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Four Value Stocks for 2013


Growth has been the hot sector for more than a year now, but the growth boom is a bit long in the tooth, while this quartet of value plays have a lot of headroom this year and beyond.

Recent quarterly financial results have been impressive. Kroger's "Customer 1st Strategy" continues to raise customer loyalty, boost same-supermarket sales, and increase market share. Management lifted its earnings guidance for the current quarter and forecast accelerating sales and earnings for 2013. Kroger is taking market share despite formidable competitors such as Wal-Mart (NYSE:WMT).

At 11.3 times current EPS and with a dividend yield of 2.3%, KR shares are undervalued. The balance sheet is solid, and Kroger shares are less volatile than the shares of most companies. Buy now.

Microsoft (NASDAQ:MSFT), the world's largest software company, develops, manufactures, and licenses software products and services for different types of computing devices. Computer software includes the Windows operating system, the Office application suite, and cloud-computing services. The company also designs and sells hardware, including entertainment products, digital music devices, and personal computer products.

MSFT's new Windows 8 operating system designed for both computers and tablets is enjoying strong demand from users. In addition, Microsoft's new tablet computer, called the Surface, has won high praise for its innovative features. The company's Xbox consoles and Kinect games continue to gain market share. MSFT's Skype voice over Internet protocol service (VoIP), acquired in May 2011, is providing rapid growth.

I forecast 11% sales growth and 10% EPS growth in 2013. The company could beat my forecast if new products, such as the Surface, exceed expectations. At 9.1 times my 2013 forecast EPS of 2.89, MSFT shares are undervalued. MSFT shares will likely advance to my Minimum Sell Price within one to two years. MSFT is very low risk.

SPDR Gold Shares (NYSEARCA:GLD) is an exchange-traded fund that seeks to replicate the performance of the price of gold bullion. The fund physically holds gold bullion and no other assets. The fund, created in 2004, maintains a low management fee of 0.4%.

Gold mining companies, such as Barrick Gold (NYSE:ABX) and GoldCorp (NYSE:GG), are experiencing declining mine production while incurring higher mining costs and higher labor costs. The uncertain near-term future of gold mining companies can be avoided by buying a gold ETF. And SPDR Gold Shares are a lot less volatile than most gold-mining stocks.

I believe the price of gold has hit bottom and will rise in 2013, which will benefit SPDR Gold Shares. Gold production has risen only 0.6% annually during the past 12 years, despite a rapid rise in the price of gold.

The threat of debt defaults, both domestic and foreign, increases the appeal of gold as a safe haven. In addition, the new Federal Reserve bond-buying program is expected to cause gold prices to rise during the next several months. The recent drop in gold prices provides an excellent buying opportunity. GLD does not pay a dividend and is low risk.

Editor's Note: This article was written by J. Royden Ward of Cabot Benjamin Graham Value Letter.

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No positions in stocks mentioned.
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