Revisiting The 2012 Portfolio: Part 1 - Growth

by: Bill Maurer

As we entered 2012, I created two distinct portfolios for investors to ponder, one growth and one value. Each portfolio contained seven names that I believed could outperform a chosen benchmark over the course of the year. The growth portfolio looked at seven names that were expected to grow revenues and earnings by double digits, percentage wise, in either 2012 or their 2012 fiscal year. Now that we are halfway through the year, it is time to revisit the names. In part one of this two part series, I'll first look at how they have performed so far. Then I'll examine where expectations stand now and give you a preview of what's to come in the second half of the year. I'll mention them in order of performance, year to date.

2012 So Far / Where Expectations Stand:

Priceline (PCLN): The online travel giant is up more than 45% so far this year, and that's even with the stock about $95 off its 52-week high achieved earlier this year. Priceline rallied in January and February into the high $500s, but a blowout earnings report in late February sent the stock over $600, and it has been above that level since then. The stock rallied as high as $775 before some profit taking set in, and although the latest earnings report was good, the stock dropped on conservative guidance (which the company always gives). The stock flirted with $600 earlier this month, but has rallied strongly as markets have come back, and now sits at $680.

When 2012 started, analysts were looking for approximately 25.3% revenue growth from Priceline. Expectations now call for 25.7%, and they have come down slightly as worries over problems in Europe persist. Priceline does do a lot of international business, which is part of the reason why the stock has come down a bit as Europe fears still linger. However, earnings per share estimates have risen nicely. When the year started, the company was forecasted to grow earnings per share by 29.53%. Those expectations have now risen to 34.58% growth. Priceline has beaten earnings per share expectations by at least 6% in the past four quarters, and could do more than $40 in earnings per share in 2013.

Apple (NASDAQ:AAPL): Apple is actually the second best performer so far, but it only trails Priceline by 37 basis points. The two names have traded the #1 spot several times this year. It has been a huge year so far for Apple. The company blew out earnings expectations in January thanks to a tremendous holiday quarter, then announced a dividend and released a new version of the iPad, which is selling extremely well. Fears of an iPhone sales slowdown were completely erased in April, and the company just released new versions of the Mac, including a MacBook Pro with retina display. The next big thing will be the release of the iPhone 5, which will probably come sometime in late September or October.

Apple expectations have soared for the fiscal year thanks to the two tremendous beats, nearly $6 in the past two quarters. When the year started, expectations for revenues this fiscal year (ending in September) were for 28.9%. Those expectations now stand at 49.5%. Analysts are now expecting almost $200 billion in revenues for fiscal 2013. Earnings per share estimates have increased tremendously as well, from 25.58% at the start of the year to 69.36% now.

Intuitive Surgical (NASDAQ:ISRG): The maker of the Da Vinci surgical system has rallied more than 18% so far this year despite being $45 off the year's high. The company has continued to blow out expectations, which continued in the first quarter. They continue to sell more and more systems, and are looking to continue getting approval for more and more procedures using the device. The company has one of the healthiest balance sheets in the market currently, and has an active buyback program. The stock was doing so well so in the first quarter that the company decided not to buy back any stock, waiting for it to come down. That's good management.

When the year started, analysts were expecting 17.5% revenue growth for this year. That number is now up to 21.3%, and I expect them to be in a 22% to 25% range when all is said and done. Earnings per share growth estimates have risen from 19.24% to 19.56%. That doesn't seem like much, but remember that this name has beaten earnings expectations by more than 10% in each of the past three quarters. 2012 earnings estimates stand at just $14.73 right now. I expect at least $15 per share, and I think $15.50 is a more realistic number. This company knows how to beat expectations.

MasterCard (NYSE:MA): The credit card giant has had a nice year so far, up nearly 15%. The company actually missed revenue expectations when it reported Q4 in February, but it beat on the bottom line. Net profit dropped due to a large one-time charge, but an increase in core earnings reassured investors. MasterCard is also stealing market share from competitor Visa (NYSE:V). When the company reported Q1, it beat on both the top and bottom line. The company has also doubled its dividend so far this year, and about two weeks ago announced a new $1.5 billion buyback that will start as soon as the current one ends.

MasterCard estimates have edged up slightly since the start of the year. Revenue estimates, which were at 12.5% to start the year, are now at 13.2%. It's not much of a rise, but it is better than a decline. Earnings per share, which were forecast to rise 16.62% at the start of 2012, are now forecast to rise 18.13%. The company's two earnings beats so far have had a lot to do with that increase, and the continued buybacks will also help moving forward.

Boston Beer (NYSE:SAM): The company behind the Samuel Adams and Twisted Tea brands is up about 7% so far this year and hit a new high on Tuesday. Despite claims that the craft brewing industry is extremely crowded, Boston Beer has beat both revenue and earnings estimates in the two quarters they have reported this year. The company is known for trying new things, including testing at least one new beer per week, and is now looking to turn some of its beer into whiskey. Analysts right now call it a hold on valuation, but there is still plenty of growth ahead.

Despite the two earnings beats and stock gains, analysts have actually trimmed estimates for this year slightly. Revenue estimates, which were forecast for 10% growth, have come down to 9%, and earnings per share estimates have declined from 11.62% to 11.17%. That's still a fair amount of growth for a name like this, especially when you compare it to some of the industry giants.

Baidu (NASDAQ:BIDU): The Chinese search giant is up just 4.5% so far this year, which I think may be rather disappointing to many. Baidu had a very good first quarter, shrugging off increased government regulation concerns that knocked down others in the industry like Sina Corp (NASDAQ:SINA). Shares were sluggish after the Q4 earnings report, but started to rally when rumors started that Baidu's search engine would be added to the next version of Apple's iOS update for the iPhone. However, when Baidu reported Q1 numbers in late April, revenues missed and revenue guidance was light. That fueled fears of a China slowdown, and remember, Baidu trades at a very high price to earnings valuation. Baidu is working to develop its own smartphone, but recently Goldman Sachs analysts reiterated their neutral stance on the name, cutting the price target from $160 to $135. That is still above the $121 current price, but well below the average analyst price target of $183.

Despite some of the negativity, analyst revenue estimates have increased since the start of the year. Baidu can probably thank Apple for that. Revenue estimates have increased from 51.2% to 56.3% growth, which is a lot of growth. Earnings per share estimates have fared even better, rising from 49.32% to 55.44%.

Molycorp (MCP): The rare earth mineral processor and producer has been the most disappointing name so far. It is actually down about 14% on the year, but hey, I don't claim to be perfect. 6 of the 7 names I picked are up, so one down isn't too bad. This entire sector is struggling right now, with many of the names near 52-week lows. Molycorp has been troubled so far this year by two revenue misses, and after the Q4 report, they mentioned production costs would be higher than expected. Molycorp has had a hard time meeting growth expectations, which has continually knocked down the stock. They announced a huge acquisition of Neo Material Technologies, and that has forced them to take out about $650 million in debt, which equals one third of the current market cap.

As you can pretty much guess, estimates for Molycorp have come down so far this year. Revenue estimates, which stood at a 75.7% growth clip prior to 2012, now stand at 68.6% after two revenue misses. But the bigger decline is in the earnings forecast, thanks to higher production costs and the debt expenses involved in the Neo acquisition. At the start of 2012, Molycorp was expected to see earnings per share rise by more than 103%. Currently, analysts expect to see earnings per share decline by 8.6% this year. However, estimates for both currently show greater growth in 2013, if Molycorp can hit its marks. It hasn't been able to do so in recent quarters.

Overall Performance:

The following table shows the overall performance of these seven names year to date.

Ticker Start Current Change Percent
AAPL $405.00 $587.41 $182.41 45.04%
BIDU $116.47 $121.72 $5.25 4.51%
MA $372.41 $427.57 $55.16 14.81%
PCLN $467.71 $680.11 $212.40 45.41%
ISRG $463.01 $548.58 $85.57 18.48%
MCP $23.98 $20.66 ($3.32) -13.84%
SAM $108.56 $116.05 $7.49 6.90%

Four of the names have shown double digit growth, with Apple and Priceline up more than 45% each so far this year. Overall, the portfolio is up 17.33%, when using equal weights. Had I actually given each an individual weight, the portfolio would have done a little better. Apple and Intuitive Surgical would have been my top two picks, and would have received a combined weight of roughly 40% to 45% in the portfolio. As I've stated in the past, I am using the Russell 1000 Growth ETF (NYSEARCA:IWF) as the market benchmark. The IWF is up 10.59% so far this year, meaning that my portfolio has outperformed by 6.74%. There is still 6 months plus in the year left, so I won't celebrate yet, but it has been a good year so far.

Looking Forward to the Second Half of 2012:

There are a couple of themes that will definitely influence how some of these names will do the rest of this year.

The first is the smartphone/mobile revolution. Apple's iPhone will have a tremendous impact on how the company will do, but it also could help Baidu when it comes to mobile searches. Baidu is also looking to get its own smartphone out, which may be a complement more than a competitor to the iPhone. MasterCard could also be in this theme, as a shift to mobile payments could influence how the credit card industry operates.

Obviously, the global growth theme will dominant. If China continues to slow down, that will have obvious impacts on both Baidu and the rare earth sector, which will impact Molycorp. Apple's iPhone is selling well in China, and that should continue. The future of Europe and the growth in that region should impact most of these names, but I figure that Intuitive Surgical, MasterCard, and Priceline are the three that could lost the most there if conditions worsen.

All of the growth issues correlate to spending, so what consumers are willing to pay will be a major factor. Boston Beer was able to successfully raise prices earlier this year, but can they maintain or raise prices even more? Only time will tell. Consumers trying to spend less on vacations should increase traffic to Priceline. Apple is always a wild card here. The average selling prices for its key product lines have fallen over the past year, and they just introduced some really expensive MacBooks. I'm not sure how many of the $5,000 MacBooks they can sell, and a weak economy could lead consumers to buy cheaper versions of the Mac, iPad, and iPhone.

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