My Maybe Not So Bold Individual Stock Predictions For 2012

by: Bill Maurer

Yes, again, we are just a few days away from watching the ball drop and seeing another year end. 2011 is ending, although for some, it won't officially end until you stop writing "2011" in the date column of checks, homework assignments, or anything else. Many are looking for 2012 to be a great year for the markets, although many were expecting that to happen in 2011. Now that the new year is upon us, here are my individual stock predictions for 2012.

Apple (NASDAQ:AAPL) will not hit $500 (without a major change such as a split, buyback, or dividend):

I will start off by saying that I am bullish on Apple. You may look at this prediction and think that I don't have a positive view of the name. That couldn't be further from the truth. I think Apple will have a great year. However, I am simply making a valuation call. Take a look at the following chart.

P/E 2007 2008 2009 2010 2011
High 52 37 24 22 15
Low 21 15 9 13 11

The chart shows Apple's high and low P/E points for the year based on that year's high and low prices, plus that fiscal year's earnings per share. Now for my argument, I'm going to change the parameters of this metric because Apple's fiscal year ends in September, and we're talking about calendar year predictions.

I believe it is entirely conceivable that Apple's P/E for calendar year 2012, based on it's highest share price, could be in the 12 to 13 range. I think the multiple will continue to contract. Now, Apple is estimated currently to have earnings per share of $34.77 for fiscal year 2012. To get a calendar year estimate, you have to increase the fourth quarter number. I'll give Apple $12.50 in earnings for their fiscal first quarter (calendar fourth quarter) of 2012. That gives us $37.45 in earnings. A high P/E of 13 would give us a price of $486.85 for the stock. My personal opinion, without a split or buyback, is for a P/E of 12.5 and that $37.45 in earnings. That gives me a target for Apple of about $468. That's still plenty of upside from current levels.

Netflix (NASDAQ:NFLX) will replace CEO Reed Hastings:

Netflix was one of the biggest disasters of 2011, after the company's price hike left customers downgrading their plan types and investors running for the exits. The stock, which was once above $300, now trades for less than $75, with many people believing that the company's business model and current situation will send shares to $0.

Netflix may have needed to raise its prices to compensate for the ever increasing costs of content, but the company did it at exactly the wrong time. With the company in the middle of a huge growth boom domestically, and expansion into international markets just starting, it was extremely bad timing. Throw in some more snafus, such as the spinning off DVD business flop, and you get a huge stock collapse.

When Netflix released its quarterly results in late October, the company lowered its subscription guidance (for the second time), and said it would be unprofitable on a global basis starting in Q1 of 2012. The company also announced that it would be halting international expansion after entering the UK and Ireland, and that stock buybacks would stop for the indefinite future.

I don't think we've seen the worst yet, and I think that means a change at the top is necessary. 90 days ago, analysts were expecting $6.52 a share from Netflix in 2012, now, they are expecting just $0.15, and many question whether the company will even be profitable. About a month ago, the company sold some convertible notes that could be swapped for stock at $85. This essentially was a stock sale at $85, for a company who in the third quarter was buying back stock at an average price of $218. Reed Hastings' compensation was recently cut by the company, and he's been the man at the top since the beginning. I feel that after another bad quarter or two, including some possible troubles with their international expansion, it will be time for Mr. Hastings to step aside.

Recent Social Media IPOs will struggle due to high valuations:

Stop me if you've heard this one before. A really big, really hyped IPO has a great first day of trading, and 6-months later that first day's closing price is a fantasy. In late 2010 and early 2011, we saw a number of international, primarily Chinese, social media IPOs come out. They had huge first days, some even stayed high for a few months, and then the bottom fell out. Take a look at the following three names.

IPOs IPO Date IPO Price IPO Close Now
LinkedIn (LNKD) 5/9/11 $45.00 $94.25 $62.35
Groupon (NASDAQ:GRPN) 11/4/11 $20.00 $26.11 $23.09
Angie's List (NASDAQ:ANGI) 11/17/11 $13.00 $16.26 $16.41

All three names are still well above their IPO prices, but I don't think that can continue for much longer. LinkedIn shares traded over $120 on its first day, and it has lost 50% since then. Groupon and Angie's List are currently holding up well, but Groupon was below $15 at one point and Angie's List was below $11.

These companies are growing at nice clips, but their valuations are just too high for my liking. Even if LinkedIn did $0.75 per share next year (about 50% higher than current estimates), it would have a P/E of 82. At current the Forward P/E is over 120. Groupon's forward P/E is currently at 85. I don't think that these are bad companies, in fact, I believe they could be quite good in the longer term. However, I think we could have one or two bad years as the valuations reset on these names. Just look at last year's hyped social media IPOs.

Mastercard (NYSE:MA) and Visa (NYSE:V) will be up by more than 25%:

I think that 2012 is going to be an incredible year for the credit card companies. Banks are starting to increase fees on debit cards, and nobody likes having to stop at a bank to get cash from an ATM. Credit cards can be wonderful if you use them properly. Think about it this way. I can buy something today, get up to 5% of the purchase price back in cash, and not have to pay for it for a month or two (assuming balance paid in full when due). Credit card companies are coming out with new rewards programs by the month, which should only encourage more people to use them.

MasterCard and Visa had great years in 2011, and I expect that to continue to 2012. I believe that it is likely that MasterCard will split its stock in 2012, and that will only lead to further price increases as shares become more readily available. Additional price increases will benefit Visa as well, as the valuations will trade it up. Both names have great balance sheets, which will allow buybacks to continue and increase. Both are also expected to have double digit revenue growth in 2012. Add in improving revenues and share repurchases, and EPS numbers will grow even faster. If MasterCard does split its stock, I think it could easily hit $500 (split adjusted). Visa could potential get to $130 if 2012 goes exceptionally well.

As we have become a more technologically advanced society, ways of the past have disappeared. Online banking has revolutionized the way we do business, and that only favors these names. The amount of purchases made with cash will decrease, because rewards programs are making credit card purchases better for the consumer. Why pay $4 for a gallon of gas with cash if your credit card is giving you 3% or 5% cash back? That's twelve or twenty cents a gallon. Between cash back programs and increasing fees on debit cards, Visa and MasterCard still have plenty of room to grow.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.