Kiplinger's 8 Stock Picks for 2013

published 1 November 2012

Coach

An “elite retailer” is how fund manager David Rolfe describes Coach (symbol COH, $57). Shares of the luxury handbag maker fell 7% in 2012, mainly because of sluggish sales in North America. But skittish investors overlooked Coach’s overseas business. In the July–September quarter, foreign sales rose 15% from the same period in 2011, driven by nearly 40% growth in China. Coach pulls in average sales of $2,500 per square foot per year from its more than 800 stores worldwide, 25% more than rival Tiffany. Coach has significantly raised its dividends every year since 2009; its stock yields 2.1%.

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A global leader in medical devices, supplies and drugs, Covidien (COV, $54) isn’t resting easy. The company, based in Ireland, expects to launch 100 new products through 2014. And it will continue to increase its research-and-development budget at a double-digit pace. Another goal: capitalize on emerging markets, where annual sales are growing rapidly. Analysts see Covidien’s plan to spin off its drug business as a positive, allowing the company to focus on its faster-growing and more-profitable devices business. The stock sells for 12 times estimated 2013 profits and yields 1.9%.

One bag of nuts is like any other, right? Not at John B. Sanfilippo & Sons (JBSS, $17). The Elgin, Ill., nut processor has done much to make its brands—Fisher and Orchard Valley Harvest—stand out. Small innovations, such the use of resealable bags, are just a start. The firm launches new products every year—such as vanilla-flavored almonds in 2012. Adam Strauss, co-manager of Appleseed Fund, expects a 44% bump in 2013 profits from 2012. The stock, which has a market value of just $184 million, sells for 8 times estimated 2013 earnings.

When anyone buys a smart phone, chances are the coffers at Qualcomm (QCOM, $58) go ka-ching. That’s because the San Diego firm created the 3G technology used in many of those devices. Qualcomm is also a leader in 4G technologies. It makes money selling the chips that drive many high-speed wireless phones and tablets. It also collects royalties from device makers that use its technology. The stock sells for 14 times estimated profits for the current fiscal year—not expensive for a company that analysts think can generate 14% annual earnings growth over the next few years.

Housing has turned the corner, and that’s pushed up homebuilder stocks. Shares of Toll Brothers (TOL, $33), which bills itself as the nation’s biggest builder of luxury homes, rose 62% in 2012, and the Horsham, Pa., company has plenty of momentum going into the new year. Toll Brothers recently reported that the backlog of homes under construction had climbed 59% from the year before. The company is diversified. Single-family homes account for 53% of sales; high-rises, senior communities and multifamily homes make up the rest. Analysts see profits rising 65% in the current fiscal year.

With auto sales reviving, things are looking up at TRW Automotive (TRW, $49). The Livonia, Mich., firm is a leading supplier of safety systems to carmakers worldwide—think seat belts, airbags, and braking and driver-assist systems. Over the past five years, TRW has cut long-term debt by 55%. It now has $1.2 billion in cash on its books—62% more than in 2008. And in 2012, it initiated a $1 billion share-buyback program. TRW expects revenues from China and South America to grow 10% a year through 2014, offsetting flat sales in Europe. The stock sells for 8 times estimated 2013 profits.

Cloud computing is hot. Analysts expect the market for Internet-based data storage and networking to grow 19% a year through 2020. That’s where VMware (VMW, $90) comes in. The Palo Alto, Cal., company creates software that builds and manages cloud-computing systems so that companies can work more efficiently. The stock, at 28 times estimated 2013 earnings, isn’t cheap. But VMware’s sales and profits have grown 23% and 25% a year, respectively, since 2007, and analysts see similar earnings growth over the next few years. Data-storage giant EMC owns 80% of VMware.

San Francisco–based Wells Fargo (WFC, $33) is one of the country’s biggest banks, with more than 11,000 branches in 39 states. It makes more loans to home buyers and small-business owners than any other U.S. bank. And it’s one of the most profitable banks, with a net profit margin of 18.1%—better than that of most of its peers. That means that even in a slow-moving economy, the bank should hold up well. Wells, which reported record earnings in the second quarter, raised its dividend in 2011 and 2012. The stock yields 2.7% and trades at 9 times expected 2013 earnings.

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Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.