquisitions should add to 2013 revenue as the company approaches $1 billion in annual sales. A bullish aerospace sector is coming as companies shift to new planes and upgrade existing ones that need work to keep up with safety requirements and fuel efficiencies.

That's a look at the first half of my top ten picks for the year. I will try and update important events throughout the year and provide quarterly updates as well on the entire portfolio.

>>Go to Part II>>

Disclosure: I am long ATVI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.