The 100 Best Stocks You Can Buy 2012 Part 1

THE.

100 BEST.

STOCKS YOU CAN BUY.

2012.

PETER SANDER.

AND SCOTT BOBO.

Dedication.

We continue to dedicate this book to all of you active investors who have the sense of purpose and independence of thought to make your own investing decisions, or at least, to ask the right questions. You continue to be wise enoughand inquisitive enoughto realize that not all the answers can be found in one place, and smart enough to seek the convenience of a good place to start.

Acknowledgments.

Peter is thrilled to have research partner and life friend Scott Bobo on board as an official author of this book. He also recognizes the good work of Value Line Inc. and their Investment Survey, which does more than any other known source to turn piles of facts and figures into a simple readable page. Next, no book happens without the added value of exercise to keep a body in shape and a mind clear, and to that end he offers his thanks to his exercise companions. And of course his familywhich has gone through a restructuring since the last editiongets all the credit for the inspiration to engage in this enterprise.

Scott would like to dedicate this book to his lovely wife Lori, who, without actually saying it, reminds him every day that it's only money. May she remain patient and tolerant of a s.h.a.ggy lawn. He'd also like to dedicate this work to his late father William Bobo, who worked every day of his life to provide for his family.

Part I.

THE ART AND SCIENCE.

OF INVESTING IN STOCKS.

By Peter Sander.

The Art and Science of Investing in Stocks.

Peter Sander

Congratulations (once again if you're a perennial reader) on your purchase of the 2012 edition of The 100 Best Stocks You Can Buy.

If you bought this book, you're probably an astute and experienced individual investor who invests in individual stocks in individual companies. Now, that might not seem so profound, but with some 10,000 mutual funds, 8,000 hedge funds, and countless exchange traded funds (ETFs) and index funds out there, it's not inconceivable that the individual stock investor is becoming an endangered species.

But that's just not so. For not only your own wealth but also for the efficient allocation of capital to businesses and ideas that work best, millions still engage in this sort of "pure" investing for all or part of their wealth. Yet, much of what we hear about in the financial media these days is still about mutual funds, hedge funds, ETFs, and other investment "products." Are the media catering to your needs or to the needs of the professional fund manager? One wonders sometimeseither way, we do exist, but we tend to exist rather quietly. Anyway, off the soapbox. Even if you buy just a few shares of one company, you're an individual investor. You're partic.i.p.ating actively in the economy, and you're buying your share of the company with hopes of partic.i.p.ating in its success. Like a homeowner choosing to take part in the work of owning a home as a "do-it-yourselfer" you're partic.i.p.ating in the individual satisfaction, responsibility, and control that comes with doing it yourself.

If you succeed, you accept the benefits of increased wealth (and reduced fees) along with the satisfaction and sense of accomplishment of doing it yourself. If you fail, it's true you'll have no one to blame but yourself. But at least you won't be forced to drink the poison of having someone else lose your money for you. In the entrepreneurial spirit that so characterizes America and much of the Western world, you'll pick yourself up, dust yourself off, learn from the mistakes, and go out and try it again.

Every edition of The 100 Best Stocks You Can Buythis 2012 edition includedis intended to be a core tool for the individual investor. Sure, it's hardly the only tool available. Today's explosion of Internet-based investing tools has made this book one of hundreds of choices for acquiring investing information. With the speed of cybers.p.a.ce, our book will hardly be the most current source. In factwe'll admit by way of a disclaimerthat because of the typical book publication cycle, we're at least six months out of date. If you check our research, you'll be able to come up with two to as many as four quarters of more current financial information, news releases, and so forth.

Does that make our book a poor information source? Not at all. Unless you're watching the news wires in real time, regardless of what information source you use, there will probably be some room for a current refresh or update. More to the pointthe companies we choose are chosen in large measure because things don't change so much, and because they avoid the temptation to manage short-term, quarter-to-quarter performance. The companies we choose are chosen because they have sustainable performance, so who cares if the latest figures or news releases are in? In 100 Best Stocks You Can Buy 2012, as with all of our previous editions, we focus on the story, not just the latest facts and figures.

As such, 100 Best Stocks is intended as a handy guide and core reference for your investing; not as a be-all end-all investing source. Thus, as much as a source of facts and numbers itself, 100 Best Stocks is intended to present the story for each company and to serve as a model for selecting the best companies and stocks to invest in.

To that same point, 100 Best Stocks goes well beyond just being a stock screen or a "study" of stocks to invest in. a.n.a.lysis forms the basis of 100 Best Stocks, but it isn't the rigid, strictly numbers-based selection and a.n.a.lysis so often found in published "best stocks" list. Sure, we look at earnings, cash flow, balance sheet strength, and so forth, but we'll also look far beyond those things. We'll look at the intangible and often subtle factors that make truly great businessesthat is, companiesgreat. That, once again, is the story.

Great companies have good business fundamentals, but what makes them really great is the presence of intangibles and subtleties that will keep them greator make them greaterin the future.

So the selection of the 100 Best Stocks continues to go far beyond being a simple numbers-based stock screen. It's a selection and a.n.a.lysis of really good businesses you would want to buy and own, not just for past results but for future outcomes. Now, does "future" mean "forever"? No, not hardly, not anymore. Nothing is really forever these daysas those who invested in GM or Eastman Kodak or AIG or Bank of America can attest. So while the 100 Best Stocks list correlates well with the notion of "blue chip" stocks, the discussion proceeds with the harsh reality that "blue chip" no longer means "forever."

As the book t.i.tle suggests, we feel that the 100 companies listed and a.n.a.lyzed in the pages that follow are the best companies to own for 2012. That said, the word "own" has become a more active concept these days. Gone are the days of "own forever," like the halcyon days when Peter's parents, Jerry and Betty Sander, bought their thirty-five shares of General Motors, lovingly placed the stock certificate in their safety deposit box, and henceforth bought nothing but GM cars. Today, there is no forever; the economy, technology, and consumer tastes simply change too fast, and the businesses that partic.i.p.ate in the economy by necessity change with it. Ownership is a more active concept than it was even ten or twenty years ago.

So going forward, we offer the 100 best companies to own now and in 2012, and that have the best chances of not only surviving but evolving withor even ahead ofthe economy based on their current market position and approach to doing business. But as we all found out during the past two years, nothing is sacred in the business world and things can fall apart with astounding speed. What does that mean?

Simply this: You can't take anything you read in the following pages as "investment advice" or as hard, unwavering truths. The world simply changes too fast, and the a.n.a.lysis of a business (and especially the value of a business) is not a precise science, it is inherently a combination of science and art. True business value is subject to different interpretations and different opinions, and further, we must layer in the pace and effects of change.

What that means is simple and straightforward: You'll have to take the information presented, do your own a.s.sessment, reach your own conclusions, and take your own actions. Anything else would go beyond our intentions, and more importantly, stop short of the mark for you.

With that in mind, make the most of what follows, and good luck with your investing!

SO WHY BUY AN INVESTING BOOK THESE DAYS?.

The Internet is great: anything you want at your fingertips, practically real-time, latest news, latest a.n.a.lysis, latest numbers. News and numbers are great, and they will inevitably help you take the latest facts into consideration and add points and counterpoints to your investment decision. But is the Internet enough?

Consider what a book like The 100 Best Stocks You Can Buy has to offer. It gives not just facts and figures, but also a collection of business stories and a stock selection mindset. A thought process you can browse through, one you can see applied repeatedly to different situations.

You might not align to the set of 100 stocks we offer here because they are too expensive or don't appeal to your tastes or just don't suit your needs or interests at the moment. That's okay. Even if you don't choose from the 100 stocks offered here, you can follow the thought processes, the choices and decisions made, as a model for your own choices.

Being an individual investor is rather like being an airplane pilot. You are ultimately in control of this aircraft; you are in control of your finances. And that means taking responsibility for your own decisions, regardless of the information sourcesthe gauges, charts, ground control folks you have helping you out. So you must develop your own mindset and set of investment knowledge and toolsthat's where this book comes in.

Remember, in investing, like life, it's the thought that counts.

What's New for 2012.

Three years ago, Peter was added to the 100 Best team as a coauthor to bring a unique value-investing perspective and to update the approach to selecting stocks and investing in general. When he came on board, he also brought Scott Bobo as a researcher, and technology and marketing expert, to lift this book beyond financial a.n.a.lysis into the more intangible world of a company's complete story in the marketplace. This year, Scott joins the team as a full-fledged coauthor.

We have also added a sister book, as well: 100 Best Aggressive Stocks You Can Buy 2012.

The 100 Best Aggressive Stocks You Can Buy.

100 Best Stocks is designed to serve the needs of a broad market of investors. While there are common threads across all stocks, some, like Apple and Google, and last year, Chipotle and NetApp, are recognizably more rapidly evolving and aggressive than, say, Campbell Soup and Kraft Foods. We offered a range of risk profiles, and more aggressive investors could make use of the 100 Best list and 100 Best approach.

But we felt that many of the more interesting stories we looked at could be valued using our principles, but were simply too aggressive or risky to put on the main 100 Best list. We saw a need to bring some of these more aggressive companies to light, particularly as we move to a more dividend-focused model for the 100 Best list, and particularly as many investors seek more ambitious growth in a climate of reduced market returns as a whole. So this year, we are releasing 100 Best Aggressive Stocks You Can Buy 2012 in parallel to the "core" book.

That book places more emphasis on the story, the intangibles, and the future. We moved four stocksChipotle, NetApp, Panera, and Peet'sto the 100 Best Aggressive list, and came up with ninety-six more entries, some of which we had considered for the 100 Best list in the past, for this new book. There are eighteen stocks on both lists. More aggressive investorsor those looking for a few good plays for your "opportunistic" portfolio are encouraged to buy our new book.

About Your Authors.

First, a bit about us.

Peter is an independent professional researcher, writer, and journalist specializing in personal finance, investing, and location reference, as well as other general business topics. He has written twenty-five books on these topics, has written numerous financial columns and done independent privately contracted research and studies. He comes from a background in the corporate world, having experienced a twenty-one-year career with a major West Coast technology firm.

He is most emphatically an individual investor, and has been since the age of twelve, when his curiosity at the family breakfast table got the better of him. He started reading the stock pages with his parents. He had an opportunity during a one-week "project week" in the seventh grade to read about, and learn about, the stock market. He read Louis Engel's How to Buy Stocks, then the pre-eminentand one of the onlybooks about investing available at the time (it first appeared in 1953; he thinks he read a 1962 paperback edition). He read Engel, picked stocks, and made graphs of their performance by hand with colored pens on real graph paper. He put his hard-earned savings into buying five shares of each of three different companies. He watched those stocks like a hawk and salted away the meager dividends to reinvest. He's been investing ever since, and in combination with twenty-eight years of home ownership and a rigorous, almost sacrificial savings regimen, he acc.u.mulated quite a respectable net worth for someone in the corporate, and hence self-employed, ranks.

Yes, he has an MBA from a top-rated university (Indiana University, Bloomington), but it isn't an MBA in finance. He also took the coursework and certification exam to become a Certified Financial Planner (CFP). By design and choice, he has never worked in a financial profession. His goal has always been to share his knowledge and experience in an educational way, a way helpful for the individual as an investor and a personal financier to make their own decisions.

He has never made money giving investment advice or managing money for others, nor does he intend to.

An Eye for Value.

A few years ago, it dawned on Peter that he has really made his living finding value, and helping or teaching others to find value. Not just in stocks, but other things in business and in life. And what does he mean by "value"? Simply, the current and potential worth of something (or someone) as compared to its price or cost. As it turns out, he's made a career out of a.s.sessing the value of people, places, and companies.

His last a.s.signment at a high-tech firm was to find value in customers. People. His t.i.tle: customer valuation manager. At the time, around the turn of the millennium, his team was building a "customer relationship management" platform, and his job was to segment millions of customers by value, and to a.s.sign values to each one to help target messaging and so-called "one-to-one" marketing campaigns. A tricky enterprise, no doubt, because no company can really know what a customer is truly worth, down to the penny, especially going forward. It became an exercise in looking at previous buying behavior, considering other known customer attributes internal and external to the business, a.s.sessing the customer's cost (marketing and support costs), making some a.s.sumptions, and testing results.

At the time, he did not really grasp that the same exact process really applied to investing, too. But a sharp editor at John Wiley & Sons' "Dummies" division put two and two together and hired him to write Value Investing for Dummies. The light went on. Whether it's people or stocks, the thought process is the same. Take what you know (fundamentals), add some intuition (intangibles), make some a.s.sumptions, proceed carefully, and evaluate the results.

The same publisherdifferent divisiongave him another chance two years later, this time to write a complete reference guide to places to live. Hundreds of places to live appraised for value and ranked top to bottom, best to worst. Value is extremely important in deciding where you would want to live. Sure, the "best" places to live might include Greenwich, Connecticut; Jupiter, Florida; or Palo Alto, California. But most of us can't afford them. So the true "best places" for most of us are the places that deliver the most value for the money, now and in the future. The resulting book, Cities Ranked & Rated: More Than 400 Metropolitan Areas Evaluated in the U.S. and Canada, and its sister publication Best Places to Raise Your Family, finally went beyond the "study" and short list to truly answer the question most of us havewhat's the best place to live for my money?

The same value approach works in the world of business and stock investing. It isn't just the biggest or the richest corporations that we should be putting our hard-earned money into. If that were the case, we'd simply buy GE or ExxonMobil and move on. But do these companies represent the best value for your investing dollar? Maybe, but maybe not.

Just like customers or places to live, we want companies that produce the greatest return, the highest value, per dollar invested. And for the amount of risk taken. The amount of risk taken translates into additional dollars that an investment might cost, a.n.a.logous to living in a great place rampant with crime or with questionable schools that might cost you more in the long term. The companies we will identify as among the 100 Best have, in our a.s.sessment, the greatest long-term value, and if you can buy these companies at a reasonable price (a factor which we leave out of this a.n.a.lysis because this is a book and prices can change considerably), then these investments deliver the best prospects.

Later we'll come back to describe some of the attributes of value that we look for.

Scott Joins the Team.

Peter's long-time friend and colleague J. Scott Bobo has officially joined the author team. Scott has been huge not only in identifying the 100 Best Stocks but also a.n.a.lyzing them and explaining their pros and cons crisply and in plain English so that you can make the best use of the list. Having Scott on the team allows you to get the combined wisdom and observations of two people, not just one, in an arena where one plus one almost always equals something greater than two.

Scott is relatively new to the professional writing game but has been an investor since age fourteen, when he made the switch from a.n.a.lyzing baseball box scores to looking at the numbers and charts in the business section. In his twenty-plus years in engineering and technology management, he's learned that a unique product value proposition is important to the success of any company. He has also learned (the hard way) that proper financial fundamentals are critical. From a development manager's perspective, comprehending a new product's risk/reward proposition is one of the keys to a company's success. From an investor's perspective, it's also one of the keys to successful value investing in a dynamic, innovation-driven market.

Scott adds a strong a.n.a.lytical touch. But he is most at home as an applications engineer, explaining how a company's products work and how they apply to a customer's needs. Consequently, and in addition to a.n.a.lytical legwork, Scott really adds an extraordinary and very real-world sense of how a company's products "fit" in the marketplace. Determining whether a company's products are relevant, best-in-cla.s.s, and have a compet.i.tive advantage over others is an oft-overlooked core skill for a value investor. Scott brings this skill to the table in a big way.

Scott is not only "officially" part of this writing team, he is the co-creator and the driving force behind our 100 Best Aggressive Stocks You Can Buy 2012 mentioned earlier.

What's Changed for 2012.

With our arrival on the scene in 2010 and the wild ride our markets gave us in 20082009, the 100 Best book series went through some pretty major changesnot revolutionary, perhaps, but strongly evolutionary. In that first year, we struck some twenty-six companies from the prevailing 2009 list, as we felt that there were too many commodity producers, defense contractors, and others that weren't comfortably placed in an era of volatile markets and public sector cutbacks. That storm blew through in 2010; in 2011, we made more moderate changes, deleting fourteen stocks from the list as we became more focused on current returnsdividends. This year, for the 2012 list, we've made twelve changes, down slightly from last year's fourteenin what we would call, like last year, more of an adjustment than a full restructuring of the list. Tables 3, 4, and 5 detail the twelve deletions and additions to the 2012 list.