If the fiscal cliff does deliver a buying opportunity, here are 10 stocks for putting money to work in 2013

12/28/2012 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

While we’re waiting for Congress and the President to come up with a deal to extend the Bush tax cuts, avoid automatic spending cuts, fix (again) the alternative minimum tax, keep the Social Security withholding tax break, and extend extended unemployment benefits, let’s think for a minute about what happens if there is a deal.

If sometime in the next few days or more likely at some point in January or at a worst case sometime in February, there is a deal, the financial markets get to breathe a big sigh of relief. We might even see a rally—of exactly the sort that you raised some cash for during this past week or so.

What would you look to buy? What’s a reasonable list of 10 best stocks for 2013?

The stocks part is simple I think. It’s the 2013 part that’s hard.

As in 2012, macro trends will drive the financial markets in 2013. In 2012 the year—and the markets—were defined by fears that China’s economy would slow to a hard landing, that the U.S. economy would stall or that the U.S. government would prove so dysfunctional that the country would default on its debts, and that in the EuroZone Greece, Spain, or Italy would fall into financial chaos.

When those worries moved to the top of investors minds, financial markets fell. When those worries receded and it looked like the financial world wasn’t headed off one cliff or another, financial markets rallied.

Two things should worry you as we head into 2013.

First, if you look past the worries about the U.S. fiscal cliff, investors, Wall Street, and economists are actually relatively optimistic as 2012 ends and 2013 begins. That’s the big reason that stocks—especially U.S. stocks haven’t sold off heavily on continued bad news about negotiations—or the lack thereof—on the financial cliff.  Consider this story that crossed the wires just about a week ago: Corporate earnings in China will climb by 10% in 2013, according to Russell Investments, and Goldman Sachs raised its economic forecast for China for 2013. Why is this a worry? Because some stocks and some markets are starting the year discounting a hunk of good news and that lays the foundation for disappointment. It’s important to remember that once we get past the fiscal cliff, 2013 could still turn out to be disappointing.

Second, it’s likely that the narrative for 2013, like that for 2012, isn’t going to unroll in a straight line. We’re likely to be disappointed to learn by the end of 2013 that the EuroZone “solution” for Greece doesn't work, and that the U.S. economy just can’t seem to build up enough speed to generate gobs and gobs of jobs. And to get giddy when we learn that China’s growth has reaccelerated to 8.5% and that the auto industry is back (and not just in the United States.)

So what do you do with a year like 2013? (To be sung to the tune of “How do you solve a problem like Maria?”)

I think you divide your 10 best stocks for 2013 into three parts.

First, stocks that will ride currently discernable trends—if they actually materialize as projected.

Second, stocks of companies that are creating their own trends and that might even be able to dance to their own tunes no matter what news the year brings.

Third, a few risky bets that could pay off big because expectations for these stocks are so low—in fact I’d say investors hate these stocks--going into 2013.

Shall we begin?

Stock 1: Borg Warner (BWA)

2012 was the year of the housing recovery—and the year to own housing stocks. 2013 will be the year of the auto recovery and the year to own auto stocks.

Borg Warner concentrates on delivering what carmakers need in the current market: improved fuel efficiency and lower engine emissions. Products such as turbo chargers enable smaller, more fuel-efficient engines to deliver more power. The company’s dual clutch technology improves fuel efficiency too and the National Highway Traffic Safety Administration projects that 39% of cars will use a dual clutch technology by 2015, up from 10% today. The shares have lagged as the European recession has hurt sales in that market. For 2012 the shares were up just 10.6% and 1.57% in the last three months as of December 27. I think they’re a bargain as we head into 2013.

Stock 2: Home Inns and Hotels Management (HMIN)

2013 is supposed to be a year when China continues rebalancing its economy toward consumption and domestic growth. If that actually happens, Home Inns & Hotels Management with its 1,682 hotels in 243 cities should be a major beneficiary since spending on travel is one of the fastest growing parts of the consumer economy. If, on the other hand, Chinese economic growth doesn’t rebalance but merely perks up to 8% or better, the hotel company should still do very well. Home Inns has built up a loyal customer base—with 10.6 million unique active members in its frequent guest program. And its third quarter showed a pickup in revenue—up 62% year over year—and RevPAR (revenue per available room)—up to 157 yuan in the quarter from 149 yuan in the second quarter.

Stock 3: Akamai Technologies (AKAM)

Cloud computing is a trend that you want to own a part of—Cisco Systems (CSCO) projects that global cloud traffic will make up 64% of total data center traffic by 2016, up from 29% in 2011. But how? Many of the biggest cloud-computing “companies” are actually units of larger companies rather than stand alone business. I don’t think buying Amazon.com (AMZN) to get its data center and cloud computing business makes a whole lot of sense. Akamai Technologies sells services that accelerate Internet traffic—and accelerators are especially important as cloud traffic grows and as a growing percentage of traffic consists of complex video and multimedia that needs to be streamed to users without glitches or lags. Akamai manages a network of more than 95,000 content delivery servers that are located within the “last mile” in 1,900 networks in 75 countries. The stock is cheap for a technology company at 23 times projected 2012 earnings per share and Akamai is remarkably consistent for a technology company with average annual revenue growth since 2007 near 17%Stock 4: Apple (AAPL)

Not all my picks for 2013 are riding trends. Some like Apple make their own trends. If Apple’s remarkable and maddening stock performance in 2012 demonstrated anything, it showed that this is one stock that dances to its own music. Apple shares are capable of climbing when everything else is tumbling and equally capable of plunging 25% or more (this December, for example) while the rest of the market is slowly moving ahead. For 2013 Apple has two things going for it: the stock ended 2012 in deep retreat as sentiment rather than fundamentals turned against Apple. (And sentiment on this baby can quickly go into reverse.) Apple fell from $589 on November 11 to $509 on December 14—and that’s after a plunge from $702 on September 19 to $526 on November 15. Investors sold Apple at the end of 2012 on downgrades from Wall Street analysts that cited order reductions to Apple suppliers. But curiously sellers seem not to have read all the way through these opinions. For example, the analyst at Canaccord Genuity who cut his target price to $750 from $800 (while maintaining a buy rating) wrote that reduced orders to iPhone suppliers could be because of softer that expected sales in international markets OR because of Apple’s intention to launch a new iPhone model in June. Other technology analysts, most notably Horace Dedlu on Asymco http://www.asymco.com/2012/12/06/does-s-stand-for-spring/ , have argued that Apple, having managed to launch new models of all its products in the fall, is moving to a six-month cycle from a new model every year cycle. With Apple’s stock now driven by product introductions, this would be a huge change. I find the argument convincing. You should read it.

Stock 5: Cheniere Energy (LNG)

Nothing much matters to Cheniere, the first and only company so far with a license to export liquefied natural gas from the United States, besides the date at which it will complete its Sabine Pass export terminal. The company remains on track to begin exporting liquefied natural gas in 2015. But the number of trains—the systems that turn gas into a liquid—keeps rising with France’s Total (TOT) recently signing on for liquefied gas from a fifth train. The economics are compelling. Natural gas in the United States, thanks to the natural gas from shale boom, sold for $3.42 per million BTUs (British Thermal Units) on December 27. In Japan liquefied natural gas sells for $16 to $17 per million BTUs. Projections are that exports from the United States would bring gas prices in Japan down to $10 per million BTUs. That’s a huge reduction in cost at a time when Japan is looking for an alternative to nuclear power. But it’s also a very good price for U.S. natural gas producers—and for Cheniere.

Stock 6: Marathon Petroleum (MPC)

A river of oil from the oil shale boom in North Dakota and Texas is gradually making its way to the country’s Gulf Coast refineries as pipelines and other infrastructure is built out. The arrival of that oil from resources like Eagle Ford and the Bakken will mean rising margins at Gulf Coast refineries as they begin their work with cheaper oil. Marathon Petroleum will get a big hunk of that refining business—and those higher refining margins—and seems determined to gather in even more with its purchase in October of BP’s (BP) Texas City refinery. Texas City gives Marathon a refinery close to the growing crude production from Eagle Ford and the Permian Basin. What I like about this deal—and Marathon Petroleum’s positioning—is that as the infrastructure build out continues the company will be able to grow margins and earnings by simply substituting cheaper mid-continent oil for more expensive imported oil.

Stock 7: First Quantum Minerals (FM.TO)

If First Quantum succeeds in its bid to acquire Inmet Mining (IMN.TO) and its Cobre Panama copper resources, First Quantum will jump from the No. 13 copper producer in the world to membership in the top 5. Notice that “if.” There’s more risk here than in Cheniere Energy or Marathon Petroleum. First Quantum recently raised its bid for Inmet but there’s no guarantee that Inmet will agree to the deal or that some other mining company won’t snatch the prize away from First Quantum. And quite a prize it is: Cobre Panama is projected to be the second largest undeveloped copper resource in the world. According to Inmet the resource, once developed, would produce 266,000 tons of copper a year. I think First Quantum will ultimately succeed—the company has the financial resources to raise its bid again and I think some of Inmet’s big institutional owners would love to find an exit at a solid profit.

Stock 8: Whitehaven Coal (WHC.AX)

Okay, so First Quantum is a bit of a gamble. But the company, even without Inmet, is a major miner of copper, gold, and nickel and the shares are up 13.81% in the last 12-months as of December 27. My last three stocks are hated. I mean HATED. Which, of course, means that they’ve got tremendous upside if market sentiment simply moves from “hated” to “despised.” My first pick is Australian coal producer Whitehaven Coal (WHC.AX.) The only thing more hated than a coal stock—on falling coal prices and falling demand from everywhere but especially China—is an Australian coal stock—where you can add rising production costs to the list of negatives. Whitehaven Coal, which owns seven coal mines (and important railroad infrastructure) in New South Wales freaked out the market last October when it said that IF coal prices stayed at current low levels, EBITDA (earnings before interest, taxes, depreciation, and amortization) would come in at just A$50 million for 2013. That was a shock since the analyst consensus for 2013 EBITDA was then looking for A$185 million. Since then, though, prices of Australian thermal coal have shown signs of climbing off the floor with reports of increased growth from China. Coal still sells for 27% less than it did a year ago but the November 30 price of $83.01 per metric ton is an improvement from $81.85 on October 31. Whitehaven shares have climbed from a November 16 low of $2.74 to $3.54 on December 27, a 29.2% gain. (The shares are still down 22.8% for 2012.) The stock’s one-year high is $5.62.

Stock 9: Yingli Green Energy (YGE)

Yipes! a Chinese solar stock? Everyone knows that the market for solar cells has collapsed and that China’s solar sector is awash in unused capacity and desperate companies barely clinging to life. Exactly. Everybody knows. So what does it take to move a stock like Yingli Green Energy? Not very much. Some positive speculation that Yingli and competitor Trina Solar (TSL) are well-financed enough (Yingli can sustain the 2013 cash burn rate for four years, Credit Suisse calculates) to be among the survivors in the sector; the news that China’s State Council would encourage mergers and acquisitions (and maybe even a bankruptcy) in an effort to reduce capacity in the sector (and ban local government financing of the sort that has kept SunTech Power (STP) and LDK Solar (LDK) in business); and a high-profile target for increased buying of solar equipment, with government funding, by China’s power companies.  That last has been especially important to Yingli Green Energy since the company has been named as the recipient of orders under the program. Shares of Yingli Green energy have just about doubled from a November 21 low of $1.28 to a December 19 price of $2.35. The 52-week high is $6.27.

Stock 10: Arcos Dorados (ARCO)

If you’re the world’s largest McDonald’s franchisee, you expect to get hit when McDonald’s (MCD) reports slowing growth (1.9% in the third quarter) in same-store sales. And when you're the largest operator of quick service restaurants in Latin America, you expect to take a hit when growth slows in Brazil, one of your key markets. And when both happen at once, your shares plunge. Which is a pretty good description of what happened to shares of Arcos Dorados this fall when they went from $15.73 on October 18 to $10.73 on November 15, a drop of 31.8%. Since then the shares have been slowly moving back up—the shares have climbed 10.3% from November 15 through the close on December 27. Why the recovery? Financial markets are looking ahead to easier year-to-year comparisons on growth that will kick in for McDonald’s and Arcos Dorados after March. The recent gain on shares of Arcos Dorados, though, outpaces the gain for McDonald’s in that period because the general improvement on global economic growth that’s likely with improved growth prospects in China will have more impact in the Latin American economies where Arco Dorados operates than in the United States, which is the source of 32% of McDonald’s sales. The World Bank just raised its 2013 growth forecast for East Asia (to 7.5% from 7.2%) and for China (to 8.4% from 8.1%.) I think that’s positive news for Brazil’s big commodity exporters. And for Brazil’s economy as a whole. The World Bank is now projecting 4.2% growth for Brazil in 2013, up from a projected 2.9% in 2012. The 52-week high for shares of Arcos Dorados is $22.90.

I’m not sure that I’d buy any of these shares before the fiscal cliff mess is resolved. There’s just too much chance of a temporary panic—otherwise know as a buying opportunity (if you’re sitting on some cash.) If we get one of those, of course, I’d be looking to buy. This list is a place to start—but as always I’d much rather you used it as a prompt for your own thoughts than simply taking my opinion as gospel.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple, Arcos Dorados, Cheniere Energy, Home Inns & Hotels Management, and Whitehaven Coal as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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