Monday, December 9, 2013

Stock picks for 2014

  1. CNQ - Canadian Natural Resources
  2. DE - Deere 
  3. GM - General Motors
  4. INTC - Intel 
  5. ABX - Barrick Gold 
  6. MET - MetLife
  7. C - Citigroup
  8. SPG - Simon Property Group
  9. LCC - US Airways Group
  10. NSRGY - Nestlé

finviz charts (new window),DE,GM,INTC,ABX,MET,C,SPG,LCC,NSRGY

1. CNQ - Canadian Natural Resources: This company has one of the best production outlooks among large North American energy outfits and could gush free cash flow after it completes an expansion of its oil-sands facility, scheduled for 2017.
  • CNQ, now trading at $32, have risen just 11% in 2013, mostly because the company is getting a deeply discounted price for its Canadian heavy crude, which accounts for 45% of its output. That crude trades at a discount of $30 a barrel, relative to West Texas Intermediate, the U.S. benchmark. The gap could narrow next year, boosting cash flow, because of increased rail capacity and the potential go-ahead for the Keystone XL pipeline.
  • A 60% dividend boost in October has brought the stock's current yield to 2.4%. Energy output, heavily weighted toward oil, is likely to rise 7% in 2014. Free cash flow could hit $5 billion annually by 2018, from $1 billion next year, once the Horizon oil-sands facility expansion is done.


2. DE - Deere: It's rare to find any industrial stock changing hands at 10 times earnings, let alone an industry leader like Deere, whose shares fetch about $84. Caterpillar (CAT) and the like have mid-teens multiples on 2014 earnings. Some smart investors own Deere, including Berkshire Hathaway (BRK.B) and Cascade Investments, Bill Gates' investment arm.
  • The knocks on Deere, the top producer of farm equipment, are that the U.S. farmers are being pinched by lower grain prices and that reduced government tax incentives might crimp sales. With Deere projecting a single-digit sales drop for its current fiscal year, ending next October, Wall Street views it as dead money. Yet, a low valuation can create its own catalyst, such as an activist investor.
  • The long-term outlook for Deere is good because a rising global population will need more food. Deere has a strong balance sheet, and it increased its stock-buyback program last week to $8 billion, about 25% of its market value. Deere is the kind of company that Warren Buffett probably would love to buy if it became available. Stranger things have happened.


3. GM - General Motors: A profitable GM has revamped its vehicle lineup and looks poised to start paying a dividend in 2014 and buy back a large amount of stock.
  • Its shares are up 36% this year, to $39, but still trade at just eight times estimated 2014 profits. Analysts like Barclays' Brian Johnson see upside to about $50. GM holders include hedge-fund manager David Einhorn and Berkshire Hathaway.
  • Washington is likely to finish selling its remaining stake in the car maker by year end, and there's speculation that GM will buy back a $4 billion equity stake held by the Canadian government next year.
  • GM has $15 billion of net cash (after subtracting debt and preferred) and is generating $8 billion of free cash flow annually. Initiation of a 1% to 2% dividend is a good bet for next year. GM could be a better play than Ford (F), which trades at a premium to it and isn't buying back stock.

4. INTC - Intel: The chip giant could surprise Wall Street in 2014 as concerns fade about its exposure to personal computers and limited inroads into tablets and smartphones.
  • At $24, Intel trades for 13 times projected 2014 earnings of $1.90 a share and yields 3.7%. Intel's dividend rate is the highest among major techs.
  • There are signs that the PC market is bottoming, and Intel is moving aggressively into tablets and smartphones, now dominated by chips using architecture from ARM Holdings (ARMH). Intel's manufacturing might could pay off with chips with faster processing speeds and lower power needs. Jefferies analyst Mark Lipacis writes that Intel "for the first time" is about to have a "manufacturing advantage in mobile."
  • Then there is Intel's high-growth group focused on the semiconductors for servers and other storage devices for cloud computing. Credit Suisse analyst John Pitzer sees Intel earning $2.50 a share in a few years. He has a $30 price target.

5. Barrick Gold: Want a depressed play on a depressed commodity? With a year-to-date decline of 56%, to $15.50, Barrick trades below where it did a decade ago when gold was below $400 an ounce, versus $1,228 now.
  • Barrick's founder and longtime chairman, Peter Munk, a key architect of its disastrous expansion strategy of recent years, is stepping down at year end. And Barrick has stopped development of a huge mine in South America that faced political obstacles. It also has shored up its balance sheet with a $3 billion equity offering in October.
  • Barrick trades for just seven times projected 2014 earnings. What it has lacked is free cash flow, because of heavy capital expenditures. Management is moving to generate more free cash, but it can do more.

6. MET - MetLife: Even after a 55% gain in its shares this year, to $51, MetLife is valued at less than 10 times projected 2014 profits of $5.76 a share and at a slight premium to a conservative calculation of book value of $48 a share.
  • MetLife could rise into the $60s in 2014 if earnings estimates pan out and it gets the regulatory OK to start buying back stock and to lift its dividend. Bulls think the payout could rise about 50%, lifting the yield to 3% from the current 2%.
  • Morgan Stanley analyst Nigel Dally likes MetLife's "improving returns, reasonable growth, and ongoing expense-reduction program." It has a respectable 11% return on equity. It's also a play on higher interest rates; life insurers could reinvest proceeds from maturing bonds at more attractive yields if rates rose.


7.  C - Citigroup: Well capitalized, Citi has the best international franchise among major banks. It also has a cheap stock. At $51, it trades for less than 10 times projected 2014 earnings of $5.41 a share and below its tangible book value of $54.52. No other big financial company trades below tangible book. And Citi's P/E is one of the lowest in the sector.
  • The bank has an unmatched global presence in 100 countries and gets almost 60% of its revenue outside of North America, triple the percentage at JPMorgan Chase (JPM). Citi's low-key CEO of the past year, Michael Corbat, actually is a banker -- Citi's first such leader in more than a decade -- and he's winning over Wall Street with his disciplined, no-nonsense approach. He aims to boost Citi's still-anemic returns, which could lead to $6-plus in profits in 2015.

8.  SPG - Simon Property Group: Despite the growth in online retailing, Americans still like shopping at malls; foot traffic was higher over the Thanksgiving weekend than it was a year earlier. Simon, the industry leader, owns 220 traditional malls and outlets, including the Copley Place in Boston and the Forum Shops in Las Vegas. Its shares are down 4% this year because of higher interest rates, a tough retail environment, and general weakness in real-estate investment trust stocks.
  • Simon Property (SPG) looks inexpensive, trading at about $151, down from a spring peak of $180. In October, it boosted its quarterly payout to $1.20 a share, 9% above the year-earlier level. Current yield: 3.2%.
  • Morgan Stanley analyst Haendel St. Juste recently upgraded Simon to Overweight from Equal Weight and boosted his price target to $186 from $180. Simon comfortably covers its dividend and generates an additional $1 billion of annual free cash for mall expansion and other growth initiatives. Funds from operations, a key REIT financial measure, are expected to rise 8% next year.

9.  LCC - US Airways Group: This airline may be the latest beneficiary of industry consolidation, now that the government has cleared its controversial merger with American Airlines.
  • Shares of the carrier, which will emerge as the world's largest airline, trade at about $22, less than 10 times estimated 2014 profits of $2.45 a share (assuming a full tax rate). Four airlines -- US Air, Delta Air Lines (DAL), United Continental Holdings (UAL), and Southwest Airlines (LUV) -- will soon control more than 80% of domestic air traffic, which could keep pricing rational and allow them to boost fares if oil prices rise. While US Air could encounter merger-integration problems, they probably won't last into 2015.
  • JPMorgan analyst Jamie Baker last week boosted his price target to $37 from $29, arguing the "earnings power of the new American [as the carrier will be known] appears sorely underappreciated." Baker sees the potential for $3.50 a share in fully taxed 2015 profits and notes that US Air trades at a sharp discount to Delta and United.
American Airlines and US Airways merged  in Dec 2013 and the new American Airlines (Nasdaq:AAL) stated trading on 12/9/13

10.  NSRGY - Nestlé: The world's largest food outfit has one of its industry's best growth outlooks, thanks to a big presence in the developing world. The Swiss company aims for 5%-6% annual organic sales growth, and it should come close to hitting that target this year. Analysts believe that Nestlé is capable of high single-digit yearly gains in earnings per share.
  • Nestlé's U.S.-listed shares, at around $72, fetch about 17 times estimated 2014 profits. Listed in the Pink Sheets, they yield 2%.
  • Nestlé isn't cheap, but it rarely is a bargain, because of the strength of its global portfolio, which includes candy, coffee, bottled water, ice cream, infant formula, and pet food. It owns almost 30% of cosmetics maker L'Oréal, a stake worth $30 billion. Excluding that, Nestlé trades at only a small premium to slower-growing U.S. food outfits like General Mills (GIS) and Kellogg (K).


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