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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.

NaCreative | iStock Vectors | Getty Images

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 (SLB)
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.

(Read more: 2014 predictions: Take a look at Mexico—it's economy may surprise you)

Qualcomm (QCOM)
Qualcomm is a leading developer, designer, and manufacturer of digital wireless-telecommunication products. The two main divisions of the company are the Technologies group and the Licensing group. The Technologies group offers comprehensive chipset solutions for all types of connected devices such as smartphones and tablets. The Licensing group holds an extensive portfolio of patents related to wireless networks and collects royalty payments from manufacturers of mobile devices. We believe the licensing side should continue to benefit from 3G penetration in emerging markets, increased 4G service, and smartphone adoption worldwide. The balance sheet holds net cash and investments of almost $17 per share representing over 23 percent of the company's market capitalization. The stock is trading at 14x CY 2014 EPS, and we believe the company is well positioned to benefit from the secular growth of accelerating wireless data traffic and proliferation of mobile devices.

United Technologies (UTX)
United Technologies (UTC) is a diversified industrial company that provides a broad range of high-technology products and services to the global aerospace and building-systems industries. The company's commercial businesses are Otis elevators and escalators and UTC Climate, Controls & Security, a leading provider of heating, ventilation, air conditioning, fire and security systems, building automation and controls. The company's aerospace businesses are Sikorsky aircraft and the new UTC Propulsion & Aerospace Systems, which includes Pratt & Whitney aircraft engines and UTC Aerospace Systems aerospace products. When we speak about the importance of owning "high-quality" companies, United Technologies comes immediately to mind. The company has produced a compound annual growth rate in EPS in the low-teens over the past 15 years while consistently generating free cash flow in excess of earnings. It has excellent exposure to international and emerging markets, and the management team is top notch. While the stock handily outperformed the overall market in 2013, the stock still trades at just slightly over 16x the consensus estimate for 2014.

Abbott Laboratories (ABT)
Following the spinoff of its AbbVie unit (pharmaceuticals), Abbott Labs is now free to specialize in diagnostics, medical devices, generic drugs and nutritionals. Within these focus areas, we expect Abbott has attractive long-term growth prospects based on 1) 40-percent exposure to Emerging Markets; 2) a leadership position in the higher-growth Nutritionals business; 3) insulation from pricing pressure on items such as hips, knees, and cardiovascular products; and 4) margin expansion opportunities after the split due to a more focused management team and dedicated resources. Moreover, we are attracted to Abbott's strong balance sheet, above-average returns on equity, seasoned management, and reasonable valuation (16.6x the consensus for 2014 EPS). We also view Abbott as a relatively defensive company whose earnings are likely to hold up relatively well in the event of recession.

Patterson Companies (PDCO)
Patterson is a leading full-service distributor of dental, companion-pet veterinary, and rehabilitation supplies. These end markets should exhibit steady and above-average long-term growth due to U.S. demographic trends. In addition, the fragmented nature of these markets provides Patterson the opportunity to supplement organic growth with bolt-on acquisitions. Despite being a leader in markets with attractive long-term characteristics, Patterson has struggled with sub-par growth over the past several years as dentists have remained reluctant to upgrade their equipment in what has been a relatively weak U.S. economy. These dental-equipment deferrals have likely led to pent-up demand that should materialize as the economy strengthens. In the meantime, long-term investors can take comfort in Patterson's solid balance sheet, strong free cash flow, and reasonable valuation (e.g. PDCO trades at 16.7x F15E EPS of $2.41, representing only a slight premium to the S&P500 of 12 percent). The valuation suggests that the market is not optimistic regarding a re-acceleration of growth, providing plenty of downside protection in the event that the current trends persist longer than we expect. We believe that PDCO represents an attractive risk/reward proposition for long-term investors.

(Read more: Gas below $3? Boldest predictions for 2014)

Accenture (ACN)
Accenture is a global management-consulting, technology-services and outsourcing firm. Its two business segments are consulting and technology services and outsourcing. We like Accenture's exposure to the secular trends of outsourcing, increased regulation, and growth in cloud and mobility. The company is well diversified across industries and geographies and has a consistent track record of earnings per share and cash flow growth. It also produces well above average returns on equity and a debt free balance sheet. The stock currently trades at 16.4x the consensus for 2014 and carries a 2.5-percent dividend yield.

JP Morgan (JPM)
Following comparatively stellar performance throughout the financial crisis, Jamie Dimon and JP Morgan have suffered their share of setbacks in recent years. Numerous regulatory initiatives as well as self-inflicted crises have limited the stock's upside during a period that might otherwise be viewed as a buying opportunity. It is true that the outlook for industry growth in revenue and earnings is somewhat subdued relative to history. However, there are also many factors working in the industry's favor, such as a stabilized housing market, continue decreases in credit losses and foreclosure-related expenses, falling unemployment, the resolution of regulatory uncertainties, fortified balance sheets, higher interest rates, and improved loan demand.

These positive developments in the years to come do not seem to be incorporated into some bank-stock valuations. That said, there are still some potential landmines to navigate. Over time, we believe the industry will succeed in rebuilding its credibility with a hurting investor base. At slightly over 1.4x tangible book value and less than 9.5x the consensus for 2014, we think the stock makes sense for long-term investors seeking exposure to a recovering industry through a well-managed, high-quality bank.

These are not recommendations to buy or sell securities. There is risk of losing principal. Past performance is no indication of future results. If you are interested in any of these names, please call us or your financial advisor to discuss.

Happy New Year!

Peace and Prosperity!!!

— Michael

—By Michael K. Farr, president of Farr, Miller & Washington and a CNBC contributor

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