Money Managers’ Minnesota Stock Picks for 2013

Why Polaris, Donaldson, ProtoLabs, and Northern Oil & Gas are worth watching.
Money Managers’ Minnesota Stock Picks for 2013

At the dawn of 2013, we asked four local investment professionals for their local stock picks for the year. Although the recommendations span a range of industries, there’s one thing they could all agree on: As the economy continues to pick up steam, there are some excellent investment opportunities. So many, in fact, that it was difficult for some to choose a single most promising stock.

Pro: David A. Brown, vice president of research and investment management, director of client services, Sit Investment Associates, Inc.
Pick: Polaris Industries, Inc. (PII)
Price 1/2/13 (close): $86.22
Target: $110
Annual revenue (2012): $3.2 billion
Why: The company has done an exceptional job of diversifying to remain competitive, says Brown, adding that the five-year return on Polaris’ stock has exceeded 300 percent, and its earnings per share have almost tripled between 2009 and 2012. Although most people think of it as a snowmobile manufacturer, such sales only account for about 11 percent of its revenue. Off-road vehicles account for 70 percent, and rather than catering exclusively to outdoor enthusiasts, the company has successfully marketed to industries including agriculture and the military. Polaris also sells Victory and Indian motorcycles, and in recent years has purchased two electric vehicle manufacturers and formed a joint venture to develop and market vehicles in India. While not all of those new segments are boosting earnings yet, Polaris is “gaining market share in every one of its business areas” and “planting seeds for future growth,” says Brown.


Pro: Peter J. Johnson, assistant vice president and analyst, Mairs and Power, Inc.
Pick: Donaldson Company, Inc. (DCI)
Price 1/2/13: $34.11
Target: mid-$40s
Annual revenue (FY ending 7/12): $2.5 billion
Why: Donaldson’s stock dropped last year as the filtration systems provider faced “a number of macro headwinds” including a decline in demand for heavy trucks, but Johnson thinks those obstacles were temporary and says the company is positioned to grow, thanks to increased sales of replacement parts. Historically, the company focused on “first-fit” sales of filtration systems to companies like Caterpillar, which use them in combines and other machinery off the production line. But competitors replicated Donaldson’s technology and were able to outsell the company when it was time for end users to replace old systems. Donaldson has beefed up patent protection, however, and rivals can no longer duplicate its parts. Whereas first-fit sales represented more than three-fourths of Donaldson’s sales 30 years ago, they now represent half of sales, with replacement parts representing the other half. “It’s a shift in strategy, but should help the company grow 8 to 10 percent per year,” Johnson says.

Pro: Richard C. Perkins, executive vice president, portfolio manager, Perkins Capital Management, Inc.
Pick: Proto Labs, Inc. (PRLB)
Price 1/2/13: $39.12
Target: $50
Annual revenue (2011): $98.9 million
Why: Proto Labs has been on an upward trajectory since it went public in February 2012 at $16 per share. The provider of customized computer-machined prototypes and parts boasts a three-year compounded revenue growth rate of 46 percent, Perkins points out, adding that Proto Lab’s “secret sauce” is software, which allows customers to send design specifications over the Internet and receive an almost-instantaneous bid. As the economy rebounds and manufacturers boost sales, they’ll funnel more business to Proto Labs, which can ship parts in as little as one business day after receiving a design submission, Perkins says.

Pro: James Ulland, president and founder, Ulland Investment Advisors, Inc.
Pick: Northern Oil & Gas, Inc. (NOG)
Price 1/2/13: $17.08
Target: $23
Annual revenue (2011): $146 million
Why: Northern Oil and Gas has seen internal rates of return of 25 to 40 percent on wells it is drilling in the oil-rich area surrounding the Bakken formation in western North Dakota, says Ulland. He points to several trends that will benefit the company this year. First, pipeline capacity is expanding, making it easier to transport oil from the Midwest to the Gulf of Mexico, where the going price is almost $20 more per barrel. Additionally, oil companies including Northern were rushing last year to drill first wells on various parcels with expiring leases, says Ulland. This year, as Northern drills subsequent wells, efficiencies will lead to decreased costs and increased margins. Lastly, “we should see, on a worldwide basis, with this kind of grudging recovery, increased oil demand, which is going to be supportive for somewhat higher pricing,” Ulland notes. He predicts Northern’s earnings will increase 30 to 40 percent this year.

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