It's that time of year where the market of 2012 takes a backseat to market of 2013 and all the investment picks that come with it. In the upcoming weeks, I will unveil what stocks I like best for 2013. But brace yourself -- my picks will probably be widely hated by Mr. Market, as my top pick in 2012 was Bank of America (BAC), which thanks to last week's nice advance is up more than 80% year to date. In the meantime, let's peek at what other investment pros like for next year.
Chuck Akre of the $1.2 billion Akre Focus Fund suggests a very controversial name, Moody's (MCO), as one of his top picks. No matter what you think of Moody's, Akre's thesis is simple: no one can access the debt markets without a rating from Moody's. That condition certainly gives Moody's a significant competitive advantage and, most of all, pricing power. The only wrinkle for investors is that Moody's shares are sitting at a 52 week high of nearly $50 a share, so it appears that Mr. Market has looked past the red tape. Moody's shares are up by more than 40% in 2012, but that certainly doesn't mean underperformance in 2013. But 2012 was a year when corporations rushed to tap the low-interest-rate debt markets, which was surely good for Moody's. Given the Federal Reserve's stance to keep rates low past 2013, perhaps Moody's will enjoy a double dip in 2013.
Among real estate picks, Public Storage (PSA) is cited more than once. Public Storage is the largest self-storage company in the U.S., in a highly fragmented market. As the biggest player, PSA only commands only a 4% market share. The rational here is Public Storage has the financial wherewithal that many of the smaller mom and pop storage outfits lack, providing an opportunity to consolidate and grow market share. The only rub I see, which many take as a positive, is that PSA's occupancy levels exceed 90% and that has allowed it to boost occupancy rates. We all have learned to be healthy skeptics any time a business starts boasting peak capacity rates. Also, as a real estate investment trusts, PSA's yield is a paltry 0.8%, which may deter income-seeking REIT investors.
Brad Evans, manager of the Heartland Value Plus, a fund that has beaten 95% of its peers over the past five years, likes small-cap Albany International (AIN). Once a conglomerate, Albany now focuses on two divisions: fabrics and belts used to make paper, and a business that makes engineered composites for the aerospace and defense industries. The paper business is the major unit, delivering nearly $700 million in annual sales vs. $60 million for the engineering unit. Evans believes that the engineered unit could grow fivefold in the next seven years to $300 million in sales, along with 20% margins. Albany today trades a trailing price-to-earnings ratio of 43 but a forward PE of 15, and it yields 2.6%. The company has a solid balance, with $150 million in net debt.
Kris Jenner is a former doctor who has been running the T. Rowe Price Health Sciences Fund since 2000. Over the past decade, the fund has delivered a 13.6% annualized gain, widely outperforming the 9% annualized gain delivered by its peers. The returns are more impressive when you consider the maze of regulatory hurdles that swarm the health care industry. Jenner is a fan of biotech giant Gilead Sciences (GILD). Gilead created the lucrative once-a-day HIV pill, and it's trying to create the same treatment for hepatitis C. According to Jenner, the hepatitis C market is worth in excess of $10 billion and GILD can grow revenues by more than 15% for the next several years, along with earnings per share growth of more than 25% annually. The market has caught on as GILD shares are up more than 80% in 2012, but if the company can pull in the numbers that the good doctor believes they can, GILD certainly has the room to climb higher.
December will be a month full of stock ideas, but they are just ideas. I am a big fan of piggybacking on others' investment ideas, but I also take each idea with a healthy degree of skepticism: most great ideas are given after a little stock price advance. You can't blame anyone for keeping their favorite idea under wraps for a brief period. Still a truly great investment creates value for many years. So between now and Jan. 1, take the time to peek at those top picks. Let the pros do the stock screening for you.