A few new names are on the watch list for MoneyShow's Jim Jubak, also of Jubak's Picks, as we enter the summer months with an eye on the next rally.
Yes, Virginia, there will be a second half to 2013. And yes, the current sell-off will end.
US stocks will find a bottom at the April low of 1,542 on the S&P 500 or at the February low of 1,488. I'd vote for either the February low or the 200-day moving average at 1,446. With the index at 1,592 at the close on June 21, 1,446 is another 9.2% lower, and would bring the total drop from the May 17 high to 13.3%.
Even the carnage in emerging-market stocks will end. The drop in the iShares MSCI Emerging Markets Index (EEM) exchange traded fund has fallen 14.8% from the May 7 high. That might be hard to believe, since the fall in emerging markets has been so hard and so painful. The index is down 14.8% from its high in May, versus a drop of 4.6% from the May 21 high for the S&P 500.
Check out my recent column for my take on the timing...but at some point in the second half (July or August for Japanese stocks, September for US stocks, and sometime after that for other markets is a reasonable projection), this drop goes from scare to opportunity.
What do you want to buy, then? Here are my ten choices for stocks for the second half.
Cheniere Energy (LNG)
This was the first company to get a license to export liquefied natural gas from the United States, and it is on schedule to start shipping gas away in 2015.
Thanks to the boom in natural gas from shale in the mid-continent, US natural gas sold on June 21 for $3.77 per million BTUs (British thermal units) in the United States, but the same amount of liquefied natural gas sold for $9.58 in the United Kingdom, $14.10 in China, and $14.50 in Japan.
A second export project recently got a license in the United States, but that project isn't scheduled to start exporting gas until 2017. And, the thing I like about Cheniere in the current economic environment is that the stock should go up—without any need for higher global economic growth to drive up natural gas demand or prices—as Cheniere gets closer and closer to first ship date.
For this stock, the driver is pretty much internal: As long as the project stays on schedule, the stock should move up.
The shares were down 16.7% as of the close on June 21 from the May 17 high. This is the only stock in this list of ten that I'd buy now. And in fact, I am adding it to my Jubak's Picks portfolio.
Statoil (STO)
This company has one of the strongest production pipelines of any of the international oil majors, with new finds in home waters off Norway, in deepwater off the coast of Brazil, in the Gulf of Mexico, and off the Newfoundland coast.
In addition, the company has growing production from its acquisitions in US oil and natural gas shale geologies. Even before the stock's current drop, however, Statoil was a wait-for-2014 story. That's the year that capital spending starts to fall and production starts to rise.
The recent market drop has only added another leg to a decline, in that has taken the New York-traded ADRs down 22.3% from the February 1 high through the close on June 21. The ADRs are down 12.8% from May 8 through June 21.
At the current price you get paid reasonably well to wait for 2014—the yield on the ADRs is 5.46%. Statoil is a member of my Jubak's Picks portfolio.
Industrias Bachoco (IBA)
I recently named Mexico's Industrias Bachoco (which also trades as BACHOCOB.MM in Mexico City) one of my 10 food stocks for a post-Smithfield world.
Industrias Bachoco is Mexico's largest poultry producer (and its No. 2 producer of eggs) with a 35% share of the Mexican chicken market and a 10% share of the egg market. In 2011, the company bought OK Industries, a US chicken producer, to increase its market share in the United States.
In the first quarter of 2013, revenue grew by 7%, but operating margins fell to 7.6% (from 8.3% in the first quarter of 2012) as the company took a one-time charge as a result of an outbreak of avian flu (influenza H7N3). Net income fell 3.6%.
Mexican stocks have sold off along with other emerging markets. And the peso, one of the world's stronger currencies before worries about Federal Reserve policy heated up, has sold off.
The New York-traded ADRs of Industrials Bachoco are down 11.2% from their May 23 high as of the close on June 21. |pagebreak|
Cemex (CX)
The decline in Cemex shares in this market sell-off has closely tracked the fall in US housing stocks.
Cemex is down 20.9% from its May 15 high to the close on June 21. That's in the same ballpark as the 18% drop in shares of US homebuilder Lennar (LEN).
Of course, as a Mexican company, Cemex took more hits from the drop in emerging markets and the peso. But still, in the second half of 2013 the cement maker's fortunes are tied closely to the US economy.
If you think that the Federal Reserve will taper off its $85 billion a month in purchases of Treasuries and mortgage-backed securities fast enough to torpedo the recovery in the US housing sector, then avoid Cemex.
If, on the other hand, you think The Taper will be more gradual than the market seems to be assuming at the moment, and that US economic growth will be decent enough to keep the sector going, then Cemex is a buy on:
- higher US demand for cement
- lower energy costs to run the company's cement plants in Mexico and in the United States
- and a somewhat weaker peso against the dollar that will give Cemex a boost on pricing in the United States and on earnings back home
The ADRs are a member of my Jubak Picks 50 long-term portfolio.
Apple (AAPL)
This is a bet on the refresh cycle for the company's iPhones, iPads, and operating systems.
Coming this fall: a new iPhone (probably), a new iPad (maybe), a new operating system for the company's Macintosh computers (certainly), iTunes Radio (certainly), and the new iOS7 operating system for mobile devices (certainly). All this is likely to mean a surge in growth for Apple.
The stock trades at something like eight times projected earnings for calendar year 2014 (or six times if you subtract cash). Unless you believe the new products will either flop or face big-time delays, this is a very cheap stock.
Apple is a member of my Jubak's Picks portfolio.
Yamana Gold (AUY)
This stock is a deeply, deeply contrarian play right now. Any bet on gold or gold miners is, frankly.
The US dollar is climbing—bad for gold and all commodity and commodity stocks—and it's hard to find a whiff of inflation anywhere in the US economy. If these trends continue, you won't be happy owning gold, although probably not as unhappy as you were in the first half of 2013.
As of the close of trading on June 21, the SPDR Gold Shares (GLD) exchange traded fund, which tracks the price of gold bullion, was down 27.9% from its high on October 4, 2012, and down 22.1% from the beginning of 2013.
On the other hand, the dollar could sink (and gold rally) if the Fed doesn't get the 3% to 3.5% economic growth its members were projecting as of its June 19 meeting, and it has to call off plans to taper its purchasing in 2013.
If inflation, as measured by the PCE index (Purchasing Consumption Expenditures), does stay near its current annual rate of less than 1%, then gold could rally.
This is a hedge. (I prefer gold mining stocks to gold itself in this situation, since gold mining stocks give you more leverage to the price of gold.) I wouldn't buy it now, but would wait until I saw some signs that the Fed was wrong on growth and/or inflation, and that the dollar was weakening.
Yamana Gold is a member of my Jubak's Picks portfolio.
Cummins (CMI)
This stock dropped 7.1% from its May 31 high to the close on June 21. The story now is exactly what the story was then—the stock is just 7% cheaper.
Cummins continues to invest in technology that enables it to gain market share. We can see an increase in sales across the truck and truck engine market, as truck owners upgrade to less polluting trucks (because government regulation around the world tell them they have to) and to more fuel-efficient trucks (because their own bottom lines tell them it would be profitable to do so).
Cummins has also been a pioneer in getting natural gas-powered truck engines to market. The company's heavy-duty truck engine using natural gas went on sale this year, and its medium-duty engine for vehicles such as school buses is scheduled for 2015.
The stock has been very predictable in its price moves in the last six months or so, topping out at $120 and bottoming near $105. I'd be happy to buy at $105 a share on this drop. (Cummins is a member of my long-term Jubak Picks 50 portfolio.) |Pagebreak|
Keppel (KPELY)
This company has three major businesses with favorable near- and long-term trends.
First, the Singapore company is the largest builder of oil rigs—and with oil exploration taking companies ever further afield (or a-ocean, actually) in the search for oil, I think the demand for new rigs with the latest in operating and safety technology will continue to grow.
Second, the company is a leader in the desalination of water. Singapore, which doesn't have much in the way of water resources itself, has pushed the technology hard to assure its own water supplies. Now Singapore companies such as Keppel are exporting that technology from the Middle East to China.
Third, the company is a leader in garbage-to-energy technology. What's most promising here is a wave of investment from private-equity companies, largely in Asia, that find the steady cash flows from garbage extremely attractive in the current low yield environment.
This enthusiasm means that waste companies will have plenty of cash for building new plants that can turn garbage into income payouts. Keppel's New York-traded ADRs pay a 5.3% dividend. (Singapore's withholding rate on overseas investors is 0%.)
The volume at around 100,000 units a day on average isn't huge, but seems enough to give reasonable liquidity for an entry and exit. (Keppel also trades in Singapore under the symbol KEP with much greater volume.) The ADRs have dropped 8.7% from their high on May 15 to the close on June 21.
Abbott Laboratories (ABT)
Here's another of the 10 foods stocks I recently recommended. Even before the shares fell 7.7% from their May 28 high to the close on June 21, this was the closest thing in the infant-nutritional space I could find to a value play.
Nutritionals made up about 30% of Abbott's sales, on a pro forma basis, after the breakup of the company into two businesses. (The pharmaceuticals business was spun off into AbbVie (ABBV).)
The nutritionals business turned in 9% sales growth in the first quarter of 2013, but even with 45% of sales coming from emerging markets, Abbott's margins in that segment trail its competitors. Management's goal is to raise operating margins in the nutritionals unit by 5 full percentage points by 2015.
That, plus a companywide goal of raising emerging-market sales to 50% of total sales (from 30% now) by 2015, should help fix the company's extremely low return on invested capital of just 10.2% for the last five years.
Abbott Laboratories is a member of my Jubak's Picks portfolio.
DaVita HealthCare Partners (DVA)
This play has the kind of steady, predictable growth that attracts an investor such Warren Buffett's Berkshire Hathaway (BRK-B), which owns 14% of DaVita's public shares as of the latest regulatory filing. And I have to say, that model is very appealing in the current market and economy.
DaVita, a member of my Jubak's Picks portfolio, provides dialysis services for diabetics. An aging US population and long-term trends toward obesity in the US population, unfortunately, pretty much guarantee mid-single-digit growth in the market for dialysis services.
DaVita also has growth potential outside the United States. As of the end of 2012, less than 2% of its dialysis centers were outside the United States.
DaVita shares have pretty much tracked the market decline, falling by 5.9% from the May 10 high through the June 21 close. The Berkshire stake gives the stock a solid base here, and I'd expect DaVita to be among the least volatile stocks in the US market on any continuation of the current downturn.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Apple, Cheniere, DaVita, Industrias Bachoco, Keppel, Statoil, and Yamana Gold as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund's portfolio here.
