SPECIAL REPORT
Sabrient Baker’s Dozen 2013
5th Annual Report
January 11, 2013
Sabrient Systems, LLC
115 S. La Cumbre Lane, Suite 100
Santa Barbara, CA 93105
www.sabrient.com
Sabrient Baker’s Dozen 2013 Report
Sabrient “Baker’s Dozen” Top Stocks for 2013
Copyright © 2013 by Sabrient Systems, LLC All rights reserved.
Reproduction or translation of any of this work beyond that permitted by Section 107 or 108 of the
1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests
for permission or further information should be addressed to the authors at support@sabrient.com.
Disclaimer: This Special Report is provided for informational purposes only. It should not be construed
as a solicitation to buy or an offer to sell securities. The report is based upon data from sources
believed to be reliable, but Sabrient makes no representation as to the data's adequacy, accuracy,
completeness or timeliness.
Sabrient Systems is not a registered investment advisor and cannot provide individual investment
advice. Consult an investment advisor as to how this research might apply to your personal financial
situation and investment objectives.
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Sabrient Baker’s Dozen 2013 Report
CONTENTS
INTRODUCTION .................................................................................................................................................. 4
MARKET OVERVIEW............................................................................................................................................ 5
SELECTING THE BAKER’S DOZEN ......................................................................................................................... 7
SABRIENT GARP 1000 .................................................................................................................................... 8
THE 2013 BAKER’S DOZEN, BY SECTOR ............................................................................................................... 8
HEALTHCARE SECTOR ................................................................................................................................... 9
TECHNOLOGY SECTOR .................................................................................................................................10
CONSUMER NON-CYCLICALS ........................................................................................................................ 15
INDUSTRIALS SECTOR .................................................................................................................................. 17
ENERGY SECTOR........................................................................................................................................... 21
FINANCIALS SECTOR .................................................................................................................................... 24
BASIC MATERIALS SECTOR ........................................................................................................................... 28
A NOTE FROM DAVID BROWN ...........................................................................................................................30
SABRIENT BAKER’S DOZEN UNIT INVESTMENT TRUST (UIT) ..............................................................................30
EXPANDED BAKER'S DOZEN TABLE AND DEFINITIONS ....................................................................................... 31
ABOUT THE AUTHOR .........................................................................................................................................32
ABOUT THE COMPANY ......................................................................................................................................32
FOR FURTHER INFORMATION ............................................................................................................................32
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Sabrient Baker’s Dozen 2013 Report
INTRODUCTION
For the past four years, Sabrient has published its annual Baker’s Dozen, a list of 13 topranked stocks that display particularly high earnings quality, exhibit strong growth potential
relative to their peers, and appear to be well-positioned to outperform going forward. The
stocks represent a cross-section of sectors and industries. Each scores particularly well in our
system, yet they are not necessarily household names.
In 2009, 2010, and 2011 the Baker’s Dozen outperformed the S&P 500 Index by an average of
12.9% per year.
In 2012, the Baker’s Dozen more than tripled the performance of the S&P 500, ending the year
with an impressive gain of 43.05%. You can view all past portfolios and performance on the
Sabrient website.
The stock selections for the Sabrient Baker’s Dozen 2013 were first revealed during an ondemand video interview with David Brown on January 10. (The late start this year was due to
the launch of the Sabrient Baker’s Dozen 2013, a Unit Investment Trust offered by First Trust
Portfolios. See page 30 for information about the UIT)
The thirteen stocks selected for this year’s Baker’s Dozen represent seven of the ten U.S.
business sectors. The only sectors not represented in this year’s list are Utilities,
Telecommunications, and Consumer Cyclicals. The Baker’s Dozen are listed below in the
order of our relative conviction about each company.
Following this table is a market overview for 2013, after which we present a brief description of
our selection process for the Baker’s Dozen, followed by a discussion and charts for each of
the stocks.
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Sabrient Baker’s Dozen 2013 Report
MARKET OVERVIEW
It’s said that past is prologue, and never has this been more true as we enter 2013 with the
chaotic past six months trailing in our wake. Europe set the stage last summer as it struggled
through a number of machinations trying to arrive at a solution for the floundering PIIGS (Portugal,
Italy, Ireland, Greece and Spain). European Central Bank (ECB) President Mario Draghi promised
to do “whatever it takes to preserve the euro,” including unlimited Eurozone sovereign debt
purchases. The comment resonated with the market, and has since calmed that situation
considerably, likely beyond anyone’s expectations.
Then came the November elections followed by the dreaded fiscal cliff. The latter dominated the
media during the final two months of 2012, and in fact carried over into New Year’s Day when a
partial solution was finally reached by Congress, which avoided the automatic budget cuts and
maintained the Bush-era tax cuts for all but the wealthiest individuals.
Throughout the year, fear of a China hard-landing has added to investor concerns. However, in
spite of experiencing a serious level of growth slowdown in 2012, all indications are that the
world’s second largest economy is rebounding, though probably not at the consistent double-digit
levels of recent years.
Certainly China’s reduced growth has contributed to the stark drop in oil prices from last spring’s
highs. Even the turmoil in the Middle East was insufficient to keep oil above the century mark for
the second half of 2012. However, the current uptrend could continue as demand increases in
response to small but incremental growth in the U.S. and China.
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For all this, the markets still managed a positive year, with the S&P 500 Index and Nasdaq
posting the biggest gains—13.4% and 15.9%, respectively. The Dow Jones Industrial Average
gained 7.3%. (Note: The 2012 Sabrient Baker’s Dozen gained a robust +43.05% for the year.)
2013 Outlook. We expect a chaotic year for the markets in 2013, with a fair amount of volatility
related to various political deadlines. While sequestration (i.e., automatic budget cuts) was
avoided, we’re still facing the debt ceiling issue and the specifics of cuts to entitlement programs
and the military. In fact, the debt ceiling debate looms in February, which will probably be
resolved, but not until the last minute, because that’s how Congress likes to operate these days.
All of this can be expected to create heightened volatility in the markets.
Globally, we’re still hearing rumblings in Europe, despite ECB President Draghi’s resolution.
Ongoing problems in the Middle East, including the Arab Spring, Syria, Iran, Egypt, and Israel,
continue to pose great risks and is one of the biggest question marks going into 2013.
Effect on Sectors. With the Administration’s commitment to make the U.S. independent of
foreign oil, the Energy Sector should be one of the surest bets, with the drive for independence
enhancing exploration and production activities. This is likely to pressure oil prices to drop, much
as the glut of natural gas caused a sharp slide in natural gas prices last year, which also impacted
the production and pricing of coal. Furthermore, lower energy prices should have a positive effect
on the Transportation Sector.
The Healthcare Sector should also benefit from the Affordable Health Care Act, a.k.a,
Obamacare. Any reduction in healthcare costs will be welcomed by the marketplace.
The Consumer Cyclicals Sector, partly spurred by recovering homebuilders, seems to be taking
off, and the more that industry recovers the more safety the sector offers to investors.
The Technology Sector is more likely than others to be impacted by the Ex-PATRIOT Act, which
abolishes some rights and incentives of offshore tenancy. Many biotech and software companies
move their intellectual property (IP) profits to countries with low tax rates, and they could be
adversely affected if Congress decides to go after them.
Effect on the Dollar. It would be wise to keep an eye on the U.S. dollar, as it is the yin and yang
of many industries, particularly those in the export business. A strong dollar impacts export
companies negatively; a weak dollar has a positive effect. At this point, it is impossible to predict
which way that will go. Much depends on whether Europe solves its problems better than we
solve ours, or vice versa.
Then there’s the Federal Reserve. It has extended QE3 (the third round of quantitative easing)
and has promised to keep interest rates low at least through 2014. But that’s not an iron-clad
promise; already, the Fed has been waffling on it. Yes, there is plenty to worry about this year.
Summary. Despite massive challenges, overall we see reasonable stock valuations, record
corporate earnings, high levels of cash in corporate coffers, and an accommodative Fed. We also
see lingering skepticism about earnings expectations rather than wild-eyed optimism. And the
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COBE Volatility Index (VIX) continues to reflect low levels of investor fear. All of this bodes well for
stocks in 2013.
However, at Sabrient we don’t worry too much about where the market is headed. Instead, our
quantitative models rank stocks relative to one another using fundamentals-based algorithms
that focus on themes like value, growth, momentum, or overall quality. In other words, we sniff
out great stocks that should outperform under any scenario. There will be winners in any
market environment, and Sabrient’s annual list of top stocks—the Baker’s Dozen—historically
has performed quite well, due to our dedication to finding strong growers at a reasonable price.
SELECTING THE BAKER’S DOZEN
All 13 stocks in the Baker’s Dozen portfolio are what we consider GARP stocks—those that
exhibit “growth at a reasonable price.” In other words, they are undervalued stocks with strong
growth potential. Our aim is to find stocks whose
projected 2013 EPS growth rate is at least double its
In this report, “forward P/E” is also
forward P/E. In addition to the growth and value
referred to as “projected P/E” or “PPE.”
requirements, the companies that make the cut must
have conservative accounting practices.
To select the Baker’s Dozen, we create a short list of high-quality stocks using our unbiased,
fundamentals-based, quantitative approach based on various statistical analytics, including
current stock valuations, forward earnings outlook, as well as factors such as a company’s
earnings and price momentum. More specifically, the selections are based on the following
concepts:
1. Forward GARP. To find strong GARP stocks, we estimate earnings growth for the coming
year and divide it by the stock price.
2. Analysts’ Behavior. To assure ourselves that a stock has strong growth potential, we
evaluate the consensus of the analysts who follow the stock to determine how confident they are
in their forecasted earnings estimates.
3. Long-term Earnings Growth Rate. With the goal of holding these stocks for a full year, we
need to be confident that, by the end of the year, the stocks will still be selling at a price well
above their current value. To that end, we estimate the secular growth rate of earnings (3-5 years)
and divide that by the forward P/E. There’s no guarantee, of course, that negative development
won’t occur in the coming year, but this is one of the measures we use to diminish that possibility.
4. Cost of Absolute Growth. We calculate the projected absolute growth of each of the next
four quarters and determine the cost of absolute growth.
5. Earnings Quality Rank (EQR). Whether a company practices conservative or aggressive
accounting is critical to the long-term success of the company. That’s why we depend on EQR,
our proprietary forensic accounting factor, to rank the conservatism of the company’s accounting.
We down-weight the scores of companies that have aggressive accounting practices and
eliminate those with overly aggressive accounting practices.
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6. Sector and Industry Diversification. To achieve diversification we allow no more than three
stocks in any one sector and no more than two stocks in any one industry.
As a final check, we examine external factors, including current news, technical charts, and
insider buying activity. The final 13 stocks are ones we believe will be among the top
performers in 2013.
THE SABRIENT 1000 GARP
In this report we sometimes compare a stock’s earnings growth rate or
projected P/E ratio with the Sabrient 1000 GARP. This is an internal “index” of
1000 top-ranked stocks that have the highest “growth at a reasonable price.”
The index is updated weekly by ranking 3,000 stocks based on, among other
things, their annualized 5-year earnings growth rate, P/E ratio, and projected
P/E ratio (PPE). The top 1000 of those stocks become the Sabrient 1000 GARP.
At the end of the first week of January 2013, the Sabrient 1000 GARP had:
–
An annualized 5-year EPS growth rate of 11.5%
–
A current P/E ratio of 17.3
–
A projected (forward) P/E ratio of 12.3
THE 2013 BAKER’S DOZEN, BY SECTOR
In this discussion, the Baker’s Dozen stocks will be grouped by sector, in the order of the
sector’s relative position in Sabrient’s most recent “SectorCast” forward-looking rankings.
These weekly rankings employ a bottom-up aggregate profile of all constituent stocks with a
one-to-three month outlook. Here are rankings of the 10 U.S. sector iShares ETFs at the time
of our stock selection process, based on Sabrient’s SectorCast rankings:
1. Healthcare (IYH)
2. Technology (IYW)
3. Consumer Goods (aka, Non-Cyclicals) (IYK)
4. Industrial (IYJ)
5. Energy (IYE)
6. Financial (IYF)
7. Basic Materials (IYM)
8. Utilities (IDU)
9. Consumer Services (aka, Cyclicals) (IYC)
10. Telecommunications (IYZ)
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HEALTHCARE SECTOR
The Healthcare Sector includes manufacturers, developers, and marketers of pharmaceuticals,
medical equipment and supplies, advanced therapeutic treatments and devices, and providers
of healthcare facilities and medical research and development. Healthcare should benefit
overall from the Affordable Care Act (aka, ObamaCare). In particular, companies that create
new drugs have been top performers, and we expect this to continue as the Baby Boomers
grow older and live longer. The sector has good support among analysts, a reasonably good
forward P/E, and solid return ratios.
The #9 Baker’s Dozen stock—JAZZ— is from the Healthcare Sector, which is ranked #1 by
Sabrient’s SectorCast model.
#9 – JAZZ Pharmaceuticals (JAZZ)
Jazz Pharmaceuticals plc is a dynamic specialty biopharmaceutical company that identifies,
develops, and commercializes innovative products to address unmet medical needs in focused
therapeutic areas. The company has a strong commercial focus and expertise in narcolepsy,
oncology, pain, and psychiatry. JAZZ seeks opportunities to acquire or in-license commercial,
near-commercial and development-stage products that would benefit from its patent-focused
commercial capabilities. Jazz is headquartered in Dublin, Ireland, with offices in Palo Alto,
California, and Philadelphia, Pennsylvania.
Reason for Selection: JAZZ’s rapid growth as a biotechnology company has been controversial
due to its focus on meeting unmet medical needs. While creating brand-new drugs in emerging
areas is riskier, JAZZ has delivered 12 consecutive quarters of revenue growth and has created a
very strong portfolio of drugs. We are confident in JAZZ’s ability to deliver on its projected EPS
growth for 2013, from $2.93 to $5.66. JAZZ also has a 5-year EPS growth rate of 26.9% for a
forward P/E under 10. It has high number of recent upward EPS revisions, low debt, ROA of 13%,
ROE of 26%, and ROS of 34%.
Figure 1: Jazz's earnings are projected to almost double in 2013.
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Figure 2: Jazz's 5-year projected EPS growth rate is more than double that of the average GARP stock.
Figure 3: And you can buy JAZZ at just 9.9 x 2013 projected earnings.
TECHNOLOGY SECTOR
Tech has proven to be an “all-weather” sector that can outperform in most market conditions.
Why? A stable or growing economy requires ongoing capital spending on technology
upgrades, and entrepreneurs continue to develop must-have technologies and “the next big
thing.” The sector includes manufacturers of semiconductors, communications equipment,
computer hardware, and technology-related office equipment, as well as providers of
consulting and IT services. Our SectorCast model indicates that Tech has a strong long-term
growth rate, a low forward P/E, and solid return ratios
The Baker’s Dozen offers three stocks in the Technology Sector: #4 NXPI, #8 STX, and #10
IACI.
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# 4 – NXP Semiconductors (NXPI)
NXP Semiconductors provides mixed signal solutions and standard products worldwide. Its highperformance mixed-signal and standard product solutions leverage its leading RF, analog, power
management, interface, security and digital processing expertise. These innovations are used in a
wide range of automotive, identification, wireless infrastructure, lighting, industrial, mobile,
consumer and computing applications.
NXPI posted revenue of $4.2 billion in 2011. The company has strong market leading products, a
large base of experienced engineers, and a strong intellectual property portfolio. It also boasts
deep applications expertise, strong well-established customer relationships, and a competitive
manufacturing base. NXPI is headquartered in Eindhoven, the Netherlands, and has operations
in more than 25 countries.
Reason for Selection: Not your average semiconductor, this company innovates in cutting edge
applications. It has great cash flow ($700 million on hand), and it can be picked up for 12 times
projected 2013 earnings of $2.55, up from the $1.31 projection for 2012. Furthermore, its 5-year
EPS growth rate is 29%.
Figure 4: NXPI expects to more than double its earnings this quarter (December 2012) compared
to the same quarter a year ago.
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Figure 5: Although earnings are expected to drop a bit in 2012 from the prior year, they are
expected to almost double in 2013.
Figure 6: NXPI's 5-year projected EPS growth rate is almost 3 times that of the Sabrient GARP 1000.
#8 – Seagate Technology plc (STX)
Seagate is a leader in the hard drive industry. The company designs, manufactures, markets, and
sells hard disk drives and storage solutions. Its products are used in dozens of different
applications, including enterprise servers, mainframes, and workstations; desktop and notebook
computers; and digital video recorders, gaming consoles, personal data backup systems, portable
external storage systems, and digital media systems. STX also provides data storage services,
including online backup, data protection, and recovery solutions for small and medium-sized
businesses..
Reason for Selection: Seagate was our number one stock for the 2012 Baker’s Dozen and it
ended the year up +81%. It’s understandable why some may be surprised to find it on our 2013
list. Yet STX remains a great GARP stock, with outstanding earnings growth that can be acquired
for a reasonable price (the stock is currently selling at $33.63). While its projected 2013 EPS
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quarter-over-quarter growth may not be as impressive as 2012’s, STX is still expecting to post
solid earnings of $5.25 in 2013 (fiscal year ends in June) and $5.51 in 2014.
We believe these estimates are conservative, and our position is strengthened by STX’s recent
release of better-than-expected sales for the December 2012 quarter. Analysts are revising their
EPS projections upward, and STX provides investors with a 5% yearly dividend yield, all for a 6.5
times forward earnings.
Figure 7: Seagate earnings remain steady through 2014.
Figure 8: Seagate’s 5-year EPS growth rate is about 40% higher than the average GARP stock.
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Figure 9: Yet STX can be had for slightly over 6 times earnings compared with 12.3 times
earnings for the average GARP stock.
#10 – IAC/InterActive Corp. (IACI)
IAC has been ranked by Fortune magazine for many years as one of the world's most admired
companies in the Internet Services & Retailing sector and was ranked 4th in 2012. IAC focuses on
the core areas of search, applications, online dating, local advertising and media. The company is
the seventh largest network in the world, with over 326 million unique monthly users and a billion
total monthly visits to its websites from more than 30 countries. Its Search segment generated
over $1 billion in revenue in 2011. The company is headquartered in New York City, with business
operations and satellite offices around the world.
Reason for Selection: IAC has had double-digit growth for the last 10 consecutive quarters. As a
provider of content and search services for such websites Ask.com, About.com, Dictionary.com,
Match.com, and Newsweek & The Daily, all of which profit from internet marketing, IAC is in an
industry that is only going to get bigger. With its diverse portfolio of successful websites, we feel
IACI is well positioned to meet its 2013 earnings of $3.80, up from $2.13 in 2012. It’s a great time
to pick up this stock, especially when it’s trading at only 13 times those forward earnings. IAC also
sports a 2% dividend yield, an uncommon perk from an internet company.
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Figure 10: IAC's earnings are expected to grow more than 75% in 2013.
Figure 11: IAC’s 5-year EPS growth rate is more than double that of the average GARP stock .
CONSUMER NON-CYCLICALS SECTOR
The Consumer Non-Cyclicals Sector is generally considered defensive, given its inelastic
demand for essential products, including household goods, alcoholic and non-alcoholic
beverages, crops, livestock, food processors, office supplies, and tobacco. In our SectorCast
rankings, stocks within the sector generally have strong return ratios and good support among
Wall Street analysts.
Baker’s Dozen #12 (ESRX) is categorized as a Consumer Non-Cyclical stock, although in fact
ESRX primarily serves the Healthcare Sector.
#12 – Express Scripts Holding Company (ESRX)
Express Scripts makes the use of prescription drugs safer and more affordable for tens of
millions of consumers through thousands of employer, government, union and health plans.
Founded in 1986 and never owned by a drug manufacturer, Express Scripts aligns its interests
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with those of plan sponsors and their members. This legacy of independence means that the
company's programs and original, in-depth research on the pharmacy benefit serve its clients.
Express Scripts drives to lowest net cost by enabling better health and value at the consumer
level. As evidence, Express Scripts' generic fill rate leads the industry. Express Scripts has
combined insights from the Consumerology Advisory Board (composed of nationally-recognized
experts in human behavior and decision making) with its own proven ability to develop, test, and
implement industry-leading programs to provide the greatest opportunity to encourage smarter
prescription-drug choices and achieve the lowest total plan cost.
Reason for Selection: This conservative company is expected to grow earnings from $2.65 in
2012 to $4.21 in 2013, and it is trading for 13.5 times those forward earnings estimates. As
“ObamaCare” continues to roll out and healthcare costs continue to rise, ESRX, the largest
pharmacy manager in the U.S., should thrive, as it has a good track record of reducing pharmacy
costs for health care benefit providers. Over the last 12 quarters, ESRX has delivered nine
positive revenue surprises. ESRX’s recent pull-back in stock price in November has provided a
good entry point.
Figure 12: ESRX's earnings are expected to grow almost 75% in 2013.
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Figure 13: ESRX’s 5-year EPS growth rate is 50% higher than the average GARP stock.
INDUSTRIALS SECTOR
The Industrials Sector includes manufacturers of industrial equipment and commercial supplies,
as well as providers of related services such as diversified trading, distribution operations and
transportation services. Performance in this sector is highly dependent on our economic
recovery. Nevertheless, these three picks appear particularly well-positioned to outperform their
peers.
The three Baker’s Dozen stocks from the Industrials Sector are #3 (AL), #6 (MTW), and #11
(ALK).
#3 – Air Lease Corporation (AL)
AL is an aircraft leasing company engaged principally in purchasing commercial aircraft and
leasing them to its airline partners worldwide through customized aircraft leasing and financing
solutions. Its leasing revenues by providing fleet management and remarketing services to third
parties. As of December 31, 2011, the Company owned 102 aircraft. Its fleet is principally
consisted of narrow-body (single-aisle) aircraft, such as the Boeing 737-700/800, the Airbus
A319/320/321, the Embraer E190; select wide-body (twin-aisle) aircraft, such as the Boeing 777300ER and the Airbus A330-200/300; and the ATR 72-600 turboprop aircraft.
Reason for Selection: Founded in 2010, AL is the youngest company in the 2013 Baker’s
Dozen, AL has found a niche market in leasing jets as “turnkey” solution for airlines, corporations,
and wealthy individuals. Its success is predicated on its business model and outstanding
customer reviews. It has an exceptionally good return on sales (ROS) of 31%, and $440 million in
cash. On track to grow earnings by over 100% in 2012, AL is trading for only 13.5 times forward
earnings of $1.74. This fast-growing company is expected to grow earnings at 42% over the next
five years—and 39% projected for 2013 is a great start.
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Figure 14: AL's projected earnings for Q4 2012 are 50% higher than the same quarter a year ago.
Figure 15: AL's earnings are projected to grow 39.2% in 2013.
Figure 16: Its 5-year EPS growth rate is almost 4 times that of an average GARP stock.
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# 6 – The Manitowoc Corporation (MTW)
MTW, one of the three “anchor stocks” in the Baker’s Dozen, is a multi-industry capital goods
manufacturer. It operates in two markets: cranes
By “anchor stock," we mean a strong,
and related products and food service equipment.
well-established company with solid
In the cranes and related products market, MTW
earnings, great cash flow, and lots of
provides engineered lifting equipment for the
global construction industry, including lattice-boom
cash—a company that can be
cranes, tower cranes, mobile telescopic cranes,
expected to weather most market
and boom trucks. In the food service equipment
storms. The three anchor stocks in the
market
MTW
manufactures
commercial
Baker’s Dozen are MTW, MPC, and ASH,
foodservice equipment serving the ice, beverage,
each of which can be bought at an
refrigeration, food-preparation, and cooking needs
exceptionally low price.
of restaurants, convenience stores, hotels, healthcare, and institutional applications.
Reason for Selection: After delivering in 2012 an EPS growth of just under 100%, this
dependable machinery company’s 2013 EPS projections are nearly 80% higher than 2012’s (from
$0.74 to $1.28), all for a forward P/E of 14.23. It has a 5-year projected EPS growth rate of 17.5%
and a 16% return on equity.
Figure 17: Manitowoc's Q4 2012 earnings are expected to be 60% higher than the same quarter a year ago.
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Figure 18: MTW's earnings are growing rapidly, with a projected gain of just under 100% in
2012 and another 70% in 2013.
#11 – Alaska Air Group, Inc. (ALK)
Alaska Air Group, Inc. was incorporated in 1985 as the holding company for Alaska Airlines and
Horizon Air. These two subsidiaries provide scheduled air transportation for passengers and
cargo throughout the United States, Canada, and Mexico.
Reason for Selection: ALK is a steadily performing airline with projected 2013 earnings growth
of $5.42, up almost 15% from $4.50 in 2012, and a projected 5-year growth rate of 30%. In the
last 12 quarters, it has delivered consistent quarter-over-quarter revenue growth, and analysts are
revising their estimates upward for 2013. ALK stands to benefit from America’s commitment to
energy independence as oil exploration and production in Alaska will no doubt increase air traffic
to the state.
Figure 19: Alaska Airlines has grown its earnings steadily, with a 15% increase expected in 2013.
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Figure 20: At 30%, ALK's 5-year earnings growth rate is almost three times that of an average GARP stock.
Figure 21: Yet ALK’s earnings are cheap, with a projected P/E ratio of only 8.36.
ENERGY SECTOR
The Energy Sector includes explorers, refiners, marketers, and distributors of fossil fuels and
renewable energy, as well as manufacturers of energy-related equipment and providers of
supporting services. This sector will be dominated by oil and gas for the foreseeable future,
although coal also remains an important energy source. Global economic recovery, along with
the Obama Administration’s commitment to energy independence, should keep the prices of
oil, gas, coal, and refined products strong.
Baker’s Dozen #5 (MPC) and #13 (EPL) are in the Energy Sector.
#5 – Marathon Petroleum Corporation (MPC)
Effective as of June 30, 2011, MPC was separated from Marathon Oil Corporation (Marathon Oil)
and became an independent company in a spin-off transaction. The company operates in three
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segments: refining & marketing, speedway, and pipeline transportation. MPC’s refining,
marketing and transportation operations are concentrated in the Midwest, Gulf Coast, and
Southeast regions of the United States. The company has two retail brands: Speedway and
Marathon. Here are some notable facts about MPC:







Nation's fifth largest transportation fuels refiner and largest in the Midwest
1,193,000 barrels-per-calendar-day capacity
Six-plant refinery system
Marketing network of more than 5,000 Marathon locations and approximately 1,460
Speedway
Owns/operates 83 light product and asphalt terminals
Owns, operates, leases or has ownership interest in 8,300 miles of pipeline
Company roots reach into the early years of the oil industry
Reason for Selection: One of the oldest and most recognizable names in the oil industry with
over $25 billion in assets, this is another of the three “anchor stocks” in the Baker’s Dozen
portfolio. Because it is following up an exceptionally strong year, MPC’s earnings are expected to
remain flat from 2012 to 2013, but the 2013 EPS projection of $9.41 can be picked up for under 7
times earnings, along with a 2.2% dividend. With analysts revising their earnings estimates
upward, we think it’s possible for MPC’s stock price to beat the market considerably in 2013.
.
Figure 22: MPC made up for the negative EPS in Q4 2011 with a projected Q4 2012 EPS of $2.21.
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Figure 23: MPC’s earnings are flat from 2012 to 2013, but you can pick them up at 6.4 times
2013 earnings, as shown in Figure 24.
Figure 24: MPC's earnings are twice as cheap as the average GARP stock.
#13 – EPL Oil & Gas Inc. (EPL)
Based in New Orleans, Louisiana, and Houston, Texas, EPL is an independent oil and natural gas
exploration and production company with operations concentrated in the U.S. Gulf of Mexico
shelf, focusing on the state and federal waters offshore Louisiana.
On Monday September 17, 2012, Dow Jones reported that EPL Oil & Gas Inc. agreed to buy
certain shallow-water Gulf of Mexico properties from Hilcorp Energy GOM Holdings LLC for $550
million, a move that nearly doubles its proved reserves. The shelf oil and natural gas interests are
currently producing about 10,000 barrels of oil equivalent per day, about 50% of which are oil. The
properties include three fields that are on the Central Gulf of Mexico shelf in the vicinity of EPL's
existing core field areas.
EPL Oil & Gas Inc. was originally a limited partnership until 2012.
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Reason for Selection: EPL is an up-and-coming company that has produced steady earnings
and is expected to double its earnings in 2013, from $1.55 to $3.16. The stock currently trades for
less than eight times forward earnings. Its provable reserves indicate a value of $46, nearly
double its current trading price.
Figure 25: EPS's earnings are expected to double in 2013.
Figure 25: At 8.06, EPL’s projected P/E is two-thirds that of comparable GARP stocks.
FINANCIALS SECTOR
The Financials Sector includes operators of commercial and investment banks, investment trusts
and financial markets, as well as providers of investment, insurance, and real estate services.
The sector overall, and the banking industry in particular, has stabilized, with the support of the
Federal government and quantitative easing. Overall, Financials reflect a relatively low forward
P/E, strong return on sales, and steady support among Wall Street analysts. Financial stocks tend
to lead during bull markets, and with the Fed having vowed to keep interest rates low for the
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foreseeable future, banks in particular are well positioned to reap the benefits of expanded
lending to small businesses and real estate investors.
Our top two picks this year, GNW, Baker’s Dozen #1, and OCN, Baker’s Dozen #2, are in the
Financials Sector.
#1 – Genworth Financial Corporation (GNW)
Genworth Financial, Inc. is a Fortune 500® company with roots tracing back to 1871. It has more
than $100 billion in assets under management and a presence in more than 25 countries with 15
million customers. Working with its distribution partners, GNW provides products, services, and
resources that help people secure their financial lives with annuities, life insurance, lifestyle
protection insurance, long term care insurance, mortgage insurance, and reverse mortgages.
According to an article published by Reuters in October 2012, Genworth is said to be looking to
sell it wealth management service, a move that will generate more cash and help strengthen its
credit, which was downgraded following losses in the mortgage insurance unit. However, those
losses have been written off; GNW has retained a large cash position and is currently
undervalued in our opinion.
Reason for Selection: Sabrient’s top stock is an “oldie but goodie.” GNW has been said to have
the highest reserves of any firm in the industry and better-positioned portfolios. Analysts are
revising their earnings estimates upward on this leading insurance company. It has great cash
flows, $11.84/share in cash, and projected 2013 earnings of $1.22, up from $0.67 projected for
2012. Plus, it has a projected 5-year EPS growth rate of 16% that can be picked up for a forward
P/E under 7.
Figure 26: GNW's earnings are projected to grow almost 85% in 2013.
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Figure 27: GNW's 5-year growth rate is almost 30% higher than the average GARP stock.
Figure 28: Yet GNW can be bought for less than 7 times earnings, compared to 12.3 for the
average GARP stock.
# 2 – Ocwen Financial Corporation (OCN)
Ocwen provides residential and commercial mortgage loan servicing, special servicing, and asset
management services in the United States and internationally. It is the industry leader in servicing
high-risk loans, particularly sub-prime mortgages; OCN works with customers in a variety of ways
to make their loans worth more, including purchasing of mortgage servicing rights, sub-servicing,
special servicing, and stand-by servicing. Ocwen is widely recognized in the national media and
by consumer advocacy groups as the industry leader in responsible home retention through
foreclosure prevention. Ocwen Financial Corporation was founded in 1988 and is headquartered
in Atlanta, Georgia
Reason for Selection: OCN was Sabrient’s best performing stock in the 2012 Baker’s Dozen,
and it may well duplicate that performance in 2013. It is projected to maintain its high earnings
growth by almost tripling its 2012 earnings of $1.37 to $4.43, all for a forward P/E of 9.63—and its
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5-year EPS growth projection is 40%. OCN is an exciting opportunity not only because of its
exceptional value and growth rates, but also because of its commitment to helping people who
are struggling under a heavy mortgage.
Figure 29: OCN’s projected Q4 earnings are more than 6 times those of Q4 2011.
Figure 30: OCN’s earnings are expected to almost triple in 2013.
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Figure 31: OCN’s forward P/E is almost 30% lower than the average GARP stock.
BASIC MATERIALS SECTOR
The Basic Materials Sector includes manufacturers, extractors (miners), and refiners of
chemicals, minerals, precious metals, steel, aluminum, forest products, and construction and
other raw materials. Many firms in this sector will benefit from rising prices spurred by rising
demand in an economic recovery (particularly if the dollar remains relatively weak) and from
any uptick in inflation.
Baker’s Dozen # 7 (ASH) is from the Basic Materials Sector.
#7 – Ashland Inc. (ASH)
Ashland is a chemical company that operates in four distinct business segments. (1) Ashland
Specialty Ingredients (representing 57% of the company) provides specialty additives and
functional ingredients, including cellulose ethers and synthetic polymers. (2) Ashland Water
Technologies (11%) is a leading supplier of process, utility-water and functional chemistries for
many of the world’s top companies. (3) Ashland Performance Materials (12%) provides Gelcoats,
pressure-sensitive and structural adhesives and unsaturated polyester and vinyl ester resins. (4)
Ashland Consumer Markets (20%) provides Valvoline™, the world’s first lubricating oil, as well as
Valvoline Instant Oil Change™ quick-lube franchises and EagleOne™ vehicle-care products.
Reason for Selection: Another “anchor” stock, this well-established chemical company with roots
back to the early 20th century has an extensive line of products in a wide range of markets. It is
expected to grow earnings from $6.63 to $7.61 in fiscal year 2013 (ending in September) and to
$9.03 in fiscal year 2014, which is growth at a reasonable price, considering its forward P/E of 11.
ASH also pays a small dividend of 1.10%.
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Sabrient Baker’s Dozen 2013 Report
Figure 32: ASH’s Q4 2012 earnings are expected to be almost 15% higher than the same quarter a year ago.
Figure 33: ASH shows a steady earnings growth through 2014.
Figure 34: ASH’s 5-year EPS growth rate is almost 15% higher than the average GARP stock.
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A NOTE FROM DAVID BROWN
That’s our Baker’s Dozen for 2013. Will it do as well as in previous years? Only time will tell,
and past performance, of course, is no guarantee of future performance. We have a
particularly tough market outlook this year, as we discussed in the Market Overview, but we
tried to pick stocks from sectors that might benefit in this potentially turbulent environment. We
hope we’ve found at least thirteen.
We wish you all the best of personal and investment success in 2013 and beyond.
Sabrient Systems, LLC
David Brown
CEO and Chief Market Strategist
Sabrient Baker’s Dozen UIT
This year the Sabrient Baker’s Dozen is being offered as a Unit
Investment Trust (UIT) by First Trust Portfolios L.P. This gives you
the choice of building a Baker’s Dozen portfolio through direct
investment in the individual equities or by investing in the UIT. For
more information on the UIT, please contact Jeff Baker of First
Trust, at jbaker@ftportfolios.com.
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Sabrient Baker’s Dozen 2013 Report
EXPANDED BAKER'S DOZEN TABLE AND DEFINITIONS
SOURCE: The financial data provided in this report comes Reuters Knowledge Direct (RKD). The long-term projected growth rate is from
Yahoo Finance! The earnings estimates are based on GAAP accounting and are fully diluted.
EQR is Sabrient’s proprietary Earnings Quality Rank, which ranks the conservatism of a
company’s accounting. A rank of “5” is the most conservative; a rank of “1” the most
aggressive. We eliminated stocks with EQR ranks of 1 and 2.
Projected P/E Ratio is the current market price divided by the next year’s consensus earnings
estimate among the Wall Street analysts who cover the stock.
1-Yr Projected Growth Rate is the consensus estimate among Wall Street analysts of the
next year's projected year-over-year earnings growth rate.
5-Yr Projected Growth Rate is the consensus estimate among Wall Street analysts of the
annualized projected earnings growth rate for the next five years. (An “n/a” indicates that there
were not enough analysts covering the given stock to provide a reliable estimate.)
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ABOUT THE AUTHOR
David Brown, Sabrient’s founder, CEO, and chief market strategist, is a former NASA scientist
and retired CEO of Telescan, Inc. David provides the vision behind our quantitative research and
the overall strategic direction of the firm. He also writes the market letter "What the Market Wants"
and managing the virtual portfolios "Sabrient Investor’s Hedge" and “Sabrient Earnings Busters.”
A lifelong investor, he designed and developed the critically acclaimed stock search program,
ProSearch, and has documented his investing expertise in four books on investing, including All
About Stock Market Strategies (McGraw-Hill, June 2002) and Cyber-Investing: Cracking Wall
Street with your Personal Computer (John Wiley & Sons, 1994, 1997). David holds a B.S. degree
in Engineering from the University of Pittsburgh and an MBA in Finance from the University of
Houston.
Assisting in the production and distribution of the Baker’s Dozen videos and report were Daniel
Sckolnik, Walter Gault, Scott Martindale, Rebekah Norris, Josh Russell, Kassandra Bentley, and
Scott Brown.
ABOUT THE COMPANY
Sabrient Systems, LLC specializes in unbiased, fundamentals-based quantitative equity research
for the benefit of investment professionals, hedge funds, and self-directed investors. The firm
analyzes nearly 6,000 U.S. and 2000 Canadian traded stocks and identifies those that appear
poised to out-perform or under-perform the market. Sabrient first published its rankings in 2002,
and its models have consistently outperformed relevant benchmarks over a broad range of
investing styles, market caps, time frames and market conditions. Its long/short strategies have
produced 10-year annualized returns ranging from 21% to 47%. Sabrient is based in Santa
Barbara, California.
FOR FURTHER INFORMATION
For information about the Baker’s Dozen, please email support@sabrient.com.
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