Roundtable: 1 Stock to Buy in December


As we do each month, we asked a handful of our top analysts across sectors for one stock that looks especially compelling right now. Here are the companies they singled out.

Jim Gillies: Portfolio Recovery Associates buys defaulted consumer debt from credit providers for pennies on the dollar and then turns that debt over to its collector work force, which collects two to three times the purchase price over the next seven years.

Sounds simple, right? The reality requires experience to appropriately value debt, discipline to purchase the debt at reasonable prices, and well-trained collectors to work the paper. Overpaying is akin to burning money, and excellent pricing models are of questionable use if the collector can't cajole debtors to pony up. Fortunately, disciplined pricing and collection has long been Portfolio Recovery's strength.

Over time management has diversified their core business into purchase of bankruptcy accounts (with already agreed-upon payment plans), ramping legal collection methods on the small percentage of debtors identified as "can-pay-but-won't-pay," and acquiring a diversifying set of fee-for-service businesses in such exciting industries as back tax collection, class action lawsuit collections, and auto-loan collateral tracking (skip-tracing).

In the past decade, the steady hand of this founder/management team has increased cash collections, revenues, and earnings 26.6%, 24.7%, and 24.4% annually, respectively. Yet the stock has sold off by about 15% since its last (excellent) earnings report and now sells for 16.5 trailing EPS, or roughly 13.3 times next year's expected earnings. Given their historical growth trajectory and track record, this is an advantageous price at which to add and hold shares.

Brendan Mathews:Valeant Pharmaceutical is an unconventional specialty pharmaceutical company. Most drugmakers spend heavily on research and development and aim to develop blockbuster drugs. Valeant takes a different tack. The company spends little on R&D -- returns on investment aren't high enough. Instead it focuses on earning 20% cash-on-cash returns by acquiring existing drugs to plug into its pipeline. Instead of blockbusters, the company focuses on niche products in favorable markets. As a result, its portfolio of products is highly diversified with less patent-expiration risk.

The architect of this strategy is CEO Michael Pearson, a former managing director of McKinsey's pharmaceutical practice. Under his watch, shareholders have seen more than 60% annual returns. Pearson also has a lot of his own money on the line -- he owns $700 million in shares that he's committed to hold until 2017.

Because of its strategy of acquisitions, the company's GAAP financials are quite messy with lots of non-cash and one-time charges. But based on my estimates, it's trading around 13 times 2014 cash earnings per share. For a fast-growing, diversified pharmaceutical company with first-class management, that's a bargain.

Matt DiLallo:EOG Resources is quite simply one of the best ways to invest in America's energy boom. The company is raking in the money, its stock is cheaper than investors realize and even Jim Cramer likes it. That's why it's my top stock to buy this month.

EOG Resources is one of the fastest growing oil producers in America for a company of its size. Over the past six years the company has grown crude oil production by a compound annual rate of 38%. Looking ahead, EOG sees best-in-class oil growth through 2017. Because of this, it is expected to be one of the largest oil producers in America by 2017.

Even better, this isn't growth at all costs. EOG earns triple-digit after-tax rates of return on most of the wells it drills. Not only is it an exceptional operator, but it gets some of the best prices for its oil because of its unparalleled market access. That's yielding substantial cash flow that has its drilling plan fully funded, with increasing free cash flow that's funding a growing dividend. Bottom line, investors looking to profit from America's oil boom need to look no further than EOG Resources.

Maxx Chatsko: Want to invest in industrial biotechnology, the world's growing sweet tooth, and one of the fastest growing economies in the world in one fell swoop? Well, you're in luck: Shares of Cosan , the world's largest sugar producer and one of Brazil's largest industrial conglomerates, are on sale thanks to short-term worries about falling global sugar prices and an oversupply of ethanol.

The market seems to be forgetting that the company operates in sugar production, ethanol production, fuel sales, natural gas pipelines, commodity export logistics, agricultural real estate, and industrial lubricants.

There is a lot to love at Cosan, but the driving force has been and will continue to be Raizen -- a joint venture with Shell that focuses on sugarcane harvesting and renewable fuels. Raizen owns 10% of Brazil's sugarcane processing (crushing) capacity, produces 10% of its ethanol, generates nearly 1 gigawatt of energy from crop waste, owns 4,700 retail fuel stations, runs 960 convenience stores, and fuels 54 airports. Construction also recently began at its first cellulosic ethanol facility, which could grow to a network of eight such biorefineries in the next decade.

Overall, Raizen has grown EBITDA at a CAGR of 15% since the 2011/2012 growing season, while Cosan has grown total revenue by 67% and free cash flow by 395% since the 2010/2011 growing season. It may not seem as if there is much room for improvement, but with capital expenditures falling to historic lows this year and next, I think long-term investors are in for quite a treat.

Jamal Carnette:My stock of the month is apropos for the flu season - Rite Aid . Rite Aid has executed a tremendous turnaround in 2013 by registering four straight quarters of profitability and has provided investors with more than 300% returns, year to date. However, the long-term story is still intact: The company shrewdly refinanced a portion of its debt to take advantage of the current low-rate environment. This led to a 17% reduction in interest expense year over year in Rite Aid's second quarter.

In spite of these shrewd moves, top-line growth continues to haunt the health care chain. Matter of fact, the company's revenue in the first two quarters of fiscal 2013 is 1% less than 2012. However, there are both short-term strategies and long-term trends that should bolster revenue growth: The company has provided resources to help consumers understand the Affordable Care Act (Obamacare) and should benefit from the law both directly through increased prescriptions and indirectly with increased foot traffic. And even if this isn't a large revenue driver in the short term, America's aging demographics should eventually provide revenue growth for the company.

Finally, the stock hasn't gotten ahead of the financials. Although the company has returned 300% year to date, it still trades at an anemic trailing-12-month price-to-sales ratio of 0.22. Competitors Walgreen and CVS trade at price-to-sales ratios of 0.77 and 0.64 respectively. Rite Aid has been, by far, my largest gainer in 2013 and I expect the turnaround to continue.

Chuck Saletta: With the market as frothy as it has been, my pick for December has a decidedly contrarian and value-oriented bent: nuclear power titan Exelon . The company caught my eye when I recently found it on a list of stocks hitting 52-week lows, and I bought it for my own portfolio a week ago Tuesday at $26.93 a share. I couldn't pass up a chance to buy a major, profitable power generator for not much above its book value.

Exelon operates partially as a regulated utility and partially in the open electric market, and low natural gas prices have hampered its pricing ability in the open market. While Exelon was forced to cut its dividend early this year because of that difficult pricing environment, the company's current yield is around 4.5% -- far above the market's average. In addition, since being cut, the dividend is now covered by both accounting earnings and free cash flow, which makes it far more supportable.

While natural gas prices will likely remain low, there really isn't much room for them to continue falling while remaining a profitable commodity for its producers. That suggests that while Exelon may not gain much new pricing power, it should face fewer challenges maintaining the prices it currently commands.

All told, I'd be (and was) happy to buy below $28 and happy to hold up to around $40 -- as long as its dividend remains covered.

Jim Mueller: I like GameStop as a timely buy before the holidays. It was left for dead by Wall Street, but ended up surviving (and has seen a great rise in share price so far this year).

Now, with the release of the PS4 from Sony and the Xbox One from Microsoft, Wall Street was expecting a lot from GameStop's fourth quarter. Yet, when the company reported a very strong Q3 (for instance, same-store sales grew by 20.5%), it didn't raise guidance as much as Wall Street had hoped . The share price got beaten back from its 52-week high, which gives long-term investors a chance to grab some shares at a lower price.

Personally, I think management was being conservative and that it will report a very nice Q4 early next year. And with its successful loyalty program, it can milk even better results going forward. I own this in the real-money portfolio I run for the Fool, and am interested in buying more at today's prices.

Tim Beyers: I'll rarely plug a stock that fails to earn raves from customers and employees, but in the case of Spirit Airlines naysayers probably aren't giving CEO Ben Baldanza enough credit. Just look at Spirit's growth profile. Revenue soared 33% and profit doubled in the most recent quarter. Analysts expect more of the same -- specifically, 32% average annual earnings growth -- over the next five years.

They're right to be optimistic. Baldanza's obsession with profit growth knows no limits. His latest gimmick? Ads on everything from overhead bins to napkins and the exterior of every aircraft. (Think NASCAR in the sky.) A cheesy strategy? Sure, but you can expect Baldanza to keep pushing boundaries so long as there's legitimate growth to be had on the other side of the barrier.

Meanwhile, Spirit recently announced new routes from Phoenix to Denver, Minneapolis-St. Paul, and Chicago O'Hare Airport. Overall plans call for doubling systemwide capacity within four years. There's sure to be turbulence along the way to cruising altitude, but the payoff -- a double or better from today's share price, I'd expect -- is worth it.

Tamara Walsh: In the spirit of holiday shopping, Target is a name investors will want to own heading into the new year. The discount retailer lost some steam last month after costs related to its expansion into Canada took a toll on the company's third-quarter earnings. The stock now trades at a discount to its potential. Shares have fallen more than 14% below Target's 52-week high of $73.50, which creates a clear opportunity for buy-and-hold investors.

Target's growth story is just getting started. The discount retailer now has 124 stores open in Canada, which should help accelerate earnings growth for Target in the year ahead. While profits will take a hit in the near term, the long-term outlook for the company looks bright. In fact, Target says that future sales at its Canadian stores will account for as much as 10% of its profits by 2017. Moreover, research from Morningstar indicates that the retailer is on track to generate $100 billion in sales that year, up from $75 billion this year.

Ultimately, patient investors should be handsomely rewarded over the next couple of years as Target's growth story begins to play out in the Great White North. Not to mention, Target pays an annual dividend of $1.72 and has paid a dividend for more than 45 years. That's particularly encouraging because dividend stocks tend to outperform non-dividend-paying stocks over the long run.

Patrick Morris: As 2013 draws to an end, one stock to consider buying in December is AIG . Yes, that AIG. While AIG was subject to one of the largest private-sector bailouts stemming from the financial crisis, it is now almost exactly one year removed from when the government sold its final dollar of the insurance company's shares.

This year has been a great one for AIG, and its primary Property Casualty and Life and Retirement insurance operations have seen their total pre-tax income rise by more than 50% through the first nine months of the year relative to last year. While the company's raw bottom line is down from where it stood at this point last year, this is because of the gains seen last year through its investment in AIA, an Asian life insurer, which it subsequently sold.

When you couple its growing and extremely profitable business with its price that is dramatically below its peers -- AIG's price-to-tangible-book-value of 0.73 is well below that of the 1.12 seen at MetLife -- AIG makes for a compelling investment consideration heading into 2014.

Steve Heller: Since its third-quarter earnings, the future of Facebook and the role it plays in teenagers' lives has been put into question. As a result, investor sentiment has shifted negatively toward the social network, which I think presents a buying opportunity for long-term investors.

Luckily, Facebook has a much larger and more diversified user base than young U.S. teens. With nearly 1.2 billion monthly active users, or MAUs, there is no larger social network on the planet. Not only does this create ridiculous network effects, it puts things into perspective that investors are likely blowing the issue of U.S. teenage engagement entirely out of proportion. Have investors forgotten that Facebook owns Instagram, which happens to be very popular among teens? How about that Instagram is already generating revenue?

Let's also not forget that total user engagement on has been on the rise, as measured by the ratio of daily active users to monthly active users. This is arguably the most important metric for investors to track because it gives insight into whether Facebook is converting the occasional user into a frequent user. From a business perspective, a higher level of overall user engagement creates more revenue-generating opportunities for Facebook.

At the end of the day, no social network is better at making the world more open and connected, and that's the biggest reason to get invested today. After all, where do you think the next 2 billion Internet users will flock to?

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The Motley Fool recommends American International Group, Exelon, Facebook, Portfolio Recovery Associates, and Valeant Pharmaceuticals. The Motley Fool owns shares of American International Group, EOG Resources, Facebook, GameStop, and Microsoft and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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