My Top 10 Stocks for 2013

12/27/2012 10:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak has set his sights on 3 types of stocks-those riding current trends, those creating their own trends, and a few hated names with potentially big payouts.

My ten best stocks for 2013? The stocks part is simple. It's the 2013 part that's hard.

As in 2012, macroeconomic trends will drive the financial markets in 2013. In 2012, the year and the markets were defined by fear: that China's economy would slow to a hard landing; that the US economy would stall or the US government would let the country default on its debts; or 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, financial markets rallied.

Two things should worry you as we head into 2013. First, investors, Wall Street, and economists sound relatively optimistic as 2012 ends and 2013 begins.

Consider a story I spotted just as I was writing this piece: Corporate earnings in China will climb by 10% in 2013, according to Russell Investments, and Goldman Sachs has 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.

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 US economy just can't seem to build up enough speed to generate gobs of jobs. We may get giddy, though, when we learn that China's growth has reaccelerated and the auto industry is back.

So what do you do? I think you divide your ten best stocks for 2013 into three parts:

  • First, stocks that will ride currently discernible trends, if those trends behave as expected.
  • Second, stocks of companies that are creating their own trends and could dance to their own tunes no matter what news the year brings.
  • Third, a few risky bets that could pay off big, because the expectations are so low going into 2013.

Shall we begin? Click through the following pages for a look at the ten best stocks, grouped within these three focus areas.

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1. BorgWarner
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.

BorgWarner (BWA) concentrates on delivering what carmakers need in the current market: improved fuel efficiency and lower engine emissions. Products such as turbochargers enable smaller, more fuel-efficient engines to deliver more power.

The company's dual-clutch technology improves fuel efficiency, too. The National Highway Traffic Safety Administration projects that 39% of cars will use 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 5.9%, and they're down 11.7% in the past three months, as of December 18. I think they're a bargain as we head into 2013.

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2. Home Inns & Hotels Management
2013 is supposed to be a year in which China continues re-balancing its economy toward consumption and domestic growth. If that actually happens, Home Inns & Hotels Management (HMIN), 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 re-balance 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.

Its third quarter showed a pickup in revenue-up 62% year over year-as well as RevPAR (revenue per available room), which was up to 157 yuan ($25.20) in the quarter from 149 yuan ($23.92) in the second quarter.

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3. Akamai Technologies
Cloud computing is a trend 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 to buy in? Many of the biggest cloud-computing "companies" are actually units of larger companies rather than standalone businesses. 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 (AKAM) sells services that accelerate Internet traffic. Accelerators are especially important as cloud traffic grows, and as a growing percentage of traffic consists of complex video and multimedia that need to be streamed to users without glitches or lags. Akamai manages a network of more than 95,000 content delivery servers 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 of nearly 17%.

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4. Apple
Not all my picks for 2013 are riding trends. Some, including Apple (AAPL), make their own trends.

If Apple's remarkable and maddening stock performance in 2012 demonstrated anything, it was that this stock dances to its own music. Apple shares are capable of climbing when everything else is tumbling and of plunging while the rest of the market is slowly moving ahead.

The stock ended 2012 in deep retreat as sentiment, rather than fundamentals, turned against it. (And sentiment on this baby can quickly go into reverse.) Apple fell from $593 on December 3 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 a result of softer-than-expected sales in international markets or Apple's intention to launch a new iPhone model in June.

Other technology analysts, most notably Horace Dediu on Asymco, have argued that Apple is moving to a six-month cycle from a new-model-every-year cycle. This would be a huge change, and I find the argument convincing.

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5. Cheniere Energy
Nothing much matters to Cheniere Energy (LNG), the 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 on the Gulf of Mexico.

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 $3.41 per million British thermal units on December 18. In Japan, liquefied natural gas sells for $16 to $17 per million BTU.

Projections are that exports from the United States would bring gas prices in Japan down to $10 per million BTU. That's a huge reduction in cost at a time when Japan is looking for an alternative to nuclear power. It's also a very good price for US natural gas producers-and for Cheniere.

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6. Marathon Petroleum
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 are built out. The arrival of oil from resources like the Eagle Ford and Bakken shales will mean rising margins at Gulf Coast refineries as they begin their work with cheaper oil.

Marathon Petroleum (MPC) will get a big hunk of that refining business-and those higher refining margins-and it 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 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 buildout continues, the company will be able to grow margins and earnings by simply substituting cheaper mid-continent oil for more expensive imported oil.

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7. First Quantum Minerals
If First Quantum (FQVLF) succeeds in its bid to acquire Inmet Mining (IEMMF) and its Cobre Panama copper resources, First Quantum will jump from the No. 13 copper producer in the world to membership in the top five. (First Quantum trades in Toronto as FM; Inmet is IMN.)

Note 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.

And quite a prize it is: Cobre Panama is projected to be the 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.

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8. Whitehaven Coal
OK, so First Quantum (FQVLF) is a bit of a gamble. But the company, even without Inmet Mining (IEMMF), is a major miner of copper, gold and nickel, and its shares are up 15.6% in the past 12 months as of December 18.

My last three stocks on this list, on the other hand, are hated. I mean hated. Which, of course, means that they've got tremendous upside if the market simply moves from "hated" to "despised."

My first pick is Australian coal producer Whitehaven Coal (WHITF). 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, to which you can add rising production costs to the list of woes.

Whitehaven Coal, which owns seven mines (and important railroad infrastructure) in New South Wales, freaked out the market in 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 (that's about $52.4 million) for 2013. That was a shock, since the analyst consensus for 2013 EBITDA was then at 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 posted a 26.6% gain from a November 16 low through December 19, but they are still well below the highest price of the year.

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9. Yingli Green Energy
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 (YGE)?

It doesn't take much. Some positive speculation that Yingli and competitor Trina Solar (TSL) are well financed to be among the survivors in the sector would do it. (Yingli can sustain the 2013 cash burn rate for four years, Credit Suisse calculates.)

Yingli would also be helped China's State Council encouraging mergers and acquisitions (and maybe even a bankruptcy) in an effort to reduce capacity in the sector-and banning local government financing of the sort that has kept Suntech Power (STP) and LDK Solar (LDK) in business.

There's also a new, high-profile target for increased buying of solar equipment with government funding by China's power companies. That last factor has been especially important to Yingli Green Energy, since the company is set to receive 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 $2.44. But there's room to run; the 52-week high is $6.27.

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10. Arcos Dorados
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 if both happen at once, your shares plunge.

That's a pretty good description of what happened to shares of Arcos Dorados (ARCO) 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, climbing 17.8% through the close on December 18.

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, though, outpaces the 7.7% gain for McDonald's in that period. That's because the general improvement on global economic growth will have more impact in the Latin American economies, where Arco Dorados operates, than in the United States, which accounts for 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.

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, may or may not now own positions in any stock mentioned in this post. The fund owned shares of Johnson Controls 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 here.

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