11 Stocks Poised for Gains in 2011 and Beyond
In an uncertain economic environment, your best investment opportunities are in the stocks of solid companies with proven business models, strong balance sheets and steady profits. Even after the market's gains from the March 2009 bottom, many stocks remain attractively priced and yield more than the ten-year Treasury bond's current yield of 3.3%.
With most of the world's growth currently coming from outside the U.S., it's best to invest in companies that derive a major part of their revenues overseas. Developing nations are the fastest growers, so companies expanding in emerging markets should generate superior profits and offer the best opportunities for capital appreciation.
Despite a challenging environment for restaurants, McDonald’s (symbol MCD) continues to boost sales and generate excellent returns with the rollout of new products, such as smoothies and a line of specialty coffee drinks. The Oak Brook, Ill., fast-food giant has significant bargaining power over its suppliers, so it can keep costs low. Its strong brand name, convenient locations and international expansion opportunities should drive growth for years. Analysts see earnings rising 9% in 2011. Over the past five years, McDonald’s has boosted its dividend at an annualized rate of 29%. The stock, at $77.56, yields 3.1% and trades at 15 times 2011 profit forecasts. (All prices and related numbers are as of market close on December 10, 2010.)
Oil giant ConocoPhillips (COP) is in the midst of a restructuring program that includes the sale of low-returning assets, including a nearly 20% stake in Russia's Lukoil. The Houston-based company will use the proceeds from the sales to trim debt and finance the capital investments needed for long-term growth.
As global economic conditions improve, demand for oil will increase, boosting its price and Conoco's profits. Already, crude's price has jumped 12% since August. Moreover, because oil is priced in dollars, crude will probably rise should the greenback continue to slide. At $64.58, Conoco trades at ten times estimated 2011 earnings (a low figure relative to its peers) and yields 3.4%.
Polo Ralph Lauren
Polo Ralph Lauren (RL), the New York City-based designer of luxury lifestyle products and apparel, is expanding into emerging markets, with stores in Chile, China, South Korea and Malaysia. Yet with only 40 stores outside North America, Polo has a lot of room to expand internationally, especially among China’s growing middle class. Because newly affluent people in emerging markets want to buy luxury goods with strong brand names, the company should be able to boost prices pretty easily. Polo is also extending its product line beyond clothing into such things as watches, jewelry and sunglasses. At $112.99, Polo trades at 21 times estimated 2011 earnings, which are expected to be up 13% from 2010.
A domestic play, electronics retailer hhgregg (HGG) is jumping into the void left by Circuit City's demise. Having doubled its store total, to 173, over the past three years, the Indianapolis-based retailer hopes to become a 500-store national chain by decade's end. Capitalizing on the downturn in commercial real estate, the company locked in low rents on the more than 90 stores it has opened since 2008. Analysts expect profits to jump 30%, to $1.34 a share, for the fiscal year that ends this March. The stock trades at $25.72. Unlike Best Buy, which pays its salespeople by the hour, hhgregg hires commission-based salespeople who can negotiate prices. Just the kind of store you want when times are tough.
Discovery Communications (DISCA), the leading producer of nonfiction content on cable TV, is focusing on expanding overseas. Best known for the Discovery Channel, TLC and Animal Planet, it's launching the Oprah Winfrey Network in 2011. The Silver Spring, Md., company has the ability to broadcast the same programs across many markets, and that is spurring growth. Discovery receives a steady revenue stream from subscription fees, which account for 49% of total sales; advertising makes up 43%. With its networks distributed in 180 countries, foreign lands provide 33% of revenues, and about 40% of that comes from emerging markets. Analysts expect earnings to rise 19.9% in 2011, to $2.11 a share. The stock trades at $42.48.
In a challenging economy, companies don't want to hire, but they're willing to spend on technology that can boost productivity. After its 2009 purchase of Sun Microsystems, Oracle (ORCL) looks poised to capitalize on that strategy.
Combining hardware and software, Oracle's new Exalogic Elastic Cloud seeks to be the premier system for cloud computing, the trend of using the Internet to maintain applications and data. Analysts expect the Redwood City, Cal., company's profits to climb 18.6%, to $1.98 a share, for the fiscal year that ends this May. At $29.95, the stock trades at 15 times that number. Oracle, which instituted its first dividend in 2009, yields just 0.7%, but it has the muscle to easily boost the payout.
Genuine Parts Co.
Sluggish demand for new autos suggests that many drivers will be holding on to their old cars for at least another year, and maybe longer. Meanwhile, the recovery in the manufacturing sector has boosted industrial spending. Both trends bode well for Genuine Parts Co. (GPC), a supplier of replacement parts for both the auto and industrial markets. Car parts account for half the sales of this Atlanta-based company, which operates stores under the NAPA name. Analysts expect earnings to advance 10.9%, to $3.25 per share, in 2011. At $50.55, the stock, which yields 3.2%, looks attractively valued at a price-earnings ratio of 15, on the lower end of its historic range. Genuine Parts has boosted dividends 54 straight years.
Freeport-McMoran Copper & Gold
Freeport-McMoran Copper & Gold (FCX), the world’s largest publicly traded copper miner, is a play on surging demand for minerals in emerging markets -- especially in China. Copper prices are volatile, but the slowing rate of new copper discoveries, the decline in average ore grades, and concern that many mines will be depleted by 2021 mean that the metal’s price should stay high. With copper prices currently near record highs and demand expected to outstrip supply in 2011, Freeport’s profits are expected to grow 17% for the year. The Phoenix, Ariz., miner brings in so much cash that in October it boosted its dividend by 80%, to an annual rate of $2 a share. At $112.87, the stock yields 1.8% and trades at 11 times expected earnings.
Either way the economy breaks, VF Corp. (VFC) stands to benefit. In hard times, it makes money by selling what many consumers consider a low-priced necessity: jeans. With its Lee and Wrangler brands, VF holds 20% of the U.S. jeans market. When the economy picks up, consumers spend more for VF's upscale brands, such as John Varvatos, Nautica and The North Face. The Greensboro, N.C., company receives 30% of revenues from outside the U.S. and expects that figure to hit 40% in five years, with the bulk of the increase coming in Asia. At $86.04, the stock sells at just 13 times the $6.80 per share that VF is expected to earn in 2011. VF has raised its dividend 38 straight years and yields 2.9%.
After adding money to its underfunded pension plan, paying down debt, cutting costs and improving productivity, Honeywell (HON) should see profits jump 13% in 2011. A diversified industrial company based in Morristown, N.J., Honeywell is a player in such cyclical businesses as aerospace products, automotive turbochargers and energy-efficient environmental-control systems. If the economy picks up steam, those businesses will do well. At $51.98, the stock trades at 14 times estimated 2011 earnings (compared with an average PE ratio of 16 for the industrial-goods sector) and yields 2.3%.
The primary growth strategy of Washington, D.C.-based Danaher (DHR) has been to buy companies in niche industrial markets at attractive prices. The disciplined management team focuses on cutting costs, which leads to higher profits. Danaher, which makes, among other things, environmental controls -- such as water filters and gas meters -- tools, and medical and dental instruments, earns half of its revenues outside the U.S. Its water-treatment business in particular is doing well in emerging markets. Profits are expected to grow 15% in 2011, to $2.64 per share. The stock trades at $45.87.
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