7 UBS Stock Picks for 2012

UBS Investment Research’s recently published report, “US Morning Meeting Highlights”, discusses different companies and how they are likely to be affected this year. The report is published on January 13th and we will summarize its main points. UBS analysts are of the opinion that Obama’s victory would have a positive impact on the “tech and industrial companies”, whereas the “healthcare, financial, energy and consumer” companies will be negatively affected due to the tougher regulations imposed. A Republican victory, on the other hand could be beneficial for “universal banks, managed care, coal, defense, and high-end consumer stocks”. In this article, we will discuss the buy-rated stocks mentioned in UBS’s report.

UBS AG (USA) (NYSE:UBS)

CSX Corporation (CSX) engages in the provision of rail-based transportation services. It has been given a buy rating by UBS. Currently, CSX is the market leader in freight transportation services in the U.S. Despite an adverse macro environment and a volatile market, CSX is expected to generate significant profits and strong returns in 2012. Shares of the company are currently trading at $23 per share and are expected to reach a target price of $31 which is based on the earnings per share estimate of $2.34, for the year 2013.

We are bullish about CSX. CSX reported higher gross and operating margins of 38% and 29.5%, respectively, than its competitor, Norfolk Southern Corporation (NSC). Also, it has a price-to-equity ratio of 14x versus the industry average of 18x. As the company is likely to invest in its infrastructure program, margins are expected to improve this year. We believe that CSX shares are a good purchase for the longer term since the company is usually more vulnerable to headwinds, such as a decrease in soft-coal demand, during the short term. Jeffrey Vinik had the largest stake in CSX among the 350+ hedge fund managers we are tracking. Jim Simons’ Renaissance Technologies initiated a brand new position in CSX during the third quarter.

KBR, Inc. (KBR) is an engineering and construction company that operates on a global scale. It has been given a buy rating by UBS. The current joint venture of JGC, Chiyoda and KBR is expected to reward investors as soon as the final investment decision is made. The completion of the contract is likely to add around $5 billion to the company’s backlog. Shares of the company are currently trading at $32 per share and are expected to go north of $42.Also, earnings per share are expected to reach a target of $2.65.

We are bullish about KBR. The company’s high earnings per share of $3.06 are significantly higher than the industry’s average of $0.4 and are the reason behind KBR’s low price-to-equity ratio of 10.5x. KBR’s PEG ratio of 0.6x is half the industry’s average of 1.2x, indicating that its shares are currently undervalued and are a good buy in the present circumstances. Steven Richman’s East Side Capital had nearly $100 million invested in KBR at the end of September. The fund boosted its stake in the stock by 20% over the third quarter.

McDermott (MDR) is an engineering and construction company. UBS has given the company a buy rating. With its $34 billion Ichthys LNG project finalized, McDermott has been selected to construct and install the subsea flow line for the Inpex company. This contract will be worth $1.5 billion and even if McDermott is able to book only half of the contract, it will benefit from 18% of the 9/30 backlog. Shares of the company are currently trading at $12.7 per share and are expected to reach a price target of $14 by the end of 2012. Earnings per share are likely to rise by a margin of $0.1 to $0.95 by the end of 2012.

We think MDR can outperform the market this year. The company has a tangible book value of approximately $1.6 billion, indicating that it’s capable of protecting itself in times of recession and from tough competition. We believe that the approval of the Ichthys project is going to, significantly, raise McDermott’s valuation for the year 2012. Steven Cohen’s SAC Capital significantly boosted its stake in the stock during the third quarter.

iSoftStone Holdings (ISS) engages in the provision of information technology services mainly in China. UBS has given the company a buy rating. With the upcoming joint venture between ChinaSoft and Huawei, iSoftStone is also considering its own venture with Huawei. UBS speculates that iSoftStone will either generate a better deal than ChinaSoft or abandon its intentions altogether. Shares of the company are currently trading at $9.5 per share and are expected to reach a price target of $16, based on a price-to-equity ratio of 19x.Also; earnings per share are expected to increase to $0.78 per share.

We are neutral on ISS but we should note that ISS has one of the highest institutional buying among the China-based stocks. Lone Pine Capital boosted its holdings in ISS by 32% during the third quarter.

VMware, Inc. (VMW) is a provider of virtualization-based cloud infrastructure. It has been given a buy rating by UBS since it is the leading company in this sector. UBS analysts expect positive catalysts for the company in 2012, such as the building of a market-leading cloud app platform and the company’s involvement in the emergence of a user computing paradigm. UBS expects VMware to install over 80 million servers by the year 2014. Shares of the company are currently trading at $87.8 per share and are expected to reach a price target of $115 by the end of 2012.

We are bullish about VMW. VMware currently has one of the highest insider purchases among its competitors, indicating that the management and owners of the company expect the company’s stock valuation to increase in the near future. Its gross and operating margins of 83% and 18% respectively are, both, higher than the industry averages of 39% and 7.8%. This indicates that the company is highly profitable. John Burbank’s Passport Capital initiated a brand new position in VMW during the third quarter.

Aruba Networks (ARUN) is a provider of network access solutions for mobile enterprises. UBS has given the company a buy rating. The company significantly benefits from 100% customer loyalty which is apparent from the increased size and frequency of purchases by Aruba customers. UBS considers this to be a competitive advantage for the company. UBS analysts consider Aruba Networks to be a secular share gainer with a potential for better performance. Shares of the company are currently trading at $21.8 per share and are expected to reach a price target of $30.

We are long-term bullish about Aruba as well. Aruba Networks reported a growth of more than 20% in the last five years and has experienced a rise in insider trading over the last six months. Despite the company’s negative operating margin, the company’s management has been handling its inventory quite well. It is also doing better than its competitors such as Hewlett-Packard (HPQ) and Motorola Solutions, Inc. (MSI), in terms of significant increases in quarterly revenue growth and higher gross margins. Panayotis “Takis” Sparaggis’ Alkeon Capital is the most bullish hedge fund about ARUN.

Qualcomm (QCOM) is a designer and manufacturer of digital communications products. It has been given a buy rating by UBS Investment Research, primarily due to the increase in demand for Qualcomm’s Snapdragon processors. With the increase in usage of LTE, bigger displays and thinner phones, Qualcomm’s processors are experiencing a rise in demand. UBS does not expect the company’s competitive position to be jolted despite the increase in discrete application processors offered by Intel and NVIDIA. Shares of Qualcomm are currently trading at $58 per share and are expected to reach a price target of $70, indicating a potential upside of 20%.

Qualcomm is one of the most popular stocks among hedge funds. Qualcomm introduced its new Snapdragon S4 processor for powering Windows 8 tablet devices. We expect an increase in demand for Qualcomm’s processors. We are bullish about QCOM.

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