4 Value Stocks for 2013

01/07/2013 10:45 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Growth has been the hot sector for more than a year now, but the growth boom is a bit long in the tooth, while this quartet of value plays have a lot of headroom this year and beyond, observes J. Royden Ward of Cabot Benjamin Graham Value Letter.

Which stocks will perform well in 2013? I follow value stocks closely. For the past several decades, value stocks have outperformed growth stocks consistently, but during the past 15 months, growth stocks have outperformed value stocks.

During the past three months, though, value stocks have begun to outshine growth stocks. I believe 2013 will be an exceptional year for value stocks. Top-notch companies in leading industries are clearly undervalued and look very attractive.

I scanned my database to find five stocks with the right credentials to perform very well in 2013. My five picks are the stocks of US companies with exceptional prospects for 2013. All of my stock choices pay dividends, and all are selling at bargain prices. The Gold ETF does not pay a dividend but is selling at a bargain price.

My first recommendation is BlackRock (BLK). BLK is the largest publicly traded investment management company in the world, with assets under management totaling $3.7 trillion.

The company offers a variety of investment and advisory products and services to institutional and individual investors. The 2009 acquisition of Barclays Global Investors, manager of all iShares ETFs, doubled BlackRock's revenues and added significant profits.

BlackRock is best known for its expertise in fixed-income asset management. The company has benefited from the globalization of capital markets and the growing demand for more sophisticated risk management tools and solutions. The firm has been gaining market share, aided by its size and untarnished reputation in the marketplace.

Sales and earnings growth slowed during the past 12 months, but a rebound is underway. Sales will likely rise 9% and EPS will increase 11% in 2013. New business from banks and governments seeking help to manage asset risk and to help unload troubled assets could push sales and earnings higher than expected.

BLK is Low Risk, share price volatility is below average, and the dividend yield is attractive at 2.9%. Buy now.

Kroger (KR)
Founded in 1883 in Cincinnati, Kroger is one of the largest US grocers, with 2,422 supermarkets in 31 states. The company also operates 790 convenience stores, 344 jewelry stores, and 1,141 supermarket fuel centers.

Kroger's typical format includes food and drug stores containing bakeries, delis, seafood, meat and floral shops, pet centers, and high-quality fresh items such as organic produce.

Management recently introduced an ambitious program to boost the number of new stores. Kroger will also expand its business by launching discount stores and restaurants. Management is committed to improve sales and earnings growth considerably during the next couple of years and beyond.

Recent quarterly financial results have been impressive. Kroger's "Customer 1st Strategy" continues to raise customer loyalty, boost same-supermarket sales, and increase market share. Management lifted its earnings guidance for the current quarter and forecast accelerating sales and earnings for 2013. Kroger is taking market share despite formidable competitors such as Walmart (WMT).

At 11.3 times current EPS and with a dividend yield of 2.3%, KR shares are undervalued. The balance sheet is solid, and Kroger shares are less volatile than the shares of most companies. Buy now.

Microsoft (MSFT)
The world's largest software company develops, manufactures, and licenses software products and services for different types of computing devices. Computer software includes the Windows operating system, the Office application suite, and cloud-computing services. The company also designs and sells hardware, including entertainment products, digital music devices, and personal computer products.

MSFT's new Windows 8 operating system designed for both computers and tablets is enjoying strong demand from users. In addition, Microsoft's new tablet computer, called the Surface, has won high praise for its innovative features. The company's Xbox consoles and Kinect games continue to gain market share. MSFT's Skype voice over Internet protocol service (VoIP), acquired in May 2011, is providing rapid growth.

I forecast 11% sales growth and 10% EPS growth in 2013. The company could beat my forecast if new products, such as the Surface, exceed expectations. At 9.1 times my 2013 forecast EPS of 2.89, MSFT shares are undervalued. MSFT shares will likely advance to my Minimum Sell Price within one to two years. MSFT is very low risk.

SPDR Gold Shares (GLD) is an exchange traded fund that seeks to replicate the performance of the price of gold bullion. The fund physically holds gold bullion and no other assets. The fund, created in 2004, maintains a low management fee of 0.4%.

Gold mining companies, such as Barrick Gold (ABX) and GoldCorp (GG), are experiencing declining mine production while incurring higher mining costs and higher labor costs. The uncertain near-term future of gold mining companies can be avoided by buying a gold ETF. And SPDR Gold Shares are a lot less volatile than most gold-mining stocks.

I believe the price of gold has hit bottom and will rise in 2013, which will benefit SPDR Gold Shares. Gold production has risen only 0.6% annually during the past 12 years, despite a rapid rise in the price of gold.

The threat of debt defaults, both domestic and foreign, increases the appeal of gold as a safe haven. In addition, the new Federal Reserve bond-buying program is expected to cause gold prices to rise during the next several months. The recent drop in gold prices provides an excellent buying opportunity. GLD does not pay a dividend and is low risk.

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