If I had some money I was looking to put into play for the coming year, the following stocks are at the top of the list, writes Paul Larson of Morningstar StockInvestor.



While the sovereign debt crisis is still playing out over in Europe, I continue to think that investing in firms that hold the high ground with sustainable competitive advantages is the best way to protect and grow the buying power of our dollars.



In the spirit of the holiday season, here are stocks that fit this bill that you could give as gifts to your loved ones (or keep for yourself).



Google (GOOG)

Google is an Internet behemoth, with an estimated market share in search of more than 60%. It also has one of the leading mobile ecosystems with Android, right up there with Apple’s (AAPL) iOS. (According to Gartner, Android had in excess of 50% market share for mobile operating systems in the third quarter.)



Google Wallet and its new efforts in online shopping could also eventually become forces to be reckoned with. But at its core, Google is an advertising company benefiting from the secular trend of marketing moving from traditional sources to online.



Google benefits from an intangible (a reputation—rightfully deserved—of having the best search results). In addition, both its advertising and especially its mobile businesses benefit from the network effect. As more people adopt Android, the more application developers it attracts, making the ecosystem more attractive to new users.



The company has a revenue and earnings growth rate currently in excess of 30%—quite impressive given the anemic economic recovery. Meanwhile, the stock trades at just 14 times forward consensus earnings, which seems far too little given the company’s solid positioning and heady growth.



Consider this comparison: Facebook is reportedly eyeing an IPO that would value it at $100 billion, despite only having about $4 billion in annual revenue. Google already has $35 billion in annual revenue over the past 12 months (adding about $7 billion in revenue this year alone) and nearly $10 billion in trailing annual earnings, but only trades at a market valuation of about $200 billion.



Google is far from perfect, and has seen its fair share of initiatives flame out. But it has a few absolute home runs to its credit.



I’m thrilled to be able to buy a company with competitive advantages like this at such a cheap valuation, where the P/E multiple is half the current growth rate.



Energy Transfer Equity (ETE)

With a healthy 6.6% yield, Energy Transfer remains my favorite idea for those seeking income from their portfolios.



(But for various reasons, it’s a good idea to keep master limited partnerships like ETE in taxable accounts and out of qualified 401k and IRA accounts. Namely, one should try to capture the tax benefit associated with the deferral of taxes on distributions while avoiding the headaches that could be generated from unrelated business taxable income (UBTI) inside a qualified account.)



ETE owns the general partner of two other partnerships, Energy Transfer Partners (ETP) and Regency Energy Partners (RGP). ETE is like an asset manager in that it can earn additional profits either by growing the earnings from the assets it manages (likely to happen at both ETP and RGP) or by gathering additional assets to manage. ETE is doing both.



My thesis for ETE is essentially the same as what I had for Enterprise GP before that company was taken out via merger with Enterprise Products Partners (EPD).



It is worthwhile to be aware that ETE is basically paying out every dollar it currently takes in; its coverage ratio is right at 1.0. The reason is ETE got a little ahead of itself in raising its distribution while trying to woo Southern Union (SUG) shareholders to accept its merger proposal. As such, I do not expect the company to raise its distribution for a couple of quarters.



But once Southern Union is integrated and the numerous growth projects at its underlying subsidiaries start fully contributing cash flow, I expect long-term distribution growth to resume at a rate in the high single digits, implying an expected total return in the mid-teens. Not bad for a relatively stable pipeline company.



Continued…



St. Joe (JOE)

It’s a minor miracle the Tortoise and the Hare are still beating the S&P 500 year to date (portfolios up 2.6% on a combined basis versus 1.9% for the benchmark index) given that St. Joe, the largest holding in either portfolio heading into the year, is the second-worst performing stock of the 42 positions held all year in both portfolios.



St. Joe is down some 34%. Yikes!



Besides real estate not awakening from its slumber this year, I think the vigilantes in the market may smell blood with St. Joe’s largest shareholder, Fairholme (FAIRX).



Fairholme, a major investor in financials, has had a simply horrific year, posting losses of 29.5% year to date. It also lost its co-manager and has seen its assets under management shrink by more than half. If Fairholme were to liquidate its 23 million St. Joe shares, it’d take over a month to sell at today’s average daily trading volume of close to 700,000 shares.



I think the market may be worried about the wheels continuing to come off at Fairholme. But at a mere 3% of Fairholme’s assets, I think a forced liquidation of Fairholme’s St. Joe position has very long odds of actually occurring.



Looking at what St. Joe has actually done this year, there is really nothing to complain about. Overhead expenses have been cut to the bone, timber assets have been monetized, and progress has been made developing the area around the new Panama City airport, with the company recently signing a major lease with ITT Exelis (XLS). St. Joe still has roughly $160 million in cash net of its negligible debt.



Meanwhile, the stock continues to be priced at dirt cheap levels. At a recent $14, the implied valuation on the company’s land is less than $2,000 per acre. While this is probably a fair price for raw timberland, it dramatically undervalues St. Joe’s land around the airport and along the beach. I’m not sure how much further this spring can coil.



Vulcan Materials (VMC)

Despite its competitive cost advantage, Vulcan has had a terrible couple of years. Its purchase of Florida Rock just as the real estate market was about to collapse was horribly timed, and the cyclical headwinds have been at hurricane-force.



It’s tough for any business to survive volumes going down by roughly half, but this is what Vulcan has had to deal with. However, Vulcan has indeed survived, and eventually the cyclical headwinds will turn into a tailwind.



In a nutshell, thanks to a growing population, new household formation in this country should run at a normalized annual rate of near 1.4 million. But we’ve only been building about 400,000 houses per year over the last couple years, or just enough to replace houses lost to disasters and obsolescence.



While there was certainly a massive amount of excess inventory built up during the housing bubble, it is being quickly burnt off. The slack is nearly out of the rope today. When the housing market does come out of hibernation, Vulcan Materials should be sitting pretty once again.



Eyes wide open that this is a high risk and reward situation, as the company does remain financially leveraged—roughly $3 billion in debt against about $400 million in EBITDA expected for the full year 2011. But between volumes that could nearly double from this year’s levels and the inherent operating leverage those additional volumes would bring, EBITDA could easily triple when the construction market normalizes.



In a nutshell, the view out the windshield looks far better than the ugly situation in the rearview mirror.



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Tickers in this Article: ETE, ETP, FAIRX, GOOG, JOE, RGP, SUG, VMC, XLS

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