Barron's 10 Favorite Stocks for 2011

Barron's has a recent article with their favorite picks by Andrew Bary. Some are dividend stocks that I currently hold and will be making additional purchases this year. Our 10 Favorite Stocks for 2011

Barron's has identified 10 big-caps worth buying now.

ExxonMobil

It's no accident that the world's best-managed energy giant has the industry's most attractive asset mix. Even so, ExxonMobil's stock (ticker: XOM) has been a laggard since the company agreed in late 2009 to purchase XTO Energy, a large U.S. natural-gas producer. The deal increased Exxon's exposure to the gas market, which now accounts for almost half its daily energy output, just as domestic gas prices were tumbling.

At around 73 a share, Exxon trades for 12.5 times estimated 2010 profits of $5.87 a share, and 11 times projected 2011 net of $6.46. Exxon pays a dividend of $1.76 a share and yields 2.4% and could rally to 90 a share in 2011, particularly if U.S. gas prices rebound.

United Continental Holdings

U.S. airline operators have grown stronger in the past two years because mergers have created an oligopoly: United Continental (UAL), Delta Air Lines (DAL) and AMR (AMR), parent of American Airlines, now account for more than 70% of industry revenue. Pricing discipline has held, planes are flying full and spending on new aircraft has been restrained. Rising oil prices remain a risk for 2011, but United still would be profitable even if crude tops $100 a barrel. The stock could hit 35 in 2011.

JPMorgan Chase

Wall Street loves JPMorgan CEO Jamie Dimon but has been cool toward his stock. JPMorgan shares (JPM) rose just 2% in 2010, to 42, badly trailing the 22% gain in the bank-stock index. Disappointments during the year included the lack of a dividend boost, high expenses and the bank's exposure to the mortgage-market mess.

But JPMorgan easily could top 50 a share in 2011, as its profits rise to $4.61 a share from under $4 in 2010. The bank, which is overcapitalized, is expected to lift its dividend to about 80 cents a year from a current 20 cents, and announce a large stock buyback.

Barrick Gold

Gold-mining stocks theoretically should outperform the metal in a bull market because mining profits are leveraged to gold. Yet Canada's Barrick Gold (ABX) and another industry leader, Newmont Mining (NEM), haven't delivered. Barrick shares, at 53, are little changed since early 2008 despite a 50% rise in gold to more than $1,400 an ounce.

Wal-Mart Stores

Wal-Mart (WMT) sorely lagged in a strong retailing group in 2010, rising just 1% to 54, while Target (TGT) and Costco Wholesale (COST) each gained about 25%. Wal-Mart can't simply blame the poor financial condition of its customers, because rivals Dollar General (DG) and other retailers catering to budget-minded shoppers did well.

At 13 times project profits of $4.05 a share in its fiscal year ending in January, and 12 times fiscal 2012 estimates of $4.45, Wal-Mart looks inexpensive. Even with some merchandising miscues and flat domestic comparable-store sales, its profits likely rose 11% in 2010 and could increase a further 10% in 2011. The company gets little credit for its fast-growing international operations, which now account for more than 20% of earnings.

Cisco Systems

The subject of a positive cover story in last week's Barron's ("Ending the Cisco Skid," Dec. 27), Cisco Systems has seen its stock (CSCO) fall 15% in 2010, to 20 and change, one of the year's worst performances among big-cap technology stocks. Yet Cisco remains the world's leading networking-equipment maker, and probably can generate annual profit growth of 10%.

The stock is trading for 12 times projected profits of $1.61 a share for the fiscal year ending in May. Strip out net cash and investments of almost $5 a share, and Cisco is even cheaper at 10 times earnings.

Pfizer

Once the most exciting growth company among large drug producers, Pfizer (PFE) has become the prime example of the industry's woes. The company's troubles include drug-pipeline disappointments, overpriced acquisitions and looming patent expirations on lucrative drugs such as Lipitor.

Much of the bad news already is factored into Pfizer's depressed shares, which trade around 17.50, or for eight times projected 2011 profits of $2.29 a share. As Barron's recently noted, Pfizer can't do much about its patent problems. But it can raise its dividend, buy back a sizable amount of stock and consider the sale or spinoff of valuable businesses such as consumer and animal health that now are buried within the company. Pfizer could see its stock trade into the low 20s in 2011.

General Motors

GM's November initial public offering was the biggest, hottest deal of the year. But the stock (GM) barely budged from its IPO price until lifting last week amid a slew of Buy recommendations from Wall Street analysts who had to wait 40 days from the IPO date before beginning coverage of the auto maker.

The analysts could be right in predicting that the stock, trading around 36, could hit 45 or so in 2011. JPMorgan analyst Himanshu Patel, with a $44 price target, noted last week that GM has the No. 1 market share in both the U.S. and so-called BRIC countries (Brazil, Russia, India and China), including a lucrative joint venture in China that could be worth $15 billion, almost a quarter of GM's market value.

Entergy

Shares of traditional electric utilities rose about 10% in 2010, but Entergy and many other utilities exposed to the wholesale- power market declined as weakness in natural gas depressed power prices.

Entergy stock (ETR) fell about 13% during the year, to 71, and now trades for less than 11 times projected 2011 profits of $6.57 a share. The stock yields 4.7%. Entergy operates regulated utilities in the South and owns a group of nuclear-power plants, including the two Indian Point reactors in New York, that sell power in the open market. The regulated business probably is worth about $50 a share, or 12 times projected 2011 profits, meaning investors aren't paying much for the nuclear fleet.

PepsiCo

The packaged-foods giant has a powerhouse portfolio of beverages and snack brands, but it is valued like a slow-growth food company. At 65, PepsiCo (PEP) trades for 14 times projected 2011 profits of $4.61 a share—a discount to rival Coca-Cola's (KO) P/E of 17. Pepsi also provides a secure dividend yield of almost 3%. Bulls see the stock topping 70 in 2011, and it could do even better if sluggish trends at Frito-Lay North America and Gatorade reverse.

Disclosure: The Div Guy owns shares of XOM, PFE and PEP at the time of this post.