A Winning Value Portfolio for 2012

 | Jan 04, 2012 | 12:00 PM EST
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"I'd rather pay a fair price for a great business than a great price for a fair business."

-- Warren Buffett

This quote from Warren Buffett holds enormous value for investors today. Often, value-seeking investors are so consumed with investing in stocks that have low price-to-earnings and low price-to-book ratios that they end up really investing in low-quality stocks.

The hidden message in Buffett's statement is that the No. 1 creator of investment value is growth. Just as I would avoid Amazon (AMZN) right now because it trades at a P/E of 94, I am also going to take a pass on Best Buy (BBY), even though it trades at a P/E of less than 9. While I do believe that Best Buy is looking attractive at these price levels, buying a consumer products retailer at the current moment may not be the most productive use of capital. 

I've come up with a portfolio of 10 stocks that have what it takes to deliver winning results in 2012. While even a year may not often be enough time for a good business to deliver attractive investment results, it is a satisfactory period of time. Some names in this portfolio have low P/Es, while others do not. Some are currently profitable, while others are working at righting the ship.

What they have in common are share prices that for one reason or another stand a very good chance being higher at the end of December. Dollar General (DG), Advance Auto Parts (AAP), IBM (IBM), Potash (POT) and Mosaic (MOS) are all expected to continue growing earnings throughout 2012. 

Dollar General trades at a P/E of 20, so it doesn't show up on "deep value" screens, but its business will do well in 2012 for obvious reasons. Potash and Mosaic are in the portfolio because shares prices in both these names declined significantly in 2011, despite strong agricultural fundamentals. In 2012, crop prices should remain healthy, making farming profits attractive. Profitable farmers buy more and more fertilizer.

Here is my winning portfolio for 2012:

Gad portfolio for 2012

Given the disastrous year financials experienced in 2011 and the fact that current prices reflect another financial catastrophe in the U.S., financials may be some the best performers in 2012.

In December, I offered my thoughts as to why Bank of America (BAC) could be a huge winner in 2012. Brookfield Infrastructure Partners (BIP), an owner-operator of world-class infrastructure properties, is stock built for the worst of times, and its 5% annual yield is nothing to sneeze at either. Sterling Construction (STRL) and Premier Exhibitions (PRXI) are two small-caps that for various reasons look incredibly cheap. Sterling is a small-cap gem that no one seems to notice, and Premier is a special-situation stock I discussed on Real Money about a week ago. 

Each couple of months or quarters, I will discuss the performance of this portfolio and measure it against the S&P 500. I will assume each position has an equal weighting in the portfolio and no additions or deletions will be made throughout the year. 



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