The small and mid-cap sectors are showing a lot of promise in 2013, so now is the time to start building this piece of your portfolio with the strongest ones out there, notes Chloe Lutts of Dick Davis Investment Digest.
2013 is off to a good start, market-wise. The major indexes have all held the big gains they made on December 31 and January 2 (the latter has been dubbed the Fiscal Cliff relief rally). In most cases, that puts them right around their multi-year highs reached in September-October.
Yet investors are still pessimistic, and analysts are emphasizing all the issues Washington still has to work out (spending cuts and the debt ceiling chief among them). I haven't seen a single magazine cover (an anecdotal but useful contrarian indicator) trumpeting the market's highs.
The market is doing well, and sentiment is lousy: that's the perfect environment for further market gains. To take advantage, you'll want to be in the market's strongest stocks. Right now, that means small- and mid-cap growth and momentum names.
The Russell 2000 (full of small stocks) and S&P 400 Midcap index are both outperforming the broader market indexes right now, showing that those are good places to be. More specifically, you want to be in small- and mid-cap stocks that are showing stronger action than the market, but are still unloved by the majority of investors-that means they'll still have gas in the tank.
For ideas, I looked at the last couple of issues of Investment Digest for names that have been powering ahead into the New Year. Here's what I found. In the December 5 Investment Digest, Investors Intelligence Editor John Gray pointed subscribers toward this rapidly-rising car dealership stock:
"Lithia Motors (LAD) has performed strongly this year, up 63.7%. The price chart is rising toward its all-time high of $37.15 from mid-October. Conditions are not overbought thanks to the sideways correction since that high. A new high is expected in the days ahead.
"The P&F relative chart shows long-term outperformance. There has been a slight relative pull-back over recent weeks but the uptrend is expected to soon reassert. We shall buy the car dealership operator for the Trading Portfolio. Target is to $40 and we would exit following an end-of-day close beneath $31.40."-Michael Burke and John Gray, Investors Intelligence, 12/3/12
Since then, LAD rode the Fiscal Cliff relief rally to the new highs Gray predicted (and he would probably call it a bit overbought now). But I think the stock's strong upward trend, and new highs are both great signs of further gains to come. New buyers will probably be able to get in on a dip of a point or two in the days ahead.
Our next super-strong stock also comes from the December 5 Investment Digest. This name was found by Upside Editor Richard Moroney, who wrote:
"Schweitzer-Mauduit International (SWM), a leading global supplier of products to the tobacco industry, is being upgraded to Best Buy. Core products include cigarette papers and reconstituted tobacco leaf sold to most major tobacco companies.
"Increased adoption of lower-ignition-propensity paper, which enhances safety by reducing the likelihood of accidental fire, should sustain near-term sales momentum. In addition, cost reductions via lean manufacturing initiatives should bolster profit margins.
"Armed with strong cash flow, Schweitzer is positioned for growth, particularly in Asian markets. For the 12 months ended September, cash provided by operations more than doubled to $166 million, while free cash flow surged eightfold to $125 million. For 2012, per-share earnings are expected to increase 11% to $3.62. Revenue should be flat. Next year, the consensus calls for a 10% profit increase to $3.97.
"So far this year, the stock has climbed 12% and trades near a 52-week high. But strong operating momentum and a modest valuation point to further gains. The stock, trading at only nine times estimated 2013 earnings, earns a Quadrix Value score of 88. Schweitzer, yielding 1.6%, is a top pick."-Richard J. Moroney, Upside, 12/3/12
In addition, SWM has traced out a strong and smooth multi-month uptrend since mid-October. It is now perched just below multi-year highs set back in 2010. It could take some time for the stock to overcome those levels (just below $42), but if it does, look out. You could try to buy on a small correction or wait for a breakout above $42.
Finally, in the December 19 Investment Digest, Ford Equity Research Report Editor Richard Segarra recommended this fast-growing company from the mortgage and real estate industry:
"Stewart Information Services (STC) is engaged in global title insurance and real estate services. The company provides these services to homebuyers and sellers; residential and commercial real estate personnel; mortgage lenders and servicers; title agencies and real estate attorneys; homebuilders; and US and foreign governments.
"We project that STC will strongly outperform the market over the next six to 12 months. This projection is based on our analysis of three key factors that influence common stock performance: earnings strength, relative valuation, and recent price movement.
"Earnings strength is very positive. Analyst forecasts have recently been raised. The company recently reported better than expected results. ... While Stewart Information Services' earnings have increased from 21 cents to an estimated $2.69 over the past five quarters, they have shown strong acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur.
"Relative valuation is very positive. Stewart's operating earnings yield of 9.9% ranks above 87% of the other companies in the Ford universe of stocks, indicating that it is undervalued. [Finally,] price movement is very positive. Stewart's stock price is up 158.8% in the last 12 months, [which is] very positive. This historical performance should lead to above-average price performance in the next one to three months."- Richard Segarra, CFA, Ford Equity Research Report, 11/30/12
STC had a quieter month in December, correcting gradually back to its 50-day moving average by the end of the month, but then the stock bounced back to its early-December highs on the fiscal cliff relief rally. This one might have less gas in the tank than LAD and SWM, because it had a truly roaring 2012 (so be prepared to sell if it breaks down), but it's definitely poised for more gains here.