James Glassman's 10 Picks for 2012

Once more into the breach. For the 13th time in the past 17 years (I got time off for good behavior), I am presenting readers with a list of ten stocks for the year ahead, culled from the selections of experts I admire.

My choices have done well, but 2011 was a setback. From the day we priced my picks through November 4, they lost an average of 2.6%. Over the same period, Standard & Poor’s 500-stock index gained 4.7%. The good news was that, in keeping with my penchant for downside protection, no single stock got clobbered. Worst was Cisco Systems (symbol CSCO), a selection from Calamos Growth Fund, which was down 24.7%. Best was Caribou Coffee (CBOU), from Bridgeway Ultra-Small Co. fund, up 32.1%.

Here are my ten new picks for the New Year:

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Bolt Technology (symbol BOLT)

Unfortunately, our top stock picker from years past, Jay Weinstein, of Highline Wealth Management, in Bethesda, Md., is taking a sabbatical. But he thoughtfully recommended another specialist in micro caps (stocks of tiny companies) as his replacement: Daniel Abramowitz, of Hillson Financial Management, up the road in Rockville, Md.

Abramowitz likes Bolt Technology, a company whose main business has been the manufacture of air guns that shoot sound waves to the ocean floor and produce data from the resulting rebound to pinpoint oil and gas reserves. Bolt also owns SeaBotix, which makes underwater robotic vehicles. Abramo­witz says that SeaBotix has been a drag on Bolt’s earnings, but he adds that orders are strong. Meanwhile, Bolt holds 80% of the marine air-gun market, and the com­pany’s balance sheet is gorgeous, with no debt and $31 million in cash -- quite a bundle for a firm with a market value of just $87 million. “Bolt,” says Abramo­witz, “offers the perfect combination of my two primary goals: above-average return potential and a significant margin of safety.”

Ruby Tuesday (RT)

Robert Olstein made his name in the 1970s with his Quality of Earnings Report newsletter, which blasted companies that fudged their numbers. He still runs two mutual funds and continues to dig deep into balance sheets and income statements. He’s especially keen on firms with abundant free cash flow -- that is, the money that’s left for shareholders after the capital outlays necessary to maintain the business.

For the year ahead, he likes Ruby Tuesday, a chain of about 850 midprice restaurants. Olstein calls the company “a successful turnaround story that the market has yet to fully recognize.” He estimates that Ruby Tuesday “has core free cash flow power of $1.25 per share” and figures that it is worth $16 to $18 a share -- about twice its current price.

Life Time Fitness (LTM)

Connor Browne became co-manager of Thornburg Value Fund in 2006, when he was just 27 years old. The fund’s holdings are a mix of old and new -- General Electric and Google, among them -- with an emphasis on mega-capitalization stocks.

But Browne’s choice for 2012 is a good deal smaller. Life Time Fitness, with a market value of just $1.8 billion, has “created a new mousetrap in the fitness space -- clubs that give their members a high-end experience at a reasonable price.” With 92 clubs, Life Time has a lot of room to grow before saturating its market, says Browne. He sees earnings per share rising an average of 20% annually for the next three to five years, and he thinks the stock can hit $74 within a year, 70% above its recent price.

Intel (INTC)

As one of our top gainers of 2011 attested, the Value Line Investment Survey’s highest-ranked stocks have historically outperformed the market by a wide margin. Currently, only one Value Line stock out of more than 2,500 scores a rank of 1 (highest) in all three of the service’s rating categories: timeliness, safety and technical measures.

What is this superachiever? It’s Intel, the world’s largest maker of microchips. The U.S. economy may be sluggish, but, thanks to rapid growth in emerging markets, the global economy as a whole is doing pretty well, and Intel gets 85% of its sales abroad. Value Line projects that Intel will generate sales of $57 billion in 2012, up from $35 billion in 2009. The stock, which yields 3.5%, looks cheap.

Shire (SHPGY)

Only 20 diversified foreign stock funds get a five-star rating from Morningstar. My favorite among the no-loads in the group is the little-known Sextant International (SSIFX), which is in the top 1% of its category for returns over the past five years. Its holdings -- mainly large caps -- are weighted toward Europe, a nice contrarian play.

Sextant likes drug companies, and I lean toward the number-three stock in the portfolio, Shire, which trades as an American depositary receipt in the U.S. Based in Ireland, Shire is a fast-growing maker of specialty pharmaceuticals, aimed at such diseases as HIV, hepatitis, dementia and colitis. (See OPENING SHOT: Best Bets in Health Care Stocks.)

Gilat Satellite Networks (GILT)

James Roumell, who excelled in the Wall Street Journal’s old dartboard-versus-stock-pickers contest, has given me fine choices in the past -- though last year’s, Compuware (CPWR), was a loser. He still likes the company, but I prefer another of his choices -- Gilat Satellite Networks, an Israeli outfit that provides services that connect businesses to satellites. Gilat has roughly 30% of the market in North America for processing credit card transactions at gasoline-station pumps, and its share for state lotteries is about 70%. Gilat’s “valuation is very compelling,” says Roumell.

Noble Energy (NBL)

In 1996, I set out to find the best actively managed mutual fund. The winner: Fidelity Contrafund (FCNTX). The fund’s girth ($74 billion in assets today) hasn’t prevented manager Will Danoff from racking up an 8.7% annualized return over the past 15 years, compared with 5.8% for the S&P 500.

Danoff’s top holding is Apple (AAPL), but the most intriguing, in my view, is his fund’s seventh-largest position, Noble Energy, an 80-year-old company that is extracting natural gas and oil in the U.S., off the coast of Israel, in the North Sea, in West Africa and elsewhere. Its price-earnings ratio (based on estimated 2012 earnings) divided by its expected earnings growth rate is less than 0.9. A PEG ratio of less than 1.0 usually indicates a bargain.

SuccessFactors (SFSF)

SuccessFactors is a software company that helps businesses hire, manage and assess workers in a simple, consistent way. The company went public only four years ago, and profits are scant. But, writes analyst Terry Tillman, of Raymond James & Associates, “investments for growth and the sheer size of the billings’ upside opportunities should please long-term growth investors.”

Tillman calls the stock a “strong buy” and headlines his report to clients, “Growth Story Continues to Perform.” And because Raymond James has a stellar record as a Ten Best picker, I take the enthusiastic recommendation seriously.

Microsoft (MSFT)

Jensen Quality Growth Fund (JENSX) is a consistent performer that has beaten the S&P 500 over the past 15 years and holds on to stocks in its gold-plated portfolio just about forever (average annual turnover is 7%).

High on its list of 28 stocks is Microsoft, which has made the transition from super growth stock to must-have value stock. Trading at just 9 times estimated earnings and yielding 3.0%, Microsoft is loaded with cash and keeps raking in billions from its operating system and its Office software, with enough growth to keep the PEG ratio under 1.0. For more on Microsoft, see Can Two Tech Giants Get Off the Mat?

iShares MSCI Brazil Index (EWZ)

For the first time ever, I registered my own pick on the Ten Best list a year ago: iShares MSCI Brazil Index, an exchange-traded fund that tracks the Brazilian stock market. It lost 23.6%, the list’s second-worst performer.

Undeterred, I am back with the very same choice. The Brazilian economy is perking along, with estimated growth of 3.6% in 2011 and a bit more in 2012, according to the Economist magazine. Inflation is rising, but it seems to be under control, and Brazil’s unemployment rate (6%, compared with our own 9%) and annual budget deficit as a proportion of gross domestic product (2.5% versus 9.1% in the U.S.) are enviable. In this, the fifth-most populous country in the world, the middle class is growing, and the nation is a target for increased investment from abroad.

Disclaimer: "These are just suggestions."

I’ll end with my usual warnings: I have chosen these securities because I expect them to beat the market over the next 12 months. But I am a believer in long-term investing, and you should consider these long-term holdings. The com­panies vary by sector and size, but they aren’t meant to represent a truly diversified portfolio. Finally, these are just suggestions. Ultimately, the decisions are yours.

James K. Glassman, executive director of the George W. Bush Institute in Dallas, is the author of Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence (Crown Business).