Is Nigeria’s 7-Up Bottling Company a Bargain?

Nigeria’s 7-Up Bottling Company is one of the Nigerian Stock Exchange’s best performing shares this year, surging 107% on the back of strong sales and earnings growth.

Here we examine whether the Pepsi distributor’s current price offers value to long-term investors.

You don’t have to spend much time in Africa to realize that Coke has the upper-hand in the continent’s cola war. The bright red signs with the cursive lettering seem to be everywhere.

But Coca-Cola’s (KO) African dominance is being challenged, and Nigeria’s 7-Up Bottling Company (7UP) is one of its fiercest competitors.

7UP bottles PepsiCola, Mountain Dew, Mirinda, and AquaFina in addition to its namesake brand. It operates nine bottling facilities and some 200 distribution centers across the country.

Founded (and still controlled) by the Lebanese El-Khalil family in 1959, the company’s profits surged 125.3% during its 2014 fiscal year. Sales increased 21.5% thanks in part to an innovative marketing strategy that included a giveaway of one minute of mobile airtime on every bottle cap. Efficiency gains helped widen the operating margin from 8.6% to 11.7%.

This outstanding performance made investors very thirsty for 7UP shares. The company’s stock price has risen 107% so far this year.

So, is the valuation too frothy here? Or is it time to gulp down some shares?

Let’s take a quick look.

7UP Valuation: Refreshing or Sickly Sweet?

7UP currently trades at a price-to-earnings ratio of 13.3 and offers a 1.7% dividend yield.

Is that a fair price?

To get a sense of a stock’s potential and downside risk, I often look at how well the underlying company has grown its book value (or shareholders equity) over time.

Over the past two years, 7-Up Bottling Company grew its book value at an annual rate of 24.5%. That’s fantastic. It means the net asset value of the company increased by well over half in just 24 months. It’s no wonder investors took note!

As long-term investors, however, the question for us is what sort of growth rate we can expect from the company over the next five years. A 24.5% rate would be excellent, but such rapid growth is exceedingly difficult to sustain for very long.

7 Up Bottling Company
Photo by Ben Freeman

So, let’s dig deeper into our financial statement archive and calculate how quickly 7UP’s book value grew since March 2004 — over ten years ago. When we do so, we find that shareholders equity grew at an annualized rate of 16.8% without any injections of new capital.

That sounds like a rate we can reasonably expect the company to match over the next five years.

If it should do so, 7UP’s present book value of N30.43 per share will grow to roughly N66.15 per share by October 2019.

N30.43 x (1 + 16.8%)^5 = N66.15

Many companies trade at a substantial premium to their book values in order to account for their growth potential.

As you can see, with a current share price of N147.73, 7UP is no exception. It’s price-to-book ratio is 4.85.

N147.73 / N30.43 = 4.85

But investors haven’t always been so optimistic about the stock’s prospects. In fact, just two years ago, 7UP’s price-to-book ratio was only 1.98.

A Pessimistic Scenario

So let’s put together a pessimistic set of assumptions.

What kind of return would we get five years from now if:

  1. 7UP’s growth slowed to 16.8%,
  2. management decided not to raise the dividend from its current N2.50 per share,
  3. and a market mood swing reduced the price-to-book ratio to 1.98?

To find out, we multiply our estimated future book value (N66.15) by 1.98, and add five years worth of dividends.

N66.15 x 1.98 + (N2.50 x 5) = N143.48

Now, compare this result to the current share price of N147.73.

Not much difference, is there? So, even if growth slows and the market falls out of love with the stock, we can be fairly confident that the stock will be at least as valuable five years from now as it is today. The biggest downside risk is missing out on a better opportunity. Not bad.

An Optimistic Scenario

And what if the market is more bullish five years hence?

Suppose 7UP’s price-to-book ratio is 6.0 – the same multiple currently sported by shares of PepsiCo (PEP) on the New York Stock Exchange. We end up with a total future value of N409.40

N66.15 x 6.0 + (N2.50 x 5) = N409.40

That’s an annualized return of 22.6%. Most investors would be delighted with a tall glass of that sort of performance.

So, in my view, based on the recent performance of the business, its growth prospects, and market valuation, 7UP Bottling Company offers significant upside potential with limited downside risk.

What Do You Think?

Where do you think shares of 7-Up Bottling Company will trade five years from now? Is the stock a bargain? Let’s hear your thoughts in the comments!

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Are Ecobank Shares a Bargain?

Shares of Pan-African lender, Ecobank Transnational (ETI), have surged 7.1% in the month of September, blowing away the Nigerian Stock Exchange’s All Share Index.

Qatar National Bank’s purchase of a 23.5% stake in the firm triggered the big price move.

Now the stock trades at its highest point in over four years. Is there still value left on the table? Or would investors be better off looking elsewhere? Let’s take a closer look to find out.

Shares of Pan-African lender, Ecobank Transnational (ETI), have surged 7.1% in the month of September, blowing away the Nigerian Stock Exchange’s All Share Index.

Qatar National Bank’s purchase of a 23.5% stake in the firm triggered the big price move.

Now the stock trades at its highest point in over four years. Is there still value left on the table? Or would investors be better off looking elsewhere? Let’s take a closer look to find out.

A Very Big Footprint … and Growing

Ecobank boasts an unmatched pan-African presence. It operates in 36 countries across the continent and is expanding rapidly. Recent expansion activity includes a launch of operations in Mozambique and the procurement of a banking license in  Angola.

Note that the Togo-based bank’s operations are spread pretty thin outside West Africa, and Nigeria in particular. Of Ecobank’s 1253 branches, 1022 are in West Africa and nearly half are in Nigeria. Operations outside of West Africa account for less than 17% of group revenue.

But the mere fact that Ecobank has established a toehold in so many African economies, puts it well ahead of much larger competitors with pan-African aspirations.

Emerging From a Leadership Crisis

It wasn’t long ago that investors were clambering over each other to exit this stock. An executive director of the bank accused the former CEO, Thierry Tanoh, of pressuring her to mis-state the bank’s 2012 earnings and was subsequently fired. This led to a leadership struggle that lasted many months until the board finally voted to remove Tanoh in March of this year. He was replaced by deputy CEO, Albert Essien, a Ghanaian with nearly 25 years of employment at Ecobank.

The allegations of poor governance shown a global spotlight on how the bank does business. While this was a deeply disturbing development for shareholders, I take the view that the bank has emerged a stronger institution as a result of the turmoil and increased scrutiny.

Are Ecobank shares a bargain?
Photo by Gabriel Millaire
Powerful Partnerships

Now, with the entry of Qatar National Bank (QNB), Ecobank benefits from three important alliances.

QNB could prove to be a conduit to loan deals originating from the Middle East. And some analysts suspect that it will eventually make a bid to acquire the bank in its entirety.

Johannesburg-based Nedbank (NED) is looking to build its sub-Saharan footprint to keep up with its South African peers. Toward that end, it loaned Ecobank $235 million in 2011 which the bank can opt to convert into a 20% equity stake up until November 25. If it should do so, the partnership would likely accelerate Ecobank’s expansion in Southern Africa.

Finally, South Africa’s Public Investment Corporation, the government workers’ pension fund, controls an 18% stake in the bank. They’ve proved to be very involved in governance issues, calling for Tanoh’s ouster. I see them as an important watchdog of minority shareholders’ interests.

Improving Efficiency

It’s not cheap to launch banking operations in 36 countries in less than 30 years. And Ecobank’s shareholders have felt the pinch of expansion costs. The bank’s return on equity over the past 12 months is a measly 5.3% and the board opted not to pay out a dividend last year.

As the bank has scales up, however, expansion costs will like begin to take a smaller bite out of earnings. The cost to income ratio improved from 78.7% in the first half of 2013 to 76.2% in the most recent six months. Management hopes that its increased promotion of online and mobile banking platforms will drive further efficiency improvements in coming years.

Valuing Ecobank Shares

Ecobank has grown its net asset value at a 16.5% pace over the past five years, and its shares currently sport a price/book ratio of 1.2. If management is able to grow the bank’s net asset value at a rate of 15% over the next five years, long-term shareholders would realize an 11% annualized local currency return even if the price/book multiple drops to 1.0 and the board decides not to reinstate the dividend.

Given its roster of powerful shareholders and the groundwork it has laid — securing banking licenses across the continent — I think the above assumptions are on the conservative side. Are there bigger bargains out there? Yes. But I believe patient investors at today’s price of NGN18.10 will be well-rewarded over the next five years – assuming a larger bank doesn’t gobble it up before then.

Investors can purchase Ecobank shares on three different African exchanges, namely the Nigerian Stock Exchange, the BRVM, and the Ghana Stock Exchange.

What Do You Think?

Do Ecobank shares look like a good long-term buy? Let’s hear your thoughts in the comments!

Disclosure: Ryan holds a beneficial interest in shares of Nedbank through his work with Africa Capital Group.

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Is Nigeria’s Diamond Bank a Gem in the Rough?

Is Nigeria’s Diamond Bank a Gem in the Rough?

After some rocky years in the wake of Nigeria’s banking crisis, Diamond Bank looks like it’s regained its footing. Now it wants to grow.

Toward that end, the bank has launched a rights issue which offers existing shareholders the right to purchase three additional shares for every five shares they own.

Is it a good deal? Or should investors dig for value elsewhere? Let’s take a closer look and make an assessment.

After some rocky years in the wake of Nigeria’s banking crisis, Diamond Bank (DIAMONDB:NL) looks like it’s regained its footing.

Now it wants to grow.

Toward that end, the bank has launched a rights issue which offers existing shareholders the right to purchase three additional shares for every five shares they own at a price of N5.80 per stub.

If the issue is fully subscribed, the bank will raise just over N49 billion (roughly $300 million). It plans to use the capital injection to open 30 new bank branches, refurbish 73 others, upgrade its software platform, and make additional loans.

Is the Diamond Bank rights issue a bargain, or should investors dig for value elsewhere? Let’s take a look at the rights circular and make an assessment.

Take a Look at Book

One method of valuing a financial firm like Diamond Bank is to consider its book value and forecast its growth over time. Assuming the company’s accountants and auditors are doing their jobs right, a company’s book value is the amount that would be paid out to shareholders if the company was liquidated. This is why it’s also commonly known as shareholders’ equity.

We calculate it by subtracting a company’s total liabilities from its total assets.

book value = total assets – total liabilities

In theory, a bank’s share price shouldn’t stray very far from its book value per share. In practice, however, it fluctuates wildly. Banks that are perceived to be growing very quickly often see their market prices soar far above their book values. Meanwhile, banks that have fallen out of favor with investors often trade at deep discounts to book value.

Where does Diamond Bank stand on this value spectrum?

To find out, we’ll first take a look at the bank’s most recent financial statement. The balance sheet on page two shows that, as of June 30, 2014, shareholders’ equity was N148.6 billion.

If we assume that the rights issue will be fully subscribed, all of the money raised will be added to this amount.

book value = shareholders’ equity + rights proceeds

Page 12 of the rights circular tells us that the net proceeds of the offer will be N49.3 billion. Therefore, in a few weeks, Diamond Bank’s book value will equal N197.9 billion (N148.6 + N49.3 = N197.9).

Diamond Bank's Rights Issue a Gem in the Rough?
Photo by Jeff-o-matic

Now, we must figure out how much book value is represented by each share of the company. To do that we simply divide the book value by the total share count at the conclusion of the rights issue.

book value per share = book value / share count post rights issue

At the top of page 55 of the rights circular, we see that (assuming a full subscription) there will be a total of 23,160,388,968 Diamond Bank shares. So, the stock’s projected book value per share at the conclusion of the rights issue is N8.54 (N8.54 = N197.9 billion / 23.16 billion shares).

Good. We’re making some progress.

Make Conservative Assumptions

Now it’s time to do some forecasting. This is always the tricky part.

If you’re like me, you invest with the intention of holding for the long term. So, we want to make our best guess as to what Diamond Bank’s book value per share will be five years from now. This will allow us to determine whether it’s worth buying some shares.

The rights circular tells us on page 52 that shareholders’ equity was N106.1 billion on December 31, 2009. On June 30, 2014 (four and a half years later) it was N148.6 billion. That’s an annualized growth rate of 7.8%.

(N148.6 / N106.1) ^ (1 / 4.5) – 1 = 7.8%

Can Diamond Bank easily replicate this growth rate over the next five years?

I believe it can. Here are a few reasons why.

  • The IMF projects that the Nigerian economy will grow at an average rate of 6.8% over the next five years. To keep net assets growing at 7.8%, Diamond Bank’s management need not do much more than ride this wave.
  • The bank has grown shareholders’ equity at a rate of 24.5% over the past two and a half years or since the end of Nigeria’s banking crisis.
  • The rights offering’s injection of capital looks likely to accelerate growth.

So, let’s conservatively assume that shareholders’ equity continues to grow at a 7.8% rate. At the end of the fifth year, book value per share will then be N12.43.

N8.54 x (1 + 0.078) ^ 5 = N12.43

Guessing Mr. Market’s Mood

Now, our next question is how much the stock market will value N12.43 of Diamond Bank’s book value in August 2019. In other words, what will the stock’s price/book ratio be?

While we can’t know for sure, we can make a fair guess by looking at the bank’s price/book ratio over the past five years. In that time, the ratio has fluctuated within a range from 0.38 to 1.25.

If the bank grows book value at a steady 7.8% pace over five years, I believe it should command a book value multiple of 0.9 – right about the middle of its historic range. That results in a share price of N11.18 five years from now.

N12.43 x 0.9 = N11.18

Don’t Forget Dividends

Last year, Diamond Bank paid a dividend of N0.30 per share. This is equivalent to N0.19 per share if we factor in the additional shares that will result from the rights issue.

If we conservatively assume that the bank will continue to pay that dividend for the next five years, we will receive a total of N0.95 worth of dividends during our holding period (N0.19 x 5 = N0.95).

Now, add those total dividends to our projected share price.

N11.18 + N0.95 = N12.13

So, N12.13 is our conservative estimate of total investment value in August 2019.

The Bottom Line

Therefore, if you hold rights to purchase additional shares of the bank at a price of N5.80. You can reasonably expect them to more than double in value over the next five years. If they should achieve the price of N12.13, your annualized return would be 15.9%.

(N12.13 / N5.80) ^ (1/5) -1 = 15.9%

In my view, this is a decent return considering that our assumptions are conservative and that a 10-Yr Nigerian government bond currently yields 12%.

What Do You Think?

Is this an appropriate method of valuing Diamond Bank? Would you change any of the forecast assumptions? Let us hear your thoughts in the comments!

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Why Cadbury Nigeria’s Sugar Rush Could Be Harmful to Your Wealth

Get ready for a stomach ache.

Investors’ big binge on Cadbury Nigeria shares may be nearing an unpleasant conclusion.

Like a sugar rush, the stock’s meteoric 372% rise over the past 24 months was fun while it lasted, but judging from the company’s 2013 results, the stock’s valuation is now sickly sweet.

Get ready for a stomach ache.

Investors’ big binge on Cadbury Nigeria shares may be nearing an unpleasant conclusion.

Like a sugar rush, the stock’s meteoric 372% rise over the past 24 months was fun while it lasted, but judging from the company’s 2013 results, the stock’s valuation is now sickly sweet.

The company, which is 75% owned by Mondelez International (formerly Kraft Foods, Inc), produces a wide range of drinks and sweets. Its flagship brands are Bournvita, a malted chocolate drink, and TomTom, a menthol-flavored candy.

Confectionery goods account for well over 90% of the company’s sales. Processed cocoa goods (butter, liquor, and powder) comprise the remainder.

The company gained notoriety as “Nigeria’s Enron” in 2006 when investigations revealed that the CEO and CFO had, for years, been cooking Cadbury’s books. The scandal resulted in two years of earnings losses, fines, lawsuits, and a decimated balance sheet.

Thus, when management announced Cadbury’s first dividend payout since 2005 last year, the company was rightly hailed as a successful turnaround.

With profitability restored, investors eager to profit from the growing wealth of the Nigerian consumer piled into the stock, making it one of the exchange’s best performers in 2012.

The rally continued throughout the following year, which saw the shares more than double in value, and made the company the eighth largest listing on the Nigerian Stock Exchange. It presently boasts a bigger market cap than heavyweights Guinness Nigeria and Ecobank Transnational.

Unwrapping Cadbury Nigeria

CEO Emil Moskofian and his management team have indeed steered the company deftly in recent years.

Cadbury Nigeria: Sugar Rush?
Photo by Yum9me

Cadbury’s pre-tax earnings soared 38% in 2013, and it generated huge wads of cash in each of the past three years. Profit margins widened dramatically. This helped the firm’s return on assets to leap from 9.4% in 2012 to 13.2% over the past 12 months.

And the balance sheet was nearly as liquid as the Gulf of Guinea.

It was this increasingly cash-rich balance sheet that eventually provided investors with a concrete indication that the company’s shares were substantially overvalued.

Late last year, instead of deploying its capital in the construction of new manufacturing or distribution centers, management proposed to buy back 40% of the company’s ordinary shares.

The capital reduction, which was approved by shareholders in December, was an admission that management didn’t see great opportunities for expansion. Cadbury Nigeria essentially revealed that its growth prospects are minimal. So, instead of wasting its cash pile on fruitless pursuits, Moskofian and his team opted to return it to shareholders.

The company’s modest outlook is bolstered by the company’s revenue growth (or lack thereof) in recent years. Revenue actually dropped in 2012, and, in 2013, it rose just 7%, a rate lower than inflation.

The company was boosting earnings by cutting costs, not by selling more TomToms.

This would be just fine if it weren’t for the fact that, even after a 22% drop from its high water mark, the stock still trades for more than 29x its 2013 earnings and more than 7x its post-buyback book value. Those are multiples typically reserved for small, fast-growing technology companies – not fifty-year-old candy manufacturers with stale sales growth.

Price Check

So, what is a fair price for Cadbury Nigeria?

Considering the long-term growth expectations for the Nigerian economy, the company’s excellent management team, and its new capital structure, I believe the stock is worth roughly NGN61.50 per share. That’s 28% lower than its current market value.

Nigeria investors should probably look elsewhere for nourishment.

[Disclosure: I have no position or beneficial interest in shares of Cadbury Nigeria, but I’d still like to get my hands on some Bournvita!]

Your Turn

What’s your take on Cadbury Nigeria? Do I have things all wrong? Let’s hear your thoughts in the comments!

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Nigeria’s 10 Best Stocks of 2013

It was a remarkable year for the Naija exchange. The All Share Index surged 44.6% in US dollar terms thanks to impressive profit growth and a raft of market reforms.

Let’s take a closer look at the year’s best performers.

It was a remarkable year for the Nigerian Stock Exchange.

The All Share Index surged 44.6% in US dollar terms thanks to impressive profit growth and a raft of market reforms.

Let’s take a closer look at the year’s best performers.

10. MRS Oil

+106.7% (Local Currency: +117.7%)

If recent results from this service station operator are any indication, the pace of Nigerian life accelerated dramatically in 2013. Its third quarter earnings statement shows sales of petrol increased 36% over the prior year.

MRS, which owns 416 filling stations, was forced to slash its dividend in 2012 due to thinning margins and a big foreign exchange loss. But now, with sales up and costs in check, investors are banking on a much larger 2013 payout.

9. Wema Bank

+115.2% (Local Currency: +120.4%)

This smallish regional bank gave investors two big things to cheer about in 2013.

First, it returned to profitability by cleaning up its lending book, driving the non-performing loan ratio down to just 3% from a level of 14% one year earlier.

Second, it raised $250 million in additional capital, making it eligible to obtain a national banking license. The company now intends to expand nationwide from its base in the west of the country.

8. Union Dicon Salt
Nigerian Stock Exchange
Photo by S. Remeika

+125.4% (Local Currency: +130.9%)

A resurrection story.

Until last year, this salt-maker’s shares were so dormant that the Nigerian Stock Exchange was on the verge of having them de-listed.

And share illiquidity was far from its biggest problem. In their review of the company’s 2011 financial statement, auditors noted that the company reported a big earnings loss and that its current liabilities exceeded current assets by roughly $6 million. They questioned whether Union Dicon was viable as a going concern. The company has not turned a profit in many years.

Fast forward to November 2013 and enter CBO Capital. The Nigerian investment firm injected capital sufficient to give it a controlling stake in the business, valuing the company at N14.00 per share. It’s now up to shareholders to decide whether to get while getting is good, or to stick around for the turnaround attempt.

7. Conoil

+127.0% (Local Currency: +132.5%)

Nigeria’s oldest and largest domestic filling station operator, Conoil also distributes aviation fuel, asphalt, and propane.

After reporting a drop in earnings in 2012, management slashed admin and finance charges to report 329% earnings growth through the first three quarters of 2013.

Where will growth come from next? Billionaire CEO Mike Adenuga says the company will roll out more filling stations and try to capture market share in the unregulated, high-margin engine lubricants industry.

6. Fidson Healthcare

+136.7% (Local Currency: +142.5%)

Fidson makes more than 200 pharmaceuticals and consumer goods, from antacids to chemotherapy drugs. It’s one of five Nigerian drug companies approved by the World Health Organization to distribute drugs for the treatment of HIV, malaria, and tuberculosis.

In spite of intense competition from counterfeits and legitimate imports from China and India, Fidson managed to increase earnings 272% in 2012 and by 61% through the first nine months of 2013.

The completion of a new, state-of-the-art factory in 2013 and the rollout of a new dietary supplement should lead to healthy sales and margin growth over the near term.

5. Livestock Feeds

+185.5% (Local Currency: +192.4%)

Nothing real glamorous about this business. It does what it says it does, manufactures and distributes feed for cows, pigs, turkeys, chickens, ducks, rabbits. You name the critter, chances are Livestock Feeds makes some sort of mash for them.

The company’s earnings were actually down 7% through the first three quarters of the year. But the shares popped when Nigerian conglomerate UACN acquired a controlling stake of the company in April. The move gave UACN a 32% share of the country’s animal feed market.

4. Champion Breweries

+278.0% (Local Currency: +287.2%)

Champion Breweries’ financial statements aren’t pretty. There’s red ink all over the place.

Not only did the company report a loss both in 2012 and through the first three quarters of this year, its balance sheet shows the companies liabilities exceed its assets.

Not exactly the stuff that superstar stocks are made of.

Nevertheless, the company appears on this list of top gainers because Heineken acquired a majority stake in the brewer in June. Thus, the brewer is in for a major restructuring, and shareholders seem to have decided that the glass looks half full.

3. Transnational Corporation of Nigeria

+288.9% (Local Currency: +298.4%)

Transcorp has put together quite the run. Its share price not only quadrupled in 2013, but it nearly doubled in 2012.

So, what’s behind the conglomerate’s stellar share performance?

Solid sales and earnings growth helped, but the announcement that it would acquire a power plant from the federal government is what really propelled the price gain.

The Ughelli Power Plant has a generating capacity of 1000MW, which is enough to power one million American homes. But due to disrepair, it currently produces just a third of that amount. Transcorp plans to rectify this and expand total capacity by 50%. CEO Tony Elumelu believes the investment will help the company triple its profit next year.

2. Evans Medical

+374.0% (Local Currency: +385.5%)

Another one of Nigeria’s largest pharmaceuticals manufacturers, Evans Medical makes everything from calamine lotion to HIV anti retrovirals. It also operates a chain of 30 pharmacies.

The company doubled earnings per share in 2012, but, as far as I can tell, has not updated the market on its financial performance since then.

Shareholders, did however, approve a NGN3.5 billion ($22 million) rights offering in August. The proceeds would finance working capital requirements.

In spite of the stock’s huge run-up, the shares still appear reasonably priced. The company is cash flow positive and the shares trade for less than 10x 2012’s earnings.

1. Forte Oil

+959.3% (Local Currency: +985.1%)

Nigeria’s best performer by a long shot, Forte Oil owns a network of filling stations in Nigeria and Ghana. It’s a fast-growing, high-octane business. In the first three quarters of 2013 earnings spiked 316% on a 29% sales increase. Billionaire CEO Femi Otedola plans to expand the business to Liberia and Sierra Leone within the next three years.

But this isn’t the main reason that shareholders scored a ten-bagger with the stock this year.

Like Transcorp, the company recently acquired a 414MW power plant from the Nigerian government, a move that makes the company one of the few ways to invest directly in the country’s power sector. Management believes revenue from electricity sales will see Forte triple its profits in 2014.

To top things off, the company is also bidding for some of Shell’s offshore oilfields and is considering the construction of a much-needed oil refinery.

Your Turn

Which Nigerian stocks will make investors wealthy in 2014? Share your top picks with us in the comments!

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