My choices for 2011 didn’t match the 99% average return of my 2010 picks, but they did just fine. Over the past year through November 4, my picks gained an average of 11.5%, compared with 4.7% for Standard & Poor’s 500-stock index. Hang on to American Capital (symbol ACAS), General Growth Properties (GGP) and Howard Hughes (HHC), but sell Ferrovial (FRRVY.PK) and Richardson Electronics (RELL).
Now, on to my final four for 2012.
Ron Johnson, the new CEO of J.C. Penney (JCP), helped turn Apple into a retailing powerhouse. He has brought in retail genius Michael Francis from Target as president and has invested $50 million of his own money in Penney warrants (essentially, long-term options). But Penney is, well, Penney, you might say. Get ready to be surprised. The Sephora cosmetics mini stores located within many Penney locations are helping drive traffic; exclusive offerings from the likes of Liz Claiborne, a brand Penney bought in October, will help as well. Johnson has indicated that the chain will engage in fewer promotions, which could save hundreds of millions in advertising yearly.
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Penney’s liquidation value is at least equal to its $34 share price, and in a few years Penney could earn $5 a share. All this explains why top hedge-fund manager Bill Ackman, of Pershing Square, is Penney’s largest shareholder, with a 26% stake. The stock could double before most of the world recognizes the remarkable turnaround that’s about to take place.
Smart purchases have made Ashland (ASH) a big player in specialty chemicals. It makes components of personal-care products and drugs (binders, tablet coatings), water-treatment chemicals and Valvoline motor oil. At $54, the shares sell for just 10 times estimated earnings for the fiscal year that ends next September. Moreover, the firm is ripe for a restructuring that would boost the stock. Alexander Roepers, of Atlantic Investment Management, says Ashland could spin off the Valvoline business, sell its adhesives segment or unload the water business; he sees the shares doubling in 12 to 18 months.
Motorola Solutions (MSI) is the Motorola that Google didn’t buy. But Solutions has a far stronger franchise than its handset-making cousin. It dominates the two-way radio market for municipal safety workers and, as you can see every Sunday, National Football League coaching staffs.
It also makes bar-code readers and rugged devices for mobile computing. Even though state and local governments are under financial stress, Solutions’ sales are expected to increase 5% to 7% a year. Business has been particularly strong in Asia and Latin America.
Management has cut costs, initiated a dividend (the stock yields 1.9%) and announced a $2 billion share buyback. Activist shareholder Carl Icahn owns 11% of the company, and ValueAct Capital Partners, a hedge fund, owns 6%. ValueAct’s Jeffrey Ubben says the firm could fetch $65 a share if it were bought or went private.
The Brick (BRK.TO) is my smallest pick, with a market value of $434 million (figures for this stock are in Canadian dollars). Canada’s second-largest retailer of furniture and appliances, The Brick has been walloping its rivals in same-store sales (sales at stores open at least one year). At $3, the stock, which trades in Toronto, sells for just 5.6 times the past year’s cash flow. Why so cheap? The Brick almost went bankrupt in 2009 under previous management, its stock is largely controlled by insiders, and hardly any brokers or money managers follow the firm. It has a profitable financial-services unit and a fast-growing franchising business, plus $85 million in cash after subtracting debt. At the current share price, you effectively get the core retailing business for nothing. Guy Gottfried, of Toronto-based Rational Investment Group, thinks the stock could hit $7 by 2014.
Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners. The fund and Feinberg personally own all of the stocks he recommends.
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