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2013 Barron's Roundtable - Part 2

2013 Barron's Roundtable - Part 2

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Barron's 2013 investment analysis and stock recommendations
Barron's 2013 investment analysis and stock recommendations

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Published by: desijnk on Jan 26, 2013
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Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies fordistribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visitwww.djreprints.comSee a sample reprint in PDF formatOrder a reprint of this article now
B
 ARRON
'
S
OUNDTABLE
| SATURDAY, JANUARY 26, 2013
It's Gonna Be Delicious
By LAUREN R. RUBLIN
Want a get-rich recipe? Start with our experts' mouthwatering investment bargains in energy, retailing,banking, and more. Up this week: Abby Joseph Cohen, Brian Rogers, Oscar Schafer, and Scott Black.
 Barron's
2013 Roundtable -- Part 1 (Jan. 21)Tables:2012 Roundtable Report Card2012 Midyear Roundtable Report Card
If you're dining on stocks this year (we hear the bonds are a bit overcooked), better stick to the à la carte menu.Such was the considered advice of the members of our 2013 Roundtable, when the editors of 
 Barron's
gathered the whole thoughtful crew in New York on Jan. 14 to extract their latest forecasts for the economy and financial markets. As should have been evident in last week's issue, which featured thefirst part of the daylong conversation, these investment pros don't expect all that much from the stock-market averages in the months ahead. The bigaction, they predict, will be in well-chosen individual issues, which could run rings 'round the Dow and its lethargic cousins.In this week's Roundtable feature, the second of three, it's à la carte all the way, as three superlative stock pickers -- Brian Rogers, Oscar Schafer, andScott Black -- and one seasoned strategist, Abby Joseph Cohen, make the case for 22 stocks whose performance could shine, and then some, in 2013.Most of these shares have been unfairly dissed by investors, and many offer the potential for dividend growth as well as substantial capital appreciation.They range from plays on oil and gas and agriculture to surf-wear and Korean tires, and our experts share all the juicy details with precision and verve.Happy reading. Or should we say,
bon appétit 
?
Barron's:
 
 Abby, tell us about your investment picks for 2013.
Cohen:
I'm happy to do so, but let me begin with a quick recap of our general expectations for themarket. Our sense at Goldman is that the market will get off to a slower start this year, and then get better. There are a number of things to be concerned about at the beginning of the year, including highertaxes in the U.S., and whether the Chinese economic recovery is for real. By the end of the year, however, we expect U.S. gross domestic product to be growing on the order of 2.5%, and we are forecasting 3%GDP growth in 2014. With regard to asset categories, equities are the best place to be. There may besome trading opportunities in high-quality corporate bonds. Global GDP will be on the order of 3.3% in 2013, even with weak conditions in Europe,
Zulauf:
Is that a lower growth rate than in 2012?
Cohen:
It is a little higher. China will be somewhat better, but we are waiting to make sure that the numbers we saw at the end of the year are for real.Our 2013 forecast for Standard & Poor's 500 earnings is $107. Our 2014 forecast is $114. The consensus forecast for this year is $113, and for next year itis $126. We don't agree with those numbers, although we expect companies to show profit gains because profit margins will be stable. U.S. companiesare benefiting from keeping labor costs under control. Wages aren't moving up much, and companies are seeing productivity gains. Energy costs alsoare under control. Our official price forecast for the S&P 500 is 1575, but there are many valuation models one could use. If you use the Fed model[which compares the market's earnings yield to the yield on long-term Treasury bonds], you come up with a number that is more like 1700 or 1750.The stocks I have selected today take advantage of a few factors. These include the dramatic decline incorrelation and volatility in almost every market. Market volatilities are at the lowest levels we have seenin years. The biggest decline in volatility has been in the emerging markets. Several years ago, volatilitiesin emerging markets were two or three times as high as in developed markets. Now they are roughly inthe same ballpark. To say that correlations [between markets] are down dramatically is just anarithmetic way of saying that stock selection is going to matter. The stocks I have chosen are all ratedBuy by Goldman Sachs analysts. My first stock is a pharmaceutical company,
Bristol-Myers Squibb
[ticker: BMY].
What's to like about Bristol-Myers? 
Cohen:
The company has a few things going for it. Patent-cliff issues [drug-patent expirations], not only for Bristol but a number of pharma companies, probably are coming to an end. Earnings bottomed in 2012, or will bottom in 2013. Our real focus is onearnings growth in the next two to four years, when Bristol will look much better. We recently lowered our earnings estimate for 2013, but made nochange in our long-term view. The longer term is driven by a number of promising-looking new products. One, Eliquis, has already been launched in theEuropean Union. It is a drug used to reduce stroke risk in patients with atrial fibrillation. It has been approved by the Food and Drug Administrationand is set to launch this year. Bristol-Myers also is working on PD-1, a monoclonal antibody that has shown positive results against skin cancer and
Enlarge ImageBrad Trent for Barron's
(From left) Abby Joseph Cohen, Scott Black, OscarSchafer and Brian Rogers
Enlarge Image
Barron's 2013 Roundtable, Part II - Barrons.comhƩp://online.barrons.com/arƟcle/SB5000142405274870368490457825...1 of 121/26/2013 4:10 PM
 
Abby Joseph Cohen's Picks
Company/Ticker1/11/13Price
Bristol-Myers Squibb/BMY$34.13Mosaic Company/MOS59.74Expeditors International ofWashington/EXPD42.70Hankook TireWorldwide/000240.Korea18,850 wonNoble Energy/NBL$105.57
Source: Bloomberg 
renal cancer in early-stage clinical trials.
 How will these drugs affect earnings? 
Cohen:
Longer term, earnings could grow by at least 10%. The stock has a 4% yield, so investors can collect something while they wait for higherearnings to come through. Our analysts estimate 2013 earnings of $1.80 a share.My second recommendation,
Mosaic Company 
[MOS], refers to itself as a crop-nutrition company. In other words, it produces fertilizer. Mosaic wasformed in 2004. Cargill, which owned a majority of the company, spun off its stake in 2011 in a $24 billion transaction. Mosaic is a significant supplierof both phosphate and potash base nutrients. It is No. 2 in fertilizer ingredients after
Potash Corp. of Saskatchewan
[POT]. Two things areinteresting about Mosaic. It has significant distribution operations in places such as Brazil, China, India, and other parts of Latin America, all areas where the middle class is growing and demand for food is rising. In addition, some charitable trusts and family foundations associated with Cargill havelockup agreements on Mosaic shares that begin to expire in May 2013 [the shares can't be sold before then]. The presumption is that, after the lockupsexpire and the shares are sold, the company will be able to consider capital-allocation strategies, such as dividend increases and share repurchases laterin 2013.
 Apart from this, how is Mosaic doing? 
Cohen:
The company reported fiscal-second-quarter earnings on Jan. 4. Revenue was down a little because fertilizer prices were a bit lower. In addition, international shipments were hurt because thecompany, and the industry, were engaged in contract negotiations with India and China. There has beenan agreement with China, so now things are moving in the right direction.However, business was strong in North America. On a longer-term basis, my Goldman Sachs colleagueslike the fundamentals for crop demand and pricing, which is favorable for both potash and phosphateprices. Inventories are low, and a recovery is likely within a year or two. Mosaic offers both earningsgrowth and return of cash. The company has $2.5 billion of net cash on its balance sheet.
Zulauf:
Is there a reason you prefer Mosaic to Potash? Potash is the lowest-cost producer.
Cohen:
Our team prefers Mosaic because of valuation and the catalyst it sees. Mosaic trades for about13.5 times fiscal 2013 earnings and 10 times fiscal 2014 earnings [the fiscal year ends in May]. It yields1.7%.My next company,
Expeditors International of Washington
[EXPD], is based in Seattle, not Washington, D.C. It has significant exposure to global trade, especially trans-Pacific trade, and therefore,trade with China. Freight growth appears to be picking up at the airports in Hong Kong and Shanghai,and we are seeing a reversal of very tough trends at seaports in the Pacific in 2012. If investors wantexposure to China without buying Chinese stocks, this is a good way to get it and participate in aninflection in the Chinese economy.Expeditors describes itself as a global logistics company. Basically, it expedites trade. It has about 250 locations around the world in cities such as SãoPaulo, Beirut, and Shanghai. The company helps customers get merchandise in and out of countries. It works with customs agents. It has about 13,000employees around the world.
Gross:
How do you expedite trade?
Cohen:
You smooth the process by working with a lot of customs officials. This is important for small-and mid-cap companies that might not have such expertise themselves.
Black:
Expeditors used to sell at a high price/earnings multiple. Does it still?
Cohen:
Yes. It sells for 26 times last year's expected earnings, falling to 21 times this year. It yields 1.2%.The stock disappointed last year. One of the risks for Expeditors, as seen in 2012, is that their businesshas become more cyclical.Keeping with the Asia theme, Korea looks interesting. It has a number of large companies that areengaged in international trade.
Hankook Tire Worldwide
[000240.Korea] trades in Korea. Thisstock, too, has performed poorly in recent months. There have been concerns about protectionism, weakening demand, and such. Our teams in Asia and the U.S. are seeing a pickup in demand for automobiles, including Korean vehicles sold in the U.S.and elsewhere. Korean auto manufacturers, including
Kia Motors
[000270.Korea], are having discussions about building manufacturing facilities inthe U.S., which could bode well for Hankook.
Zulauf:
You aren't concerned that if my forecast for a strong dollar and weak yen [detailed in last week's Roundtable issue] comes true, the Koreans will be hurt? They are the major competitors to Japanese automotive companies.
Cohen:
Our currency team doesn't share your view, although one could argue that if there is some weakening in the yen, it would hurt the Korean won.My final pick is in the energy area. As we discussed this morning, investors are focusing on the technological and competitive advantage that many U.S.energy companies have, and just how much they are laying out in capital expenditures. Until now, investors haven't been enthusiastic about energy. Thesector is significantly underweight among hedge funds and others.
Noble Energy 
[NBL] could benefit from increased interest in the sector. Noble has
Goldman's senior investment strategist puts anoptimistic spin on the federal budget deficit, explainswhy stocks are cheap, and makes the case forinvesting in Bristol Myers.
Jennifer Altman for Barron's
Abby Joseph Cohen: "Our teams in Asia and the U.S.are seeing a pick-up in demand for automobiles,including Korean vehicles sold in the U.S. andelsewhere."
Enlarge Image
Barron's 2013 Roundtable, Part II - Barrons.comhƩp://online.barrons.com/arƟcle/SB5000142405274870368490457825...2 of 121/26/2013 4:10 PM
 
Brian Rogers' Picks
Company/Ticker1/11/13 Price
PNCFinancial Services Group/PNC $60.05Kohl's/KSS 42.02Apache/APA 80.57Avon Products/AVP 15.22LeggMason/LM 26.52General Electric/GE 21.13
Source: Bloomberg 
undervalued reserves and high-impact exploration, or what some would call shale with scale, linked to its technological advances. You can have shale[oil and gas trapped in shale rock], but if you don't have it in scale, it is a problem. Noble has an interesting mix of exploration properties. It hasexposure to West Africa, in the Alen project, where there is higher-value crude oil. It also has exposure in the Mediterranean to Israeli natural gas, which sells for far more than U.S. gas. It is working in the Tamar field off the coast of Israel, which is generating good revenue, and in the Leviathan, anatural-gas-liquids project that is in an earlier stage of development. We assume Noble will earn $4.73 for last year, picking up to $6.70 this year. Thestock sells for $105.57, or 16 times this year's estimated earnings. It has a modest yield of 0.8% and spends a lot on research and development.
Thanks, Abby. Let's hear from Brian.
Rogers:
To frame the discussion, we have modest expectation for earnings growth this year, in the 5%, 6%, 7% range. We have a much more positiveoutlook for dividend growth in 2013, following a strong dividend picture in 2012. The housing and auto sectors look great. Deleveraging continues,except in the federal government. Corporate finances are outstanding. We'll get somewhere with Washington's debt-ceiling discussions, and maybe aSimpson-Bowles-lite agreement [on taxes and spending]. Jobs continue to be the big issue, and unemployment is sticky on the downside. Theunemployment rate will continue to tick down slowly. We talked today about supply and demand for equities. Supply will be constrained, and demand will be strong, coming from corporate buyers andindividual and institutional investors, who will begin to reallocate funds toward the equity market and out of bonds. There will be a great migration orgreat rotation, or whatever you want to call it. It will intensify as the year continues. Valuations are OK, depending on your earnings assumptions. TheS&P 500 is trading at 13.5 times 2013 earnings estimates. That isn't dirt cheap, but it isn't expensive relative to interest rates and fixed-incomealternatives. Again, it will be a year in which investment confidence is shaped by what takes place in Washington.The common theme among my stock selections is companies that have struggled, although my last pick will be an exception. Some stocks did really welllast year, and some of decent quality struggled. I have tried to identify strugglers that can get their mojo back.
PNC Financial Services Group
[PNC], the old Pittsburgh National Bank, is one. Most other financial stocks were strong performers last year. PNC, on a total-return basis, was up about4%.
What was the problem? 
Rogers:
PNC bought
Royal Bank of Canada
's [RY] operations in the southeastern U.S. last year, and that held them back a bit. I always go back to2008 and 2009 when looking at banks to try to figure out how they held together during that time. Did they get through the crisis OK? PNC earned$2.10 a share in 2008 and $4.26 in 2009, so it was profitable all the way through. The bank has completed some interesting deals, buying MercantileBank of Baltimore and National City. It is well run.
Gross:
The stock is $60 a share.
Gabelli:
PNC owns a big piece of 
BlackRock 
[BLK].
Rogers:
It owns 21% of BlackRock. Eliminate BlackRock, and PNC trades for eight times expected earnings. Most banks are trading for 10, 11, 12 timesearnings.
Gabelli:
If PNC sold its BlackRock stake, wouldn't it have a tax liability?
Rogers:
Yes, but it wouldn't be that big. The bank's capital position is really strong. After the financialindustry's latest stress-test results come out in the spring, PNC will be able to raise its dividend again.The current dividend is $1.60 a share, and it could probably rise to $1.80, giving you a 3% yield. If every other bank is selling for between 10 and 12 times earnings, and PNC, BlackRock-adjusted, is selling foreight times earnings, our view is that is the investor's opportunity.
 Witmer:
If PNC were to trade at 11 times earnings, what would be your target price?
Rogers:
It would be $70 to $75 a share.
Gabelli:
Brian, shares of 
JPMorgan Chase
[JPM] went up sharply last year.
M&T Bank 
[MTB] was up sharply. Isn't something else overhangingPNC?
Rogers:
The market is a bit concerned, Mario, about the RBC acquisition. To me, the company is always buying banks. You have to go withmanagement in a situation like this, and Jim Rohr is a good CEO. He has proven himself through many cycles.My second pick is
Kohl's
[KSS]. This is the second- or third-largest department-store company in theU.S. The stock is trading for $42. Kohl's has a $10 billion market value, after falling about 15% last year.Many other retailers did a bit better. Kohl's had some fashion-merchandising issues, which I am notqualified to comment on personally, because I wouldn't be a good fashion gauge. The company pays a$1.28-a-share dividend, and yields 3%. In the past three years it has bought back at today's price 25% of its shares, so there is a continued recapitalization theme here. Kohl's has voted with its feet.
That is for sure. What do earnings look like? 
Rogers:
For the fiscal 12 months ending this month, the company probably earned $4.20 a share. Forthe year ending January 2014, they could earn $4.80. The stock trades for a multiple of about nine timesearnings. The company will probably increase its dividend again in the next six to eight weeks, so its yield will be rising. Kohl's has been a fairly steady dividend grower since it started paying dividends about two years ago. The management team has
Jennifer Altman for Barron's
Brian Rogers: "It is hard to find anyone who wouldadmit to owning Kohl's, aside from me."
Enlarge Image
Barron's 2013 Roundtable, Part II - Barrons.comhƩp://online.barrons.com/arƟcle/SB5000142405274870368490457825...3 of 121/26/2013 4:10 PM

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