Two Macro Theme Stocks for 2010

01/11/2010 1:00 pm EST

Focus: STOCKS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, says he expects stocks to move higher again this year, and he focuses on two themes he thinks will play out in 2010.

I think there’s a good chance the Dow Jones Industrial Average will reach the 11,700 to 12,100 zone in the coming year, probably during the second half. (The equivalent readings on the Standard & Poor’s 500 index are 1240—1280.)

[But] to enhance your returns and reduce your risk, I encourage you to go on the offensive. First, adopt more of a trading mentality. When a stock you own tacks on a substantial gain over a short time span, take your profit and “recycle” your capital into businesses that are not only well managed, soundly financed, and attractively valued, but also propelled by overwhelming macroeconomic forces.

Here are [two] macro themes I advise you to emphasize as we head into 2010:

Energy hunger. It’s becoming more and more apparent that the era of cheap oil and gas is gone forever. Crude oil has doubled from its December 2008 low—despite a halting, tentative economic recovery. Natural gas has also doubled from its September 2009 bottom. Coming out of the last recession in 2002, we were paying $20 a barrel for oil. Today, black gold is $70.

My top pick in the sector is Utah-based Questar (NYSE: STR), an integrated natural gas producer that also operates 3,000 miles of wholesale pipelines and a local gas-distribution utility serving three western states.

Typically, STR generates about 70% of its cash flow from exploration and production of gas (and a little oil). All the company’s assets are located within the continental United States. The company says it’s planning to increase production 15% in the New Year. That, together with firming prices, should pop the bottom line.

Pay up to $43 for STR. (It closed just above $44 Friday—Editor.) Current yield: 1.3%.

Banking jackpot. I don’t like it any more than you do. Still, one clear result of the financial meltdown is that America’s banking business is now concentrated in fewer hands. Fewer rivals mean fatter profit margins for the survivors.

Among the big commercial banks, none has played a shrewder game than JPMorgan Chase (NYSE: JPM). Under chief executive officer Jamie Dimon, Morgan swallowed up (at fire-sale prices) Bear Stearns and Washington Mutual. Then, Dimon arranged to exit the government’s TARP program months before his chief rivals [did].

Now, Jamie has tipped his hand on the dividend, which Morgan slashed last February to placate regulators. He says he’ll bump it up to an annualized rate of 75 cents to $1.00 per share as soon as Morgan feels “confident” the economy won’t take another leg down. When might that be? My betting is January or April, after one of the bank’s quarterly earnings releases.

Buy JPM at $45 or less. (It closed slightly below there Friday—Editor.) I think Morgan has a [good] shot at earning the 20%—30% return I’m targeting in the year ahead for this month’s “theme stocks.”

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