My top 10 stocks for 2014: Farr
In each of the past 10 Decembers, I have selected and invested (personally) in 10 of the stocks we follow with the intention of holding them for just one year. These are companies that I find especially attractive in light of their valuations or their potential to benefit from economic developments.
I hold these positions for the following year, and then I reinvest in the new list. I will sell my 2013 names on Tuesday morning December 31st and buy the following names that afternoon.
It should be noted that, while last year's list did well, the previous one lagged the S&P 500 for the second straight year, so there are NEVER any guarantees.
Here are my top 10 stocks for 2014:
Family Dollar (FDO)
Family Dollar operates a chain of over 7,900 general merchandise retail discount stores in 46 states. The stores target low- and middle-income consumers with a selection of merchandise at prices generally ranging from $1 to $10. The company's historical performance has been outstanding, and its runway for future store growth is exciting. Perhaps the most compelling aspect of the investment case, though, is FDO's opportunity to close the store-productivity gap to its closest competitor, Dollar General (DG). We expect that the company's aggressive investments in store renovations and wider product selection will help achieve this goal. The company also fits nicely with our overall thesis that a stretched U.S. consumer will continue to pay down debt while saving more for retirement, leading to increasing frugality when purchasing consumer goods. We believe the combination of growth and defensiveness will serve clients well over the longer term. At about 16x the consensus estimate for calendar 2014 earnings per share, we find solid longer-term value in Family Dollar shares.
(Read more: This could be a key to a stocks repeat in 2014...)
CVS Caremark (CVS)
CVS Caremark is a leading retail drug store and pharmacy-benefits manager in the United States. After acquiring Caremark in 2007, CVS Caremark became the first integrated drugstore/PBM in the health-care industry. CVS is the number one drug store in the U.S., and the retail pharmacy accounts for 68 percent of earnings. The company operates over 7,300 stores throughout the country, a number of which include in-store clinics called MinuteClinics. As the No. 2 PBM in the country, Caremark accounts for 32 percent of earnings. The pharmacy-services segment manages employer health plans, Medicare Part D prescription drug plans, and managed Medicaid services and operates a mail-order pharmacy and specialty pharmacy services. CVS Caremark is well-positioned to benefit from the rollout of the Affordable Care Act as the Congressional Budget Office estimates that the ACA will add 30 million uninsured people to prescription drug plans. CVS Caremark also stands to benefit from demographic trends as the U.S. Census Bureau estimates that over the next 20 years, the percentage of the population over 65 years old will increase from 13 percent to almost 20 percent, and the population of Medicare-covered customers for CVS is estimated to grow 18 percent by 2016. Trading at 17.1x the consensus estimates for 2014 and with a 1.3-percent dividend, we believe the strong trends in demographics and health care give CVS Caremark a promising growth outlook.
Schlumberger is the world's premier oil-services company providing the broadest range of services to companies in the oil and gas exploration and production business. We believe the company is ideally positioned to benefit from stable and/or higher energy prices and continued increase service intensity in the exploration and production of oil and gas. The company has more exposure to international markets which tend to have longer and steadier cycles and are presently on the upswing. Schlumberger currently enjoys only a small amount of pricing power, except where it has a unique technology solution, but as spare capacity is absorbed and the industry continues to be exhibit discipline with capital expenditures, we believe improvements in pricing power are likely to follow. The stock trades at 14.8x the consensus earnings per share for 2014 and if the current environment holds, we believe earnings may grow 20 percent per year in 2014 and 2015.
Johnson & Johnson (JNJ)
Despite appreciation exceeding the overall market thus far in 2013, shares of Johnson & Johnson remain an attractive option for defensive investors. Johnson & Johnson has grown earnings at a compound annual growth rate of 10 percent over the past 10 years. The company is one of the world's largest and most diversified health-care companies. J&J sells Pharmaceuticals, Medical Devices & Diagnostics, and Consumer products. It's balance sheet is rated AAA, it generates huge free cash flow and high returns on equity, and it offers investors exposure to a truly global franchise (57 percent of total sales come from international sources). Uncertainty surrounding health-care legislation and a sluggish global economy has left investors concerned about the company's future growth rate. Though these concerns are warranted to an extent, the stock appears attractive for long-term investors at current valuation levels (16x 2014E EPS with a 2.8-percent dividend yield). Assuming no change to its current P/E multiple, long-term investors would only need about 7 percent annualized EPS growth to achieve a 10 percent annualized return from the stock from current levels.