13 investment themes for 2012(Photo: Thinkstock)
Story Highlights
- Get long on global recovery; seek stocks with bulk of earnings from abroad
- Buy into domestic energy, garbage, manufacturing
- Don’t give up on dividend-payers; avoid stocks with regulatory headwinds
1. Fill up on domestic energy shares.
The search for new energy sources in the USA that can heat homes, fuel cars and power factories is a hot growth industry. The nation is aggressively working to reduce its dependence on foreign energy sources, says Ann Miletti of Wells Fargo Advantage Funds. In a recent report, ExxonMobil said the U.S. will be a net energy exporter by 2025. Says Miletti, “I like exploration and production companies in 2013.”
2. Treat garbage as treasure trove.
Hauling waste is more smelly than sexy, but it could boost your bottom line, Miletti says. Garbage — a growth business? The sector is beaten down and smells of opportunity. “It’s a quasi housing growth play,” she says. “It’s not a Lowe’s, it’s not a home builder, but waste haulers like Republic Services could benefit from any increase in volume.”
3. Circle back to China.
U.S. stocks exposed to China did not fare well in 2012. But the world’s second-biggest economy is regaining its strength and could see growth pick up next year. These “cheap” stocks tied to China might catch a new bid and climb higher, says Adam Parker of Morgan Stanley. The best way to play it? Buy shares of U.S. industrial companies that do a lot of business with China.
“We want to increase our exposure to China,” says Parker. “U.S. stocks that have a lot of Chinese exposure lagged in 2012 and are, therefore, quite cheap based on forward earnings estimates vs. companies with no China exposure.”
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4. Don’t give up on dividend-payers.
Despite fears that the tax rate on dividends, now 15%, could surge to 43.4% for the nation’s top earners if Congress doesn’t extend the Bush-era tax cuts, the odds are low of that happening, says Parker. Don’t forget it’s still a low-yield world, with cash offering a zero return and the average stock offering a fatter yield than 10-year U.S. Treasuries.
“We are overweight companies that have high dividends or dividend growth,” Parker says. “They are compelling investments when you consider the low bond yields that persist due to the Fed’s monetary policy,” which is designed to keep interest rates low.
5. Cozy up to companies with free cash flow.
In an uncertain world, companies that have lots of cash reserves, and also generate enough cash to have money left after covering their costs, have two things investors love: “flexibility” and “freedom,” says Bob Doll of Nuveen Asset Management. “In an uncertain world when you have free cash flow, you can raise your dividend, you can buy back your stock, you can hire a worker, you can expand your business, you can buy the company down the street,” says Doll.
6. Seek stocks with the bulk of earnings from abroad.
In recent years, the U.S. has been viewed as the best house on a not-so-good block. But Wall Street is now expecting the relative change in year-over-year economic growth in 2013 to be stronger outside the U.S. than at home. Says Doll, “You want stocks that generate more of their earnings outside of the U.S. than they do inside the U.S., which is a very different picture than what worked in 2012.”
7. Beware of housing stock correction.
The housing market is improving. Sales of homes, both new and existing, are at their highest levels in years. Prices are rising again, too. But housing stocks have had a great run in 2012, and they could be vulnerable to sharp drops, warns Dan Chung of Alger, who chose home-improvement retailer Lowe’s as one of his top stock picks in last year’s Investment Roundtable[3].
“I’ve been struggling as to whether to stay on the housing bet,” Chung says. “Near term, I am somewhat negative on housing stocks, although I would like to have some exposure. Lowe’s was one of my picks last year, and it’s up 36%. My advice to readers that own Lowe’s (and other strong-performing housing stocks) is: I would not dump it. But be cautious. If there is a correction, Lowe’s will probably correct fairly hard, given where it is at.”
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ROUNDTABLE: Top stock picks for 2012[5]
8. Score profits with fast-growing Internet names.
Sure, economic growth in the U.S. is subpar. But in a slow-growth, muddle-through world, there are subsectors of the economy that will grow, or at least have a better chance of growing, their profits and businesses no matter what, says Chung. “The Internet sector is clearly one of them,” he says. LinkedIn, the Internet job search site, is one of his top picks for 2013.
9. Avoid stocks with regulatory headwinds.
With political policy uncertainty at unprecedented levels, some stocks are likely to see their progress stalled by laws and regulations that crimp their profit-making abilities. An example is the energy space, where bullishness is high, but policy is “really uncertain,” says Chung. Stiffer regulations on fracking, for example, are expected, he says. “We are very bullish long term on the potential for the U.S. energy industry, but policy there is really uncertain,” Chung says.
10. Get long on global recovery.
Betting on economic malaise might seem timely, given all the gloomy business news. But a more profitable trade in 2013 will likely be a bet on a global economic recovery, says Thomas Lee of JPMorgan Chase. “Focus on metals and mining, as well as the energy sector,” Lee says. “Those could be the sleeper hits.”
11. Hop on housing recovery.
A healthier housing market means more spending, more jobs, more robust economic activity and more purchases of things that last a long time, such as refrigerators and plant equipment. “The housing recovery,” says Lee, “is going to be the ‘point man’ for a bigger durable goods recovery. The second half of the year is also when you will see a much more visible recovery in durable goods spending, construction activity and capital spending.”
12. Buy into U.S. manufacturing renaissance.
America is getting serious again about making stuff, and that bodes well for stocks, says Liz Ann Sonders of Charles Schwab. U.S. manufacturers are improving their competitiveness, and the domestic energy scene is on the rise. “It’s a big story that is just starting to capture the broad mind-set,” Sonders says. “We are going to look back five years from now and realize we were in a transformation in terms of what the drivers of growth are inside of our economy. We’re actually going to be producing things and exporting things again.”
13. Diversify bond holdings away from U.S. Treasuries.
Many on Wall Street have been calling for the bubble in U.S. Treasury bonds to burst. Yields on government bonds remain near record lows, which means investors could lose money if the price of bonds drop and yields rise. To reduce risk, therefore, investors should diversity by investing in many different kinds of bonds, Sonders advises. “There are other places in the fixed-income space that you can get exposure,” says Sonders. “High-quality corporate bonds, emerging-market bonds and municipal bonds look pretty attractive.”
References
- ^ http://www.usatoday.com/story/money/markets/2012/12/17/usa-today-2013-investment-roundtable-fiscal-cliff/1774071/ (www.usatoday.com)
- ^ http://www.usatoday.com/story/money/markets/2012/12/17/usa-today-2013-investment-roundtable-bonds/1774015/ (www.usatoday.com)
- ^ http://usatoday30.usatoday.com/money/perfi/stocks/story/2011-12-15/investment-roundtable-2012-stock-tips/51992498/1 (usatoday30.usatoday.com)
- ^ http://www.usatoday.com/story/money/markets/2012/12/17/usa-today-2013-investment-roundtable-outlook/1767695/ (www.usatoday.com)
- ^ http://www.usatoday.com/story/money/markets/2012/12/17/usa-today-2013-investment-roundtable-stock-picks/1773943/ (www.usatoday.com)
