2012 Outlook for Stocks: Analysts are Optimistic

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Wall street is feeling optimistic about 2012 based on promising housing and construction data and positive headlines out of Europe, reports USA Today.

The market rallied nearly 3% on Tuesday; the biggest gain since November 30th, but is still down 1.3% from the year’s opening.

“A quick survey of New Year’s prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term,” reports USA Today. “A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks.”

Historically, stocks tend to get stronger after “steep corrections” says Sam Stovall, chief equity strategist at S&P. He makes an example of the eight US economic declines 15% to 25% since 1845 – the market was up an average of 31.7% in the year after the drops.

Skepticism

This year was met with an incredible amount of volatility thanks to slow economic growth and political squabbles at home and abroad. But a quick look into 2012 shows we’ll probably be in for much more of it.

2012 brings us closer to the potential breakup of the euro zone, China’s potentially hard landing, and what promises to be a divisive presidential election. And let’s not forget that Congress is scheduled to readdress the US debt ceiling at the end of 2012. Some speculate continued failure on Congress’s behalf will be met with another US downgrade.

Still, USA Today says analysts are suggesting that despite a continuance of “excess volatility and doubt,” the US is better equipped to come out on top. “The relative stability of U.S. fundamentals and economic conditions will be an attractive alternative compared to other more volatile assets around the world,” said Wall Street strategist Brian Belski.

Investing Ideas

Looking for investing ideas going into 2012?

For ideas, we started with a list of the 200 largest S&P 500 stocks. To refine the list, we only focused on S&P 500 stocks that have reported greater profitability ratios relative to their competitors over the last 12 months.

And finally, we only focused on companies that are undervalued relative to levered free cash flow.

These highly profitable companies are trading at attractive levels. Should they be on your watch list for 2012?

List sorted by market cap.

1. Time Warner Inc. (TWX, Earnings, Analysts, Financials): Operates as a media and entertainment company in the United States and internationally. Market cap at $35.03B. TTM gross margin at 45.92% vs. industry average at 42.21%. TTM operating margin at 20.01% vs. industry average at 18.53%. TTM pretax margin at 15.29% vs. industry average at 14.24%. Levered free cash flow at $10.73B vs. enterprise value at $50.04B (implies a LFCF/EV ratio at 21.44%).

2. Marathon Oil Corporation (MRO, Earnings, Analysts, Financials): Operates as an international energy company with operations in the United States, Canada, Africa, the Middle East, and Europe. Market cap at $19.8B. TTM gross margin at 29.07% vs. industry average at 28.4%. TTM operating margin at 14.31% vs. industry average at 7.54%. TTM pretax margin at 14.84% vs. industry average at 8.05%. Levered free cash flow at $4.06B vs. enterprise value at $19.54B (implies a LFCF/EV ratio at 20.78%).

3. Aetna Inc. (AET, Earnings, Analysts, Financials): Operates as a diversified health care benefits company in the United States. Market cap at $15.24B. TTM gross margin at 29.65% vs. industry average at 21.14%. TTM operating margin at 9.68% vs. industry average at 8.4%. TTM pretax margin at 8.25% vs. industry average at 6.74%. Levered free cash flow at $3.12B vs. enterprise value at $15.52B (implies a LFCF/EV ratio at 20.1%).

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Profitability data sourced from Fidelity. FCF data from Yahoo! Finance)

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