5 Turnaround Candidates for 2014
01/21/2014 7:00 am EST
While 2013 was a great year for the overall market, as always there were stocks that had less than impressive showings during the course of the year, says Michael Fowlkes of Market Intelligence Center.
It is never a great idea to try to cherry pick distressed stocks in hope of a quick rebound; it is also a bad idea to completely rule them out at as well. Sometimes stocks run into short-term trouble that they can easily rebound from, so it is wise to keep even the worst performing stocks in our screening universe.
However, it is also important to keep in mind that stocks do not trade weakly without a reason. When stocks are down, it is never easy to jump in and bet on a rebound, but when you can do it successfully, you stand to make a very hefty return. Case in point is last year's turnaround story, Best Buy (BBY). The retailer was coming off a horrendous 2012, but its shares came to life last year, amassing a mighty 244% gain in 2013. Of course, this sort of rebound is an anomaly, but it goes to show that past weakness is no guarantee of future weakness.
Keeping that in mind, we are going to take a look at five stocks that had less than stellar performance in 2013 that we believe could outpace the broader market in 2014. None of these stocks are for the faint of heart, but for contrarian investors, the long shots are often the most attractive.
For the majority of the second half of the year, the stock was stuck in a fairly tight sideways pattern, but it did start to come to life during the final month of the year. The primary reason why Caterpillar has been weak is its exposure to the mining industry, which is expected to remain depressed through 2014. However, the weakness in the mining sector should be offset by the company's construction segment, which is the company's largest business.
An improved economy both in the US and in emerging markets should boost construction sales and increase company revenues. I have a bullish long-term view of Caterpillar, and believe the stock will continue to improve through 2014. The company has been aggressively cutting costs, and investors are starting to come back into the stock. Barring any major earnings misses, I believe the stock will continue to improve, and could easily keep pace or even outperform the broader market.
CAT Daily Chart
The good news for investors is that the year could have been much worse had the stock not staged a rally in the final weeks of the year. The big problem with the stock last year was international weakness, which could reverse this year. Improvements in China's economy, along with improvements in emerging markets should help boost the company's sales growth in 2014. Late last year, the research firm IDC forecast that information technology spending would rebound in 2014, with IT spending growing 5% globally. IBM is a very large player in cloud computing, which continues to grow at a rapid pace. As long as the global economy continues to improve, IBM stands a great chance at outpacing the broader market in 2014.
IBM Daily Chart
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3. Apple (AAPL)
Apple's (AAPL) multi-year run came to an end in 2012, and while the stock did rebound during the second half of 2013, it still vastly underperformed the broader market with a gain of just 8.1%.
The NASDAQ (COMP) (QQQ), by comparison, was up 38.3%, so by all accounts it was a very disappointing year for investors. The silver lining is that the stock has started rebounding, and I believe it will continue to improve through 2014. The company recently refreshed its product line-up, and its recent deal with China Mobile (CHL) could be a major catalyst moving forward. China Mobile has around 760 million customers, so it creates a huge opportunity for Apple, which earns 53% of its total revenues from iPhone sales. Even with the recent rally in the stock, it is still very attractively priced with a P/E of 13.7. After two disappointing years for investors, I believe 2014 will be a strong year for the stock, and expect its shares to outpace the broader market.
AAPL Daily Chart
The once king of the smartphone market has seen its market share steadily erode in recent years. The company's inability to compete against the new titans of the sector, Apple (AAPL) and Google (GOOG) resulted in the company seeking a possible suitor, but it has since decided to put off those plans, and the company's new CEO, John Chen, has said that the company plans to focus on its enterprise business. This is a smart move, since the company has struggled to keep pace with the consumer market. Blackberry is a long shot, but if it is able to prove to Wall Street that it is making headway in transitioning out of the consumer market, and making progress in its enterprise business, the stock could trade sharply higher.
The stock has already started to recover from its December lows, and with so much negativity already, there is a lot of upside potential. While I do not believe that Blackberry will be able to rebound to the same extent that Best Buy did in 2013, I do believe that the worst is behind it, and if it can execute on its current plan there is a lot of upside potential.
BBRY Daily Chart
With such a large drop in share price, you may think I am crazy to even consider this one, but there are reasons to be optimistic about its 2014 prospects. First, we need to consider the reason why the stock was so weak last year. The primary reason for this is the company's close ties with Apple, which ran into problems over the last two years. Cirrus generates around 80% of its total revenues from its relationship with Apple, so the company is extremely sensitive to Apple performance. The stock took a big hit after news leaked that Apple was no longer going to use its audio amplifiers in the new iPad Air, but it still provides an audio codec for the iPad Air and the iPhone 5c. If Apple shows higher sales in 2014, this will be seen as a positive for CRUS.
CRUS Daily Chart
The company also makes controllers for LED lights, which is a growing market since incandescent light bulbs are being phased out. As this market grows, its dependence on Apple will lessen. The stock is pretty beaten up, but this has resulted in a very attractive valuation. The stock is trading with a P/E of just 8.7, so there is a lot of upside potential. Barring any additional news on Apple moving away from its parts, Cirrus stock could easily outperform the market through 2014.
By Michael Fowlkes of Market Intelligence Center