Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
My two-part 10 best stock picks for 2012--not an easy year to navigate
12/20/2011 9:30 pm EST
It’s almost like 2012 will be two separate years.
The first half of the year, I wrote on December 12, will look a lot like the last half of 2012 with head-spinning volatility and a full calendar of negative news that will overwhelm any good news from individual companies. Even good stocks will go down on the negative big picture news in the first half of 2012, much as they did in the second half of 2011.
The second half of the year will be much different. The global economy may not be racing along like the Empire Builder gaining speed east down the Continental Divide out of Essex Junction, Montana, but the big uncertainties for the year will be behind us. We’ll know how fast China and Brazil are growing, how deep the EuroZone recession will be, and how well U.S. economic growth is holding up. I think growth and modest risk will be back in favor and you’ll want to be in the shares of individual companies—and in individual stock markets—with more growth in their fortunes. (For a more detailed look at the two halves of 2012 see my post http://jubakpicks.com/2011/12/13/oh-joy-it-looks-like-the-first-half-of-2012-will-be-a-continuation-of-the-last-half-of-2011-heres-how-to-navigate-the-uncertainty/)
So if the two halves of 2012 are going to be so different, why not make up two best stocks lists for 2012, one for each half of the year and each attuned to the very different requirements for the two halves of the year?
List #1 for the first half of 2012: Goal is capital preservation with a bit of income.
The goal in the first half of the year is to preserve capital—so you have plenty of cash to deploy in the second half of the year. The risk free ways to do that would be to stuff cash under your mattress (inflation would erode it by one percent or so in six months) or buy short-term Treasuries and hold them to maturity (but given the extremely low yield that doesn’t seem worth the transaction costs in time if nothing else)
The challenge is finding a little bit of extra yield—or maybe a bit of yield with some appreciation potential from a “special situation”—without taking on much risk during a period when risk isn’t likely to pay. Be careful when you think about snapping up such traditional safe havens as Kraft Foods (KFT) or McDonald’s (MCD). Many consumer companies have a big exposure to Europe and could be looking at an earnings disappointment as European economies slow.
Some of my Dividend Income portfolio picks http://jubakpicks.com/ fit the bill—although some of them have more risk than I’d suggest to you for the first half of 2012. So I’ll start there and then build on that.
- Abbott Laboratories (ABT) is splitting into two companies to “unlock value for shareholders” in January 2013. That probably caps appreciation in the stock but it also should put a floor under the shares since existing shareholders will be inclined to hold until the event. Add that a big hunk of Abbott’s revenues come from its faster growing nutritional business, making this one of the most balanced of the big drug companies, and I think this is a very low risk way to collect a 3.4% yield. (Abbott is a member of my Dividend portfolio.)
- ONEOK Partners (OKS). Nothing like being in the right place with the right pipeline capacity. ONEOK’s system is a good match with the increasing volumes of natural gas liquids (as opposed to natural gas gases) being produced in the shale boom in the U.S. Into 2013 there’s a shortage of natural gas liquid pipeline capacity in the region that guarantees that ONEOK’s system will be filled at solid prices. The company recently raised its estimate of distributable cash flow for 2011 to $850 million to $880 million from an earlier projection of $735 million to $760 million. That the kind of growth in payout that an investor in a master limited partnership is looking for. The units pay a dividend of 4.1% right now and with the increase in distributions either the unit price or the yield is headed upwards. (This is another member of my Dividend portfolio.)
- Western Gas Partners (WES) is a master limited partnership formed in 2008 with assets spun off by Anadarko Petroleum (APC), which remains a major investor. Beginning with six gathering systems and a transmission line in Texas, the Rockies, and the Mid-Continent when it went public, the partnership has added assets such as a gathering system in the Powder River Basin that have increased the natural gas liquids exposure of the system. Almost all of Western Gas Partners revenue comes from long-term fee-based and fixed-price contracts so the partnership’s cash flow is extremely stable. The units current yield is about 4.1%. The partnership is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/
- US Bancorp (USB). What is a bank, a U.S. bank even, doing on this list? Take a look at the stock’s recent performance. While the most financials have staggered, shares of U.S. Bancorp have recently put in a bullish cross with the 50-day moving average moving above the 200-day moving average. Last quarter the bank was the biggest U.S. bank to show loan growth and the fact that it isn’t a big New York bank means the company has escaped the worst effects of the downturn in investment banking revenue. Management has said that the bank now meets new capital ratio requirements and won’t have to raise capital. I expect that U.S. Bancorp will petition regulators to raise its dividend from the current 50 cents a year (1.9% yield) to something more like its old payout ratio of 67% from the current level near 22%. A bump up to a 50% payout ratio would raise the stock’s dividend to $1.14 a share for a current yield of 4.4%. I think the anticipation of that increase in payout is one thing that has been driving the stock recently—and that will put a floor under the shares in the first half of 2012. U.S. Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/
- Canmarc Real Estate Investment Trust (CANNF OTC in the U.S. or CMQ-U in Toronto). Let me end with an example of the kind of special situation that I’m looking to add to my capital preservation portfolio in the first half of the year. Canmarc owns a portfolio of 84 commercial and retail properties in Canada. Office vacancies in Canada are running at about half the rate in the United States. So it’s not surprising that Canmarc has attracted a takeover bid from Cominar Real Estate Investment Trust. Canmarc’s management has rejected the bid and the market certainly thinks that a) Canmarc is now in play and b) that it will attract a bid above the C$15.30 that Cominar has offered. Canmarc units climbed to C$16.26 at the close on Friday, December 16. Analysts think Canmarc could attract a bid as high as Canadian$17.50. I wouldn’t chase this one too rabidly—remember you’re looking to collect a premium on the current price in any bidding war. But in the meantime the units do pay a yield of 5.8%.
List #2 for the second half of 2012: Goal is to gain capital appreciation from the decline in macroeconomic uncertainty.
I think this is one is simple—if the world goes the way I now think it will. The emerging markets of China and Brazil should lead the turnaround—both have been in deep bear markets—and take other emerging markets up with them—Chile, Colombia, Mexico, Indonesia, and Turkey, for instance—as well as stocks in developed markets that are linked to the fortunes of these emerging markets.
I hope you noticed the big “if” in that paragraph. I think investors will see a big decrease in uncertainty and worry that will flip the switch to “risk on” in a much more lasting way in the second half of the year. I think we’ll see an actual interest rate cut from the People’s Bank of China and a bottoming of the economic growth rate in both China and Brazil.
But it doesn’t have to work that way. The euro debt crisis is by no means resolved and I’m worried about the possibility of crises in India and Russia. (For more on my three crises for 2012 see my post http://jubakpicks.com/2011/12/09/get-ready-for-the-three-big-financial-crises-of-2012/ )
I’d play the second half turn by ear waiting to see the interest rate cut from the People’s Bank of China and good news on GDP growth in the second quarter from Brazil and China before moving whole hog from the kind of stocks in my first list to stocks like those in this second list. (Do I make myself clear? Don’t buy these picks now. Wait.) But if the year breaks like I think it will, you will want to make the transition from thinking about safety to thinking about profit around the middle of the year.
- Freeport McMoRan Copper & Gold (FCX). Copper is my favorite commodity for a second half turnaround and Freeport is my favorite copper miner. Not only is copper demand extremely sensitive to upticks in construction in particular and industrial production in general, but attempts to expand copper supply keep running into the constraints of diminishing ore grades and political uncertainty in the countries that hold the most promise for expanding supply. Freeport McMoRan is coming off a strike at its Grasberg, Indonesia mine that cut production in 2011 by about 20% so 2012 has some pretty easy comparisons to beat. In addition among global copper miners Freeport is best placed to expand production with relatively lower capital costs because Freeport can expand production at existing miners rather than having to develop greenfield mines. (Freeport McMoRan Copper and Gold is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ )
- Joy Global (JOY). Sales and orders at this global producer of mining equipment haven’t yet fallen significantly—bookings in the fourth quarter of fiscal 2011 were up 33% and sales, minus the effect of acquisitions, climbed 18%--but the market clearly fears that they might. The company issued guidance that talked of a leveling of growth due to sluggish market conditions in the first half of the year and then a return to strong growth in the second half. That has led to a 16% drop in the shares from December 9 through December 16. The downward trend in the share price sure looks like it will set up the second half of the year very nicely. (Joy Global is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com// )
- National Oilwell Varco (NOV). National Oilwell is in an analogous position to that of Joy Global. Everyone believes the long-term trend for oil drilling rig equipment is up, way up, but in the near term everyone is worried that uncertainty about growth in the global economy will lead oil companies to cut capital budgets and orders. But look at the potential at National Oilwell once that uncertainty fades. This company is the dominant rig equipment supplier. It controls 40% of the global market for drilling pipe, for example. The average age of the world’s offshore drilling fleet is 20 years—that means lots of equipment that needs to be either upgraded or replaced. Petrobras (PBR) alone says it intends of order 60 deep-water rigs in the next decade to develop its offshore oil discoveries. That’s $12 billion to $18 billion in orders, Morningstar estimates. Add in another $10 billion to $12 billion in that period, Morningstar calculates, for rig upgrades, spare parts, maintenance, and drilling consumables. (Drilling consumables were about 33% of revenue in 2010.) That’s a big market for National Oilwell to shoot at. Time will also take another uncertainty out of the stock: national oil companies like Petrobras are under severe pressure to award contracts for rigs to national supplier. It’s doubtful that these companies will be able to deliver this complex equipment on time. If during the next six months the current trend that has seen some of this work go to National Oilwell despite political pressure continues, then that will be one less piece of company specific uncertainty for the second half of 2012.
- Home Inns and Hotels Management (HMIN). The last five-year plan from the Chinese government backed up talk about the need to rebalance China’s economy from exports to domestic consumption with some real money—annual 15% increases in the minimum wage, for instance. But China’s economy is slowing and that is raising fears that consumer spending on such things as travel will turn downward too. Home Inns and Hotels Management fed into those fears by cutting revenue guidance for the fourth quarter to $156 million to $159 million when the Wall Street consensus was $176 million. But the third quarter shows you what this budget hotel chain is capable of producing. Revenue came in 9% above analyst expectations. The company has just opened its 1,000th hotel and now does business in 174 Chinese cities. In the second half of 2012 investors will again focus on the growth of the consumer economy in China and in the growth of such middle-class pursuits as travel. Home Inns and Hotels is one of the best ways to play those trends.
- Banco Santander (STD). I’ve reserved my last slot for a pick that I’m sure will be controversial. After all aren’t all European banks headed for the trash bin? Exactly why I’m picking this Spanish bank. I think what everyone knows is wrong and that the second half of 2012 will prove it. Banco Santander has been slapped with the biggest amount of new capital to raise--$20 billion—of any European bank by the European Banking Authority. But the bank should be able to meet that total without cutting its dividend. In the third quarter, for instance, Banco Santander sold off a piece of its Latin American insurance business and part of its U.S. consumer loan business for a total of $3.5 billion. So far in the fourth quarter it has sold off pieces of its Chilean subsidiary and all of its Colombian unit for another $2.75 billion. The bank has until June 30 to meet that $20 billion total—add in retained earnings and the capital from turning a convertible bond offering into equity and I think Banco Santander will make the number without much strain. Which leaves this stock as pretty much a pure option on Spain. Banco Santander holds $4.4 billion less of Spanish government debt now than it held in July but it still holds almost $50 billion. If Spain goes the way of Greece, Santander is looking huge write-downs. But I don’t think Spain is Greece. The Spanish economy is globally competitive although the country buried itself under a pile of bad real estate loans in its own real estate bubble. Those bad loans will almost certainly take down other Spanish banks—leaving the survivors to pick up market share in Spain. I think Banco Santander will be one of those survivors. (Banco Santander is a member of my Dividend Income portfolio http://jubakpicks.com/ )
During the next weeks, I’ll be working to orient my Jubak’s Picks portfolio along these lines as I get ready for an initially tough 2012.
And then, of course, in 2012 the market will pass its usual judgment on these picks.
Before then, though, I wish you and yours the best of the holiday season.
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 Abbott Laboratories, Banco Santander, Freeport McMoRan Copper and Gold, Home Inns and Hotels Management, Joy Global, and U.S. Bancorp stock mentioned in this post 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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