Stock picks for my "relatively positive" fourth quarter

10/09/2012 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

On Friday, October 5, I gave you my “relatively positive” time line of macro trends for the fourth quarter http://jubakpicks.com/2012/10/05/my-relatively-positive-macro-trend-timeline-for-the-fourth-quarter/ .

Today I’m going to give you some picks for profiting if my estimate of the 65%/35% odds in favor of a “relatively positive” macro picture for the quarter turns out to be correct, a rough guide to how to stage the implementation of those picks, and some suggestions what to do if the quarter winds up on the 35% side of my 65%/35% forecast.

I expect you to use my suggestions to mix and match with your own view of the quarter to come and with the stocks you already own to make up an individualized portfolio.  Your goals and risk tolerance are undoubtedly different than mine and your portfolio should reflect your parameters.

Let me start with my take on the U.S. economy for the quarter. In my October 5 post I wrote that the U.S. economy is a) showing signs of growth accelerating from very sluggish to moderately sluggish, and that b) the financial markets assume now that Washington won’t really drive the country off a fiscal cliff and back into recession in 2013. “Both of those assumptions could turn out to be completely wrong, but—and this is a critical piece of timing—investors aren’t likely to have evidence that they’re wrong until the very end of the quarter or until the beginning of 2013.”

If my view of the macro background for U.S. stocks in the fourth quarter is correct, I think it’s critical that you review your U.S. portfolio to make sure you have enough exposure to growth stocks so that you’d participate in any gains in the quarter. I suspect that a lot of investors have worried themselves out of the growth sector at least once in 2012 and then haven’t fully restored their exposure to this sector.

I say this with the full realization that the Standard & Poor’s 500 Stock index has rallied to near a new high and that U.S. growth stocks by and large certainly can’t be called cheap. But right now it looks to me like the market wants to move higher—and expectations that may ultimately be disappointed in 2013. I think the risks are reasonable right now in increasing your exposure to growth stocks in the traditional period for growth stocks.

I also think that you can make those risks more reasonable if you look for stocks in sectors that are likely to show strong growth even if the economy grows only modestly. That doesn’t remove all downside risk, of course, but it does improve that you’re buying above average growth and will get more return to the upside.

Where to look? I’d look at the technology sector, particularly at the members of what I call the Apple (AAPL) ecosystem. This group of stocks, as I’ll explain in my Friday, October 12 post, is set to participate in the extraordinarily sales numbers that will be rung up this quarter by Apple’s new iPhone 5. Apple certainly belongs to this group—and the stock is a very of my Jubak’s Picks portfolio http://jubakpicks.com/ --but so do Qualcomm (QCOM) and Broadcom (BRCM.) I’ll have more on the Apple ecosystem in a few days but in the meantime I’ll add Qualcomm to the Jubak’s Picks portfolio. (See my full write up on the stock with that pick.)

What else? Stocks in the housing sector. Housing is definitely putting in a bottom and shares in the sector are rallied—and likely to continue to do so on expectations of continued acceleration in sales. I’d look here at Pulte Group (PHM), a company with bigger exposure to first time buyers than either Toll Brothers (TOL) or Lennar (LEN). I’d also look at the stocks of suppliers to the housing industry. My favorite here is Lumber Liquidators (LL), a low cost flooring retailer.

Trends in the U.S. economy and market could well show some visible fundamentals in the fourth quarter to support rising stock prices. For China, the setting for my next set of macro trends, the fourth quarter will rest almost completely expectations. (Just in case you needed a reminder of that, on Monday the World Bank lowered its forecast for 2012 growth in developing East Asia, which excludes Japan and India, to 7.2% from 8.3% in 2011. That would be the slowest pace since 2011. The prospects for a rally in China rest on that forecast marking the low in growth for this cycle.)

The story behind those expectations goes like this: In China the November 8 meeting of the 18th Party Congress will finally put a new generation of leaders headed by Xi Jinping in power. Speculation in the Shanghai market before the extended Golden Week holiday that the government and the People’s Bank would strew new economic stimulus in the path of the incoming officials before the congress had pushed up prices in a very depressed Shanghai market. I’d expect another flurry of stimulus measures after the congress itself. (For more on the nature and limits of that stimulus see my post http://jubakpicks.com/ )

Which leaves me suggesting a three-phase approach to Chinese stocks in the fourth quarter. Phase 1 involves picking a few of the stocks that speculators jump on when they think that government policy has shifted toward stimulus and growth. Many of these names—Jiangxi Copper, China Coal Energy or the big property developers such as China Overseas Land and Investment only trade in Shanghai or Hong Kong. But you can buy some of them as ADRs in New York—Aluminum Corp. of China (ACH), for example, or Baidu (BIDU) or PetroChina (PTR). I don’t like any of those ADRs on the fundamentals or for anything other than the earliest stage of a speculative move after the end of last week’s Golden Week holiday.

Do you want to play in Phase 1? The speculative move, if it comes, could be extremely strong. The last time China’s stocks were as cheap as they are currently was in 2008. Then stocks rallied by 83% in a year. Now if you say that things were totally different in 2008 when a huge and hugely effective stimulus package pulled China out of the depth of the financial crisis, you’d be completely right. And I do have doubts about the ability of the more limited stimulus effort of 2012 to provide anything like the acceleration in growth that followed the 2008 package. But I do recognize that in the short-term this may not matter. Speculative belief that we’re looking at a reply of 2008 could well be enough to make the “facts” of the current stimulus package irrelevant. Personally, I find the lack of fundamental evidence and the purely speculative nature of a potential rally makes Phase 1 too risky for more than a dabble or too. Especially since I’m not sure that I’ll b able to know when to run, not walk, to the exit.

That leaves me much more interested in Phase 2. In Phase 2 the expectations for faster growth in China expand the rally to the domestic sector where Chinese companies do actually stand a good chance of delivering fundamental growth. For example, shares of Home Inns and Hotels Management (HMIN) popped on reports that the recently concluded Golden Week holiday showed a surge in travel. China’s 119 major scenic destinations saw a total of 34.3 million visitors, up 21% from the Golden Week total of last year. Tourism spending climbed by nearly 25%. In Phase 2 I’d add stocks like Home Inns and Hotels, already a member of my Jubak’s Picks portfolio http://jubakpicks.com/ , that will benefit from increases in consumer spending due to any pickup in growth and to the promise of a hefty 13% annual increase in the minimum wave under the latest five-year plan. Other possible Phase 2 stocks include Café de Coral Holdings (341.HK), Yum Brands (YUM), Tencent Holdings (700.HK or TCEHY in New York), Ping An Insurance (2318.HK in Hong Kong or PNGAY in New York) and Tingyi Holding (322.HK in Hong Kong or TCYMY in New York.)

A rally in China on expectations of increased stimulus and accelerating growth would lift all global boats, especially those of companies that export raw materials to China. In Phase 3 of any China rally I’d look to shares of commodity producers such as Vale (VALE) and Freeport McMoRan Copper & Gold (FCX), a member of my Jubak Picks portfolio http://jubakpicks.com/.

And while I’m on macro trends for the fourth quarter who can forget the euro debt crisis? In my post on fourth quarter macro trends I wrote: “The European debt crisis will move from full boil back to simmer in the quarter. Greece will get its next payment from the bailout fund sometime in November and be able to keep the lights on for another few months and the Spanish government will make a formal request for a program of bond buying by the European Central Bank in November.”

If that turns out to be an accurate forecast, then I think you’ll want to own a bit of Spain—my suggestions would be Spanish banks such as Banco Bilbao Vizcaya (BBVA) and Banco Santander (SAN), members of my Jubak’s Picks and dividend income portfolios http://jubakpicks.com/ , respectively—because that’s where you’ll get the biggest short-term relief bounce. A relief bounce in Europe combined with expectations for faster growth in China would also give some loft to shares of European exporters. Here my suggestions would run to luxury goods makers such as LVMH Louise Vuitton Moet Hennessy (MC.FP in Paris.)

Three major caveats to all this planning.

First, the basic macro trends scenario for the quarter could wind up going to the 35% instead of the 65%. I’d be watching carefully to see if China does indeed rally on expectations. If you don’t see that rally by early November, it would be time to get more conservative. Europe provides a very clear timetable. If there were no formal Spanish request for bond-buying aid in November, I’d also scale back the odds in favor of a positive macro trend background for stocks in the fourth quarter.

What does getting more conservative mean? Increasing your weighting to domestic companies in the best game in town, the U.S. economy. The U.S. housing sector is a good way to do that. It also means favoring dividend stocks—but you’re already doing that, right? and are on the constant lookout for any dip that gives you a shot at picking up a 4% to 5% (the dividend sweet spot currently) yield. It means looking at domestic growth stocks in emerging economies rather than export-oriented growth stocks. And it means continuing to look to gold as a hedge.

And my second caveat, says stay alert to possible disruptors. A big disruptor would be an Israeli or U.S./Israeli attack on Iran’s nuclear facilities. The likely Iranian response would attempt to disrupt global oil traffic through the Strait of Hormuz. If that happens, you’d certainly like to own stocks in oil producers that don’t send much if any oil on that route. Norway’s Statoil (STO) fits that description—and also pays a 4.2% dividend. You might also consider U.S. producers such as Pioneer Natural Resources (PXD) and Colombia’s Pacific Rubiales Energy (PRE.CN in Toronto.)

And my third caveat is a reminder that while I’m relatively positive on macro trends in the fourth quarter, I don’t see the quarter providing solutions to the problems that have produced such huge swings from fear to hope and back again in 2011 and 2012. This isn’t a time to fall in love with the stocks in your portfolio. Look to take profits when valuations reach your targets and keep your eyes peeled for indications that the first quarter of 2013 will look much less positive, even “relatively.”

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, Banco Bilbao Vizcaya, Banco Santander Freeport McMoRan Copper & Gold, Home Inns and Hotels Management, Lennar, LVMH Louise Vuitton Moet Hennessy, Pacific Rubiales Energy, Ping An Insurance, Statoil, Tencent Holding, and Tingyi Holdings as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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