Last year was one for stock market record books as index fund
buyers added 30% to their nest eggs while many hedge fund managers under
performed. Oddly, some of the smartest investment advisors believe that
despite the run up, selected equities still look attractive.
T. Rowe Price’s Head of U.S. Equities John Linehan is taking a cautiously bullish approach: “Moving forward, U.S. stocks are unlikely to match their recent strength…On the plus side, corporate health remains strong and valuations are neutral. There are still attractive areas, such as companies that are benefiting from the reindustrialization of America. Market tailwinds and headwinds are now more balanced, so we believe it’s time to be cautious.”
Linehan is essentially saying that 2014 will be a stock picker’s market. His T.Rowe Price Value Fund, for example, holds among its top holdings Irving,TX’s Flowserve Corp.(FLS) , a maker of pumps, valves and seals used in a host of industries. It also owns a significant amount of specialty chemical and materials company Celanese Corp (CE).
As has been Forbes’ tradition over the years, we have gathered a selection of “Best Ideas” from some of our favorite money managers and investment advisors. You’ll find their recommendations below:
For a look at which stocks investment experts are saying you should avoid, click here.
Marc Gerstein
Editor, Forbes Low Priced Stock Report
Buy: Ballantyne Strong (BTN)
BTN has tons of cash thanks to sales of digital equipment to movie theaters that switched to the new standard. That’s now largely played out and it would have been easy for BTN to blow cash on a “diworsification” acquisition. But instead, BTN made a great accretive purchase: Convergent Corp. with a growth business (digital content for out-of-home advertising, etc.) and an operating profile adjacent to BTN’s network support center that serves digital theaters. This debt-free company still has lots of cash (40% of the stock price) and the stock still has a measly (0.59) price/sales ratio.
Buy: Rite Aid (RAD)
I first recommended Rite Aid in June 2011 at $1.05 and again in January at $1.45. The stock now trades above $5.00 and I still like it. My original investment case remains alive and well. One aspect of this is that the company’s remodeling efforts, emphasizing its new fresh-looking “wellness” format is working. The transition still has a lot of legs left: Only a little more than 1,000 stores have been renovated thus far, out of a total of 4,600. And with more efficient operating practices, cash flows remain very healthy (as was the case even before GAAP net income moved above zero), meaning the company can comfortably pay the interest on its still-considerable debt and refinance as necessary.
Note, too, my investment case had not and still does not assume RAD will surpass or catch up to its main rivals Walgreen’s (WAG) or CVS Caremark (CVS). Instead, I continue to believe that even after RAD’s 2013 rally, the stock’s valuation remains far enough below those of WAG or CVS to enable shareholders to benefit even as RAD’s operations continue to make baby steps toward the levels maintained by the industry leaders. Bear in mind that price/sales is very much influenced by margin, and there is plenty of room for RAD’s operating margin to make progress relative to peers as store-overhaul attracts more revenue and improves overhead-cost coverage.
Buy: Omega Protein (OME)
The stock market has shown itself to be interested in the LOHAS (lifestyle of health and sustainability) through high valuations on such large issues as Whole Foods (WFMI) and Lululemon (LULU), and we’ve done well so far with such recent selections as Gaiam (GAIA) and Primo Water (PRMW). Omega Protein, which catches menhaden, a wild herring-like fish found along the Atlantic and Gulf of Mexico coasts and harvests a variety of protein and oil products, could turn into an intriguing stealth LOHAS play
At present, more than 90% of the business comes from animal feed products produced from OME’s proteins and oils. That, in and of itself, is a nice business given that these ingredients are especially good for swine and fish, which are in high demand given increasing appetites for pork and seafood. But it’s not necessarily a straight-line trend given variations in annual fish catch, product yields derived from the catch, etc. (So far this fishing season, catch has been down but yields are up).
Going forward, however, product for human consumption seems like it’s shaping up as an attractive growth driver as supplement manufacturers increasingly come to appreciate the benefits of fish-based proteins and oils, which contain Omega-3 fatty acids not produced in the body and which therefore must be obtained from food or special supplements. The mundane valuation metrics for shares of this modestly-leveraged, profitable and strong cash-flow generator do not seem to account for this prospect.
Richard Lehmann
Editor, Forbes/Lehmann Income Securities Investor
Buy: Energy master limited partnerships
Income investors should look to energy related master limited partnerships (MLPs) for income in 2014 and beyond. Such partnerships offer high current income, steady dividend growth, inflation protection and tax deferral to boot. Better yet, they offer long term price appreciation as the domestic energy boom in the U.S. will continue to displace imported oil and gas for years to come.
There are three ways to play this: by direct purchase of MLPs, by buying a closed-end fund specializing in them, and by buying an exchange-traded fund that holds a composite of the industry. For direct purchase, look at the pipeline companies Plains All American LP (PAA, 4.78% yield/10.19% dividend growth) and Kinder Morgan Energy Partners LP (KMP, 6.75%/8.45%). Pipelines offer the most reliable dividend because they don’t depend on the price of oil and gas.
To get a broader selection and specialized management look for a closed-end fund such as Kayne Anderson MLP Investment Co (KYN, 6.49%/9.44%) or Fiduciary/Claymore MLP Opportunity Fund (FMO, 6.66%/8.40%). To buy the broadest cross section of this market, the Alerian MLP ETF (AMLP, 6.32%/7.23%) offers a low fee indexed approach which has worked well. No matter which approach you use, an investment in this sector belongs in every portfolio.
John Buckingham
Editor, Prudent Speculator and CIO, Al Frank Asset Management
Buy: Ensco PLC (ESV)
Ensco is the world’s second largest offshore driller. The firm operates across six continents with one of the newest jackup and deepwater fleets in the contract drilling industry. In its last few earnings releases, ESV has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow. I believe that the outlook for deepwater drilling remains attractive and Ensco is well positioned to benefit as new builds come online and it realizes favorable contract rollovers.
ESV has a solid balance sheet and future cash use should provide another near-term catalyst, coming in the form of additional rig capacity, debt reduction, share buybacks and dividend increases. On that last point, the driller recently announced a 50% increase in its quarterly dividend (from $0.50 to $0.75). ESV trades for less than 10 times trailing 12-month earnings and for a little more than 8 times the current 2014 consensus earnings estimate, while the shares also boast a 5.3% dividend yield.
Buy: American Eagle Outfitters (AEO)
American Eagle Outfitters is a retailer of high-quality clothing focused on 15- to 25-year old shoppers. AEO operates more than 1,000 stores in North America and ships to 81 countries worldwide via its Web sites. AEO is down 25% since early August, tumbling after reporting very disappointing second quarter results due to poor product execution in women’s apparel and the need to offer a high level of promotions to drive foot traffic and in early December issuing weak guidance for the fourth quarter.
I believe the shares offer an attractive long-term opportunity, just as they did when I had a previously very lucrative stint with the company from 2000-2008, even as I respect that the teen retailing space is challenging. AEO has overall brand strength, especially in denim, and management is focused on improving product assortment, implementing inventory management enhancements and growing its international presence. Additionally, I am quite smitten with the balance sheet, which sports no debt and $1.75 per share of cash and short-term investments, and 3.3% dividend yield.
Jim Oberweis and Dave Covas
The Oberweis Report
Buy: Ligand Pharmaceuticals (LGND)
Ligand Pharmaceuticals, a biopharmaceutical company based in La Jolla, Calif., offers investors a unique biotech opportunity that is profitable today with sustainable profitability going forward. Its business model is focused on drug discovery and partnering with pharmaceutical companies at an early development stage, handing off the late-stage drug development, regulatory matters and commercialization and collecting royalties, milestones and license fees in return.
The company made a transformative acquisition of Captisol in 2011, a formulation technology that improves the function of molecules that may otherwise be sub-optimal. As partnered drugs that depend on Captisol technology get approved, Ligand stands to earn royalties from those drug sales. In October Pfizer announced the FDA approval for Duavee, a new treatment for hot flashes and prevention of post-menopausal osteoporosis. We expect significant near-term growth from two blockbuster drugs; Ligand is receiving growing royalty payments from sales of Promacta for low platelet count (co-discovered by Ligand and GlaxoSmithKline) and from sales of Kyprolis for multiple myeloma. It currently has five royalty-producing drugs in its portfolio and we think it can nearly double this to nine in 2014, providing additional revenue streams while diversifying its business even further. We believe Ligand can grow revenues 38% in 2014 to $65 million, with earnings more than doubling to $1.40 per share.
Ross Gerber
CEO, Gerber Kawasaki Wealth & Investment Management
Buy: Apple (AAPL)
Apple is a cheap stock in a tech sector that’s getting very expensive. Apple is dominating the holiday season with its tablets and phones. The refreshed product line is doing much better than expected. I expect Apple’s China Mobile deal to meaningfully add to earnings next year. The real kicker is if Apple comes out with any new product. A TV will bring this stock to new highs. It has an iconic worldwide brand and this company certainly deserves at the minimum the market multiple. I see nice upside this year with or without a television.
Buy: Tesla Motors (TSLA)
Tesla is not a cheap stock but with the pullback recently over car fires it presents a great opportunity. This is not a car stock but a company that is transforming the car industry. The model S is a great and safe car and the NTSB will confirm this in a few months giving the stock the boost it needs to rebuild its momentum in 2014. The problem is inexperienced drivers crashing the car, not the car. Sales will continue to be strong for the model S and the new model X coming out late 2014 will be an amazing SUV. This will be an incredibly sought-after car. It will also be a further catalyst for the company in 2014; the demand will outstrip supply for many years to come. Co-founder, CEO and Product Architect Elon Musk delivers and I think he will continue to in 2014.
John Reese
Editor, Validea Hot List
Buy: HCI Group (HCI)
Property and casualty insurers from Florida sound like a risky proposition. But HCI has an advantage. Florida’s state-run insurer—which was created as a lender of last resort but became the lone option for many after several big insurers left the state—is being forced to divest a substantial portion of its policies because it grew too large. The forced sale has let firms like HCI pick and choose from some very profitable policies.
That’s led to stellar growth for HCI, which has grown earnings at a 32% pace and sales at a 51% clip over the long term. The state policy divestiture is continuing, and HCI has a lot of cash left. Its net cash/price ratio (net cash is cash and marketable securities minus long term debt) is more than 35%, helping earn it a 100% score from my Peter Lynch-based Guru Strategy. The Lynch model also likes that HCI trades for just 8.8 times earnings, making for a bargain-priced 0.28 P/E-to-growth ratio. HCI also gets a perfect 100% score from my Motley Fool-inspired model, thanks in part to its $9.84 in free cash per share and 92 relative strength, and a 92% score from my Martin Zweig-based model.
John Dobosz
Editor, Forbes Dividend Investor
Buy: Brookline Bancorp (BRKL)
If you’re not a Forbes Dividend Investor subscriber, you are not yet aware of my apparent predilection for regional banks. Of our 196 currently recommended stocks, 25 of them are regional or savings banks—by far the biggest industry group represented among past picks.
In truth, I don’t have any prejudicial fondness for the financial sector. It’s just that these banks flash the kind of value and comfortable dividend coverage that I seek out. Plus they have all done very well since they were recommended. The SPDR Regional Banking ETF (KRE) that tracks the overall group was up 28% from May 1 through the first of December. Our bank stocks gained an average of 35%, with some like TrustCo Bancorp (TRST) and First of Long Island (FLIC) surging more than 40% since May. Current yields on our regional bank recommendations average 3%, double the 1.5% yield on the KRE.
With fundamentals still looking attractive and valuations still modest, this smaller bank out of Massachusetts currently sports the highest overall score for any savings banks on the model I used to select it. Brookline Bancorp is the holding company for Brookline Bank and First Ipswich Bank in Massachusetts, and Bank Rhode Island. It maintains lending and deposit relationships with small- to mid-sized businesses and individuals.
In 2013, Brookline benefitted from higher loan and deposit amounts as well as better performing loans. For the full year, analysts expect $0.54 in earnings per share. The dividend has been steady since April 2009 at $0.085 per quarter, good for an annual payout of $0.34 and a 3.6% yield. Brookline trades more cheaply than it has in recent years. At 16 times earnings, the stock is well below its 25 average price-earnings ratio since 2008. Getting back to that average P/E produces a $13.50 stock. The average price-to-sales ratio over the past five years has been 5.7. Based on sales over the past year, that P/S multiple would produce a $16 stock price. Split the difference and you’re still looking at 66% potential upside if the stock trades at historical valuations and maintains current sales and profits.
Buy: Transocean (RIG)
It’s usually a sign of underlying buying interest in a stock when it gains in price on a day when the overall market is negative. That’s what happened on December 2 with Switzerland-based Transocean, the world’s largest offshore contract driller for oil and gas wells. Its shares ticked higher by 0.38%, albeit on light volume, while the S&P 500 dipped 0.13%, and even industry-specific Market Vectors Oil Services ETF (OIH) was down 0.43%.
There’s a lot to like about Transocean these days. In November it struck a deal with Carl Icahn, who owns nearly 6% of the company, and was agitating for a number of changes. He got another one of his people on the board of directors, and Transocean also cut the number of board seats from 14 to 11, giving existing members greater weight. Icahn also extracted a pledge that Transocean will boost profits by $800 million through cost cutting and increased efficiency.
Most significant for dividend investors is that Icahn succeeded in getting the company to agree to pay a $3 per share dividend next year, up 33.4% from the current $2.24 annual rate. RIG has a current yield of 4.6%. Transocean will also explore spinning off some of its assets into a master limited partnership structure.
After taking a hit after the April 2010 explosion and spill on its Deepwater Horizon rig at BP’s Macondo Well in the Gulf of Mexico, earnings are back on the rise. Analysts expect Transocean to earn $4.18 per share in 2013, up 5.5% from 2012. Revenue should be higher by 3.5% to $9.52 billion. For 2014, earnings are forecast to grow 35% with sales up 6.7%.
Current valuations make a good case for jumping into Transocean. Its average price-sales ratio over the past five years is 2.03, 6.4% higher than today’s P/S multiple of 1.91. With $26.40 per share in expected sales for 2013 that average P/S implies a $53.60 stock price. It trades at a 75% discount to its five-year average P/E ratio, but at 43.8 times trailing earnings it’s rather plump and reflects the effects of the spill costs. Nonetheless, at 8.9 times 2014 earnings, which are growing at better than a 30% clip is pretty cheap.
Buy: M.D.C Holdings (MDC)
There was a significant bottom for housing stocks on October 3, 2011, from which the iShares Dow Jones U.S. Home Construction (ITB) ETF rose 206% through May 13 of 2013. PulteGroup (PHM) soared 560% and KB Home shot higher by 375%. Since mid-May it’s been a different story. The ITB is down 15%, and many builders have seen their shares trade lower by 25% or more.
After the pullback, there are some good pockets of value in housing and one place to find it is in shares of M.D.C. Holdings. The Denver-based homebuilder is down 27% in the past six months after shooting 150% higher from October 2011 through May 2013. Founded in 1972, MDC builds and sells first-time and move-up single-family homes under the Richmond American Homes brand name in Arizona, California, Colorado, Florida, Maryland, Nevada, New Jersey, Pennsylvania, Utah and Virginia.
2013 was a banner year for MDC. Revenue is expected to grow 36% to $1.64 billion, and earnings are forecast to jump to $6.06 per share from $1.28 in 2012. For 2014, sales growth should moderate to 6.1%, while the consensus earnings forecast is $1.91 per share.
Dividends are a big part of the MDC story, having been paid without fail since 1987. The company maintained the payout through the financial crisis and the amount has remained steady at $1.00 per year since November 2005, giving it a current yield of 3.4%. The payout is well covered by earnings. In December 2012, MDC prepaid the entire year of dividends for 2013.
MDC looks cheap at current multiples. Over the past three years, the stock has traded at an average price-sales ratio of 1.51, compared to its present P/S multiple of 0.87. With $33.55 in expected revenue per share in 2013, MDC would be a $50 at its three-year average multiple.
Taesik Yoon
Editor, Forbes Investor
Buy: LMI Aerospace (LMIA)
LMI Aerospace is a leading supplier of structural assemblies, kits and components and a provider of design engineering services to the commercial, corporate, regional and military aircraft markets. Hurt by lower-than-expected operating results—especially in the back half of the year—LMIA’s stock got clobbered in 2013.
However, the company’s operations should rebound strongly is 2014—boosted by better performance from its engineering services business and recovery in profit margins stemming from additional synergies associated with its acquisition of Valent Aerostructures, improved plant efficiencies, and the absence of cumulative cash adjustments, which negatively impacted margins in 2013.
Buy: Rovi Corp. (ROVI)
Rovi is a global leader in technology solutions that power the discovery, delivery, display and monetization of digital entertainment. The company serves cable, satellite, telecommunications, mobile and Internet service providers, consumer electronics manufacturers, and entertainment and online distribution companies including Apple, Comcast, eBay, Google, Panasonic, Samsung, Sony, Toshiba and Verizon.
A strategic decision to not sacrifice profits for volume forced the company to take a more conservative view on the expected level of contract closings for the second half of 2013. This led to two downward revisions of full-year revenue and earnings guidance over the past three months, resulting in a sharp sell-off. But I would not write off ROVI so quickly.
The company’s desire to obtain appropriate value on potential licensing contracts is the right decision from a long-term growth perspective in my view. And while it may be taking longer to secure these deals than initially expected, I remain confident that they will be obtained. Given its attractive valuation, I expect the stock to rebound sharply once this happens.
T. Rowe Price’s Head of U.S. Equities John Linehan is taking a cautiously bullish approach: “Moving forward, U.S. stocks are unlikely to match their recent strength…On the plus side, corporate health remains strong and valuations are neutral. There are still attractive areas, such as companies that are benefiting from the reindustrialization of America. Market tailwinds and headwinds are now more balanced, so we believe it’s time to be cautious.”
Linehan is essentially saying that 2014 will be a stock picker’s market. His T.Rowe Price Value Fund, for example, holds among its top holdings Irving,TX’s Flowserve Corp.(FLS) , a maker of pumps, valves and seals used in a host of industries. It also owns a significant amount of specialty chemical and materials company Celanese Corp (CE).
As has been Forbes’ tradition over the years, we have gathered a selection of “Best Ideas” from some of our favorite money managers and investment advisors. You’ll find their recommendations below:
For a look at which stocks investment experts are saying you should avoid, click here.
Marc Gerstein
Editor, Forbes Low Priced Stock Report
Buy: Ballantyne Strong (BTN)
BTN has tons of cash thanks to sales of digital equipment to movie theaters that switched to the new standard. That’s now largely played out and it would have been easy for BTN to blow cash on a “diworsification” acquisition. But instead, BTN made a great accretive purchase: Convergent Corp. with a growth business (digital content for out-of-home advertising, etc.) and an operating profile adjacent to BTN’s network support center that serves digital theaters. This debt-free company still has lots of cash (40% of the stock price) and the stock still has a measly (0.59) price/sales ratio.
Buy: Rite Aid (RAD)
I first recommended Rite Aid in June 2011 at $1.05 and again in January at $1.45. The stock now trades above $5.00 and I still like it. My original investment case remains alive and well. One aspect of this is that the company’s remodeling efforts, emphasizing its new fresh-looking “wellness” format is working. The transition still has a lot of legs left: Only a little more than 1,000 stores have been renovated thus far, out of a total of 4,600. And with more efficient operating practices, cash flows remain very healthy (as was the case even before GAAP net income moved above zero), meaning the company can comfortably pay the interest on its still-considerable debt and refinance as necessary.
Note, too, my investment case had not and still does not assume RAD will surpass or catch up to its main rivals Walgreen’s (WAG) or CVS Caremark (CVS). Instead, I continue to believe that even after RAD’s 2013 rally, the stock’s valuation remains far enough below those of WAG or CVS to enable shareholders to benefit even as RAD’s operations continue to make baby steps toward the levels maintained by the industry leaders. Bear in mind that price/sales is very much influenced by margin, and there is plenty of room for RAD’s operating margin to make progress relative to peers as store-overhaul attracts more revenue and improves overhead-cost coverage.
Buy: Omega Protein (OME)
The stock market has shown itself to be interested in the LOHAS (lifestyle of health and sustainability) through high valuations on such large issues as Whole Foods (WFMI) and Lululemon (LULU), and we’ve done well so far with such recent selections as Gaiam (GAIA) and Primo Water (PRMW). Omega Protein, which catches menhaden, a wild herring-like fish found along the Atlantic and Gulf of Mexico coasts and harvests a variety of protein and oil products, could turn into an intriguing stealth LOHAS play
At present, more than 90% of the business comes from animal feed products produced from OME’s proteins and oils. That, in and of itself, is a nice business given that these ingredients are especially good for swine and fish, which are in high demand given increasing appetites for pork and seafood. But it’s not necessarily a straight-line trend given variations in annual fish catch, product yields derived from the catch, etc. (So far this fishing season, catch has been down but yields are up).
Going forward, however, product for human consumption seems like it’s shaping up as an attractive growth driver as supplement manufacturers increasingly come to appreciate the benefits of fish-based proteins and oils, which contain Omega-3 fatty acids not produced in the body and which therefore must be obtained from food or special supplements. The mundane valuation metrics for shares of this modestly-leveraged, profitable and strong cash-flow generator do not seem to account for this prospect.
Richard Lehmann
Editor, Forbes/Lehmann Income Securities Investor
Buy: Energy master limited partnerships
Income investors should look to energy related master limited partnerships (MLPs) for income in 2014 and beyond. Such partnerships offer high current income, steady dividend growth, inflation protection and tax deferral to boot. Better yet, they offer long term price appreciation as the domestic energy boom in the U.S. will continue to displace imported oil and gas for years to come.
There are three ways to play this: by direct purchase of MLPs, by buying a closed-end fund specializing in them, and by buying an exchange-traded fund that holds a composite of the industry. For direct purchase, look at the pipeline companies Plains All American LP (PAA, 4.78% yield/10.19% dividend growth) and Kinder Morgan Energy Partners LP (KMP, 6.75%/8.45%). Pipelines offer the most reliable dividend because they don’t depend on the price of oil and gas.
To get a broader selection and specialized management look for a closed-end fund such as Kayne Anderson MLP Investment Co (KYN, 6.49%/9.44%) or Fiduciary/Claymore MLP Opportunity Fund (FMO, 6.66%/8.40%). To buy the broadest cross section of this market, the Alerian MLP ETF (AMLP, 6.32%/7.23%) offers a low fee indexed approach which has worked well. No matter which approach you use, an investment in this sector belongs in every portfolio.
John Buckingham
Editor, Prudent Speculator and CIO, Al Frank Asset Management
Buy: Ensco PLC (ESV)
Ensco is the world’s second largest offshore driller. The firm operates across six continents with one of the newest jackup and deepwater fleets in the contract drilling industry. In its last few earnings releases, ESV has shown a relatively impressive ability to keep operating expenses in check and generate solid free cash flow. I believe that the outlook for deepwater drilling remains attractive and Ensco is well positioned to benefit as new builds come online and it realizes favorable contract rollovers.
ESV has a solid balance sheet and future cash use should provide another near-term catalyst, coming in the form of additional rig capacity, debt reduction, share buybacks and dividend increases. On that last point, the driller recently announced a 50% increase in its quarterly dividend (from $0.50 to $0.75). ESV trades for less than 10 times trailing 12-month earnings and for a little more than 8 times the current 2014 consensus earnings estimate, while the shares also boast a 5.3% dividend yield.
Buy: American Eagle Outfitters (AEO)
American Eagle Outfitters is a retailer of high-quality clothing focused on 15- to 25-year old shoppers. AEO operates more than 1,000 stores in North America and ships to 81 countries worldwide via its Web sites. AEO is down 25% since early August, tumbling after reporting very disappointing second quarter results due to poor product execution in women’s apparel and the need to offer a high level of promotions to drive foot traffic and in early December issuing weak guidance for the fourth quarter.
I believe the shares offer an attractive long-term opportunity, just as they did when I had a previously very lucrative stint with the company from 2000-2008, even as I respect that the teen retailing space is challenging. AEO has overall brand strength, especially in denim, and management is focused on improving product assortment, implementing inventory management enhancements and growing its international presence. Additionally, I am quite smitten with the balance sheet, which sports no debt and $1.75 per share of cash and short-term investments, and 3.3% dividend yield.
Jim Oberweis and Dave Covas
The Oberweis Report
Buy: Ligand Pharmaceuticals (LGND)
Ligand Pharmaceuticals, a biopharmaceutical company based in La Jolla, Calif., offers investors a unique biotech opportunity that is profitable today with sustainable profitability going forward. Its business model is focused on drug discovery and partnering with pharmaceutical companies at an early development stage, handing off the late-stage drug development, regulatory matters and commercialization and collecting royalties, milestones and license fees in return.
The company made a transformative acquisition of Captisol in 2011, a formulation technology that improves the function of molecules that may otherwise be sub-optimal. As partnered drugs that depend on Captisol technology get approved, Ligand stands to earn royalties from those drug sales. In October Pfizer announced the FDA approval for Duavee, a new treatment for hot flashes and prevention of post-menopausal osteoporosis. We expect significant near-term growth from two blockbuster drugs; Ligand is receiving growing royalty payments from sales of Promacta for low platelet count (co-discovered by Ligand and GlaxoSmithKline) and from sales of Kyprolis for multiple myeloma. It currently has five royalty-producing drugs in its portfolio and we think it can nearly double this to nine in 2014, providing additional revenue streams while diversifying its business even further. We believe Ligand can grow revenues 38% in 2014 to $65 million, with earnings more than doubling to $1.40 per share.
Ross Gerber
CEO, Gerber Kawasaki Wealth & Investment Management
Buy: Apple (AAPL)
Apple is a cheap stock in a tech sector that’s getting very expensive. Apple is dominating the holiday season with its tablets and phones. The refreshed product line is doing much better than expected. I expect Apple’s China Mobile deal to meaningfully add to earnings next year. The real kicker is if Apple comes out with any new product. A TV will bring this stock to new highs. It has an iconic worldwide brand and this company certainly deserves at the minimum the market multiple. I see nice upside this year with or without a television.
Buy: Tesla Motors (TSLA)
Tesla is not a cheap stock but with the pullback recently over car fires it presents a great opportunity. This is not a car stock but a company that is transforming the car industry. The model S is a great and safe car and the NTSB will confirm this in a few months giving the stock the boost it needs to rebuild its momentum in 2014. The problem is inexperienced drivers crashing the car, not the car. Sales will continue to be strong for the model S and the new model X coming out late 2014 will be an amazing SUV. This will be an incredibly sought-after car. It will also be a further catalyst for the company in 2014; the demand will outstrip supply for many years to come. Co-founder, CEO and Product Architect Elon Musk delivers and I think he will continue to in 2014.
John Reese
Editor, Validea Hot List
Buy: HCI Group (HCI)
Property and casualty insurers from Florida sound like a risky proposition. But HCI has an advantage. Florida’s state-run insurer—which was created as a lender of last resort but became the lone option for many after several big insurers left the state—is being forced to divest a substantial portion of its policies because it grew too large. The forced sale has let firms like HCI pick and choose from some very profitable policies.
That’s led to stellar growth for HCI, which has grown earnings at a 32% pace and sales at a 51% clip over the long term. The state policy divestiture is continuing, and HCI has a lot of cash left. Its net cash/price ratio (net cash is cash and marketable securities minus long term debt) is more than 35%, helping earn it a 100% score from my Peter Lynch-based Guru Strategy. The Lynch model also likes that HCI trades for just 8.8 times earnings, making for a bargain-priced 0.28 P/E-to-growth ratio. HCI also gets a perfect 100% score from my Motley Fool-inspired model, thanks in part to its $9.84 in free cash per share and 92 relative strength, and a 92% score from my Martin Zweig-based model.
John Dobosz
Editor, Forbes Dividend Investor
Buy: Brookline Bancorp (BRKL)
If you’re not a Forbes Dividend Investor subscriber, you are not yet aware of my apparent predilection for regional banks. Of our 196 currently recommended stocks, 25 of them are regional or savings banks—by far the biggest industry group represented among past picks.
In truth, I don’t have any prejudicial fondness for the financial sector. It’s just that these banks flash the kind of value and comfortable dividend coverage that I seek out. Plus they have all done very well since they were recommended. The SPDR Regional Banking ETF (KRE) that tracks the overall group was up 28% from May 1 through the first of December. Our bank stocks gained an average of 35%, with some like TrustCo Bancorp (TRST) and First of Long Island (FLIC) surging more than 40% since May. Current yields on our regional bank recommendations average 3%, double the 1.5% yield on the KRE.
With fundamentals still looking attractive and valuations still modest, this smaller bank out of Massachusetts currently sports the highest overall score for any savings banks on the model I used to select it. Brookline Bancorp is the holding company for Brookline Bank and First Ipswich Bank in Massachusetts, and Bank Rhode Island. It maintains lending and deposit relationships with small- to mid-sized businesses and individuals.
In 2013, Brookline benefitted from higher loan and deposit amounts as well as better performing loans. For the full year, analysts expect $0.54 in earnings per share. The dividend has been steady since April 2009 at $0.085 per quarter, good for an annual payout of $0.34 and a 3.6% yield. Brookline trades more cheaply than it has in recent years. At 16 times earnings, the stock is well below its 25 average price-earnings ratio since 2008. Getting back to that average P/E produces a $13.50 stock. The average price-to-sales ratio over the past five years has been 5.7. Based on sales over the past year, that P/S multiple would produce a $16 stock price. Split the difference and you’re still looking at 66% potential upside if the stock trades at historical valuations and maintains current sales and profits.
Buy: Transocean (RIG)
It’s usually a sign of underlying buying interest in a stock when it gains in price on a day when the overall market is negative. That’s what happened on December 2 with Switzerland-based Transocean, the world’s largest offshore contract driller for oil and gas wells. Its shares ticked higher by 0.38%, albeit on light volume, while the S&P 500 dipped 0.13%, and even industry-specific Market Vectors Oil Services ETF (OIH) was down 0.43%.
There’s a lot to like about Transocean these days. In November it struck a deal with Carl Icahn, who owns nearly 6% of the company, and was agitating for a number of changes. He got another one of his people on the board of directors, and Transocean also cut the number of board seats from 14 to 11, giving existing members greater weight. Icahn also extracted a pledge that Transocean will boost profits by $800 million through cost cutting and increased efficiency.
Most significant for dividend investors is that Icahn succeeded in getting the company to agree to pay a $3 per share dividend next year, up 33.4% from the current $2.24 annual rate. RIG has a current yield of 4.6%. Transocean will also explore spinning off some of its assets into a master limited partnership structure.
After taking a hit after the April 2010 explosion and spill on its Deepwater Horizon rig at BP’s Macondo Well in the Gulf of Mexico, earnings are back on the rise. Analysts expect Transocean to earn $4.18 per share in 2013, up 5.5% from 2012. Revenue should be higher by 3.5% to $9.52 billion. For 2014, earnings are forecast to grow 35% with sales up 6.7%.
Current valuations make a good case for jumping into Transocean. Its average price-sales ratio over the past five years is 2.03, 6.4% higher than today’s P/S multiple of 1.91. With $26.40 per share in expected sales for 2013 that average P/S implies a $53.60 stock price. It trades at a 75% discount to its five-year average P/E ratio, but at 43.8 times trailing earnings it’s rather plump and reflects the effects of the spill costs. Nonetheless, at 8.9 times 2014 earnings, which are growing at better than a 30% clip is pretty cheap.
Buy: M.D.C Holdings (MDC)
There was a significant bottom for housing stocks on October 3, 2011, from which the iShares Dow Jones U.S. Home Construction (ITB) ETF rose 206% through May 13 of 2013. PulteGroup (PHM) soared 560% and KB Home shot higher by 375%. Since mid-May it’s been a different story. The ITB is down 15%, and many builders have seen their shares trade lower by 25% or more.
After the pullback, there are some good pockets of value in housing and one place to find it is in shares of M.D.C. Holdings. The Denver-based homebuilder is down 27% in the past six months after shooting 150% higher from October 2011 through May 2013. Founded in 1972, MDC builds and sells first-time and move-up single-family homes under the Richmond American Homes brand name in Arizona, California, Colorado, Florida, Maryland, Nevada, New Jersey, Pennsylvania, Utah and Virginia.
2013 was a banner year for MDC. Revenue is expected to grow 36% to $1.64 billion, and earnings are forecast to jump to $6.06 per share from $1.28 in 2012. For 2014, sales growth should moderate to 6.1%, while the consensus earnings forecast is $1.91 per share.
Dividends are a big part of the MDC story, having been paid without fail since 1987. The company maintained the payout through the financial crisis and the amount has remained steady at $1.00 per year since November 2005, giving it a current yield of 3.4%. The payout is well covered by earnings. In December 2012, MDC prepaid the entire year of dividends for 2013.
MDC looks cheap at current multiples. Over the past three years, the stock has traded at an average price-sales ratio of 1.51, compared to its present P/S multiple of 0.87. With $33.55 in expected revenue per share in 2013, MDC would be a $50 at its three-year average multiple.
Taesik Yoon
Editor, Forbes Investor
Buy: LMI Aerospace (LMIA)
LMI Aerospace is a leading supplier of structural assemblies, kits and components and a provider of design engineering services to the commercial, corporate, regional and military aircraft markets. Hurt by lower-than-expected operating results—especially in the back half of the year—LMIA’s stock got clobbered in 2013.
However, the company’s operations should rebound strongly is 2014—boosted by better performance from its engineering services business and recovery in profit margins stemming from additional synergies associated with its acquisition of Valent Aerostructures, improved plant efficiencies, and the absence of cumulative cash adjustments, which negatively impacted margins in 2013.
Buy: Rovi Corp. (ROVI)
Rovi is a global leader in technology solutions that power the discovery, delivery, display and monetization of digital entertainment. The company serves cable, satellite, telecommunications, mobile and Internet service providers, consumer electronics manufacturers, and entertainment and online distribution companies including Apple, Comcast, eBay, Google, Panasonic, Samsung, Sony, Toshiba and Verizon.
A strategic decision to not sacrifice profits for volume forced the company to take a more conservative view on the expected level of contract closings for the second half of 2013. This led to two downward revisions of full-year revenue and earnings guidance over the past three months, resulting in a sharp sell-off. But I would not write off ROVI so quickly.
The company’s desire to obtain appropriate value on potential licensing contracts is the right decision from a long-term growth perspective in my view. And while it may be taking longer to secure these deals than initially expected, I remain confident that they will be obtained. Given its attractive valuation, I expect the stock to rebound sharply once this happens.
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