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The Gist

In December, I like to take some time to look ahead to the next year and attempt to determine which stocks have the greatest chance of success in the coming year based on a set of assumptions.

First, the market is currently being held back due to the uncertainty over the resolution of the fiscal cliff. I don't think the politicians will allow us to go over the cliff. They will find a way to make it happen. Thus, now is the time to start looking for opportunities.

Second, the Fed is currently employing quantitative easing which should underpin the markets providing the so called "Bernanke Put." Based on these assumptions I believe the risk reward for starting positions in stocks on your watch list that you perceive to be undervalued now is prudent.

I started a position in Ford (NYSE:F) yesterday for this reason. I believe the company is undervalued and is well positioned to take advantage of resurgence in new car buying as evidenced by the current uptick in sales.

The Goods

In the following sections, we will perform a review of the fundamental and technical state of each company under review followed by an analysis of the underlying catalysts for the stocks. The following table depicts summary statistics and Tuesday's performance for the stocks. The following charts are provided by Finviz.com.

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Alcatel-Lucent, S.A. (ALU)

The company is trading 57% below its 52-week high and has 10% upside potential based on the analysts' mean target price of $1.27 for the company. ALU was trading Tuesday for $1.15, up almost 5% for the day on news of a possible loan from Goldman Sachs.

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Fundamentally, ALU has several positives. EPS growth for next year is expected to be 67%. ALU is trading for approximately 58% of book value. The company has $2.57 in cash per share. Book value per share is $1.88.

Technically, ALU has been in a well-defined trading range between $1 and $1.20 for the last several months. The stock recently breached resistance at the 50-day sma. In my latest missive regarding the stock, I suggested buying the stock at the $1 mark. The company has clearly marked a bottom.

Alcatel-Lucent has rallied in recent weeks based on the news AT&T (NYSE:T) plans to spend $22B on capex each of the next 3 years. The telecom sector is growing by leaps and bounds currently. Furthermore, ALU is in talks with Goldman Sachs Group Inc. (NYSE:GS) about obtaining a loan to strengthen the unprofitable network equipment vendor's balance sheet.

The recent pop was most likely due to a new contract win. According to a report by PR Newswire Tuesday,

"Alcatel-Lucent today announced that it has been selected by Telefonica, one of the world's leading communications service providers, to upgrade the operator's Internet protocol (IP) networks, initially in Argentina and the Czech Republic, with one of the industry's most powerful core network routers, the Alcatel-Lucent 7950 Extensible Routing System (NYSE:XRS)."

The risk reward ratio is favorable for the long haul at this point. ALU is taking the proper steps to return the company to profitability. The stock is a buy at this level.

Bank of America Corporation (BAC) & Citigroup, Inc. (C)

These two banks are well positioned to take advantage of the uptick in the U.S. housing market. This is a derivative play on housing due to the fact the home builders are currently trading at sky high valuations. The U.S. housing market is on the mend and these banks stand to gain from it. Please review the following analysis of the current fundamental and technical state of each stock.

Bank of America Corporation

The company is trading 3% below its 52-week high and has 4% potential upside based on a consensus mean target price of $10.20 for the company. BAC was trading Tuesday at $9.82, up slightly for the day.

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Fundamentally, BAC has several positives. BAC insider ownership has increased by 51% over the past six months. The company has a forward P/E of 10.10. BAC has a net profit margin of 6.08%. BAC is trading for approximately 44% of book value. EPS next year is expected to rise by 131% and the company pays a dividend with a yield of .41%.

Technically, BAC has been looking good. The coveted golden cross was fulfilled earlier this year. The stock has been in a solid uptrend since mid-July.

Bank of America has a fortress balance sheet. Bank of America was recently upgraded to Buy from Hold at Stifel Nicolaus. The analysts noted the bank's success at cutting costs, its much-improved capital position, and the likelihood of higher capital returns. The stock is a solid buy at this level.

Citigroup, Inc.

The company is trading 12% below its 52-week high and has 26% upside potential based on the analysts' mean target price of $42.85 for the company. Citigroup was trading Tuesday for $34.27, up slightly for the day.

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Fundamentally, Citigroup has several positives. The company has a forward P/E of 7.38. Citigroup is trading for slightly over half of book value. The company has a PEG ratio of 1.28 and a net profit margin of 10.95%. Citigroup insider ownership has increased by 60% over the past six months. Director William S. Thompson bought 6,850 shares of stock recently.

Technically, the stock had a recent downturn which coincided with the recent election. Even so, the golden cross was recently achieved at the beginning of October. This is a bullish indicator that has served me well. Recently the stock has pulled back, yet is still trading 8% above the 200-day sma.

Citigroup beat earnings estimates in October. The next day CEO Vikram Pandit stepped down following a clash with the board over strategy and performance. Citigroup named Michael Corbat, a Citigroup veteran, as Mr. Pandit's successor.

I think the fresh blood will serve Citigroup well. I like the stock long term. It appears there are some bottom fishers already nibbling at the stock today based on the price action.

Ford Motor Co.

The company is trading 12% below its 52-week high and has 30% upside based on the analysts' mean target price of $14.67 for the company. Ford was trading Tuesday for $11.31, down 1% for the day.

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Fundamentally, Ford has several positives. The company has a forward P/E of 7.82. Ford is trading for 10.93 times free cash flow and 2.3 times book value. EPS next year is expected to rise by approximately 10%. The company pays a dividend with a yield of 1.75% and has a PEG ratio of 0.49 and a net profit margin of 13.36%.

Technically, Ford is currently in a well-defined uptrend. The stock has been in a solid uptrend since the last quarter. Look at the chart. The stock is about to achieve the coveted golden cross where the 50-day sma crosses above the 200-day sma. This is a significant event and should drive the stock higher as many technical traders use this as a bullish signal to buy.

Mulally is staying around till 2014, sales and profits are up and the recent storm has not affected production or sales. The stock remains a buy long-term. Uncertainty about the fiscal cliff isn't hurting demand for cars and trucks either, or at least not yet, Ford's global sales and marketing chief stated recently. I like the stock here.

Sirius XM Radio Inc. (SIRI)

The company is trading 5% below its 52-week high, and has 13% upside potential based on the analysts' mean target price of $3.18. Sirius stock was trading for $2.82 Tuesday, up nearly 1% for the day.

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Fundamentally, this stock has several positives. SIRI has a forward P/E of 28, and trades for 23 times free cash flow. EPS for the next five years is expected to rise by 28%. Quarter-over-quarter sales are up 14%. SIRI's TTM ROE is 87%, and the company's net profit margin is 103%.

Technically, Sirius stock has been in a well-defined uptrend since the start of July. The coveted golden cross was just achieved by the stock. This is considered extremely bullish. The stock has recovered after breaking through support at the bottom of the current uptrend channel and the 50-day sma.

Barton Crockett, an analyst at Lazard Capital Markets, "sees Sirius' market penetration and profit growing sharply in the next few years, as the number of cars with Sirius radio climbs to 150 million from 50 million now. Sirius shares are up 51% this year, to $2.74. Crockett thinks the stock could hit $3.50 in a year."

Furthermore, Liberty is awaiting regulatory approval to take full control of Sirius, which could come this year or early in 2013. It's likely to spin off Sirius, perhaps as early as next year which should create significant shareholder value.

The Bottom Line

The market may experience substantial volatility in the next few weeks as it reacts to headlines regarding the resolution of the fiscal cliff. Use these pullbacks as an opportunity to start positions in your favorite stocks on your watch list. I expect the fiscal cliff situation to be resolved and the market to rally in 2013.

Let's not forget, the world's central banks have been taking action and the Bernanke put is firmly in place until 2015. I have chosen stocks I feel have notable upside long-term but are down substantially from their all-time highs. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most likely end up on the wrong side of the trade. I see any sell off as a buying opportunity. The market always bounces back. This is a buy on the dip scenario. Do your own due diligence and layer in to any position to reduce risk.

Source: 5 Stocks To Buy Well Positioned To Rally In 2013

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.