My 2013 Investment Game Plan

by: Ray Merola

It's good to have a plan.

Today, I offer my 2013 investment game plan for your review and comment. Following the same format and sequence as the past two years, I intend to submit a mid-year and year-end review on this plan to S.A. editors for publication; outlining results and sharing my 2013 course adjustments with you.

The plan is relatively short and simple. I begin with a set of macro assumptions, and then organize an investment strategy around it.

Please note that I consider myself an "investor" versus a "trader." What this means is that while I occasionally stake a short-term trade, my style is to try to uncover undervalued securities and invest or a minimum of twelve to eighteen months as they (hopefully) reach fair value. I re-evaluate the investment thesis for each security routinely. My portfolio tends to include a limited number of positions that I monitor closely. Predictably, my portfolio turnover is low.

2013 Macro Assumptions

  • The global economy will show improvement. The economies of the United States, China and Japan will all demonstrate positive growth. Emerging markets will hit-and-miss follow along. Europe has seen the worst of its recession, but ongoing deleveraging will continue to prevent any meaningful economic expansion.
  • U. S. interest rates will remain low. Indeed, the Fed has stated its intent to keep rates down. Likewise, inflation will remain subdued. The banks will continue to straighten themselves out, perhaps with even more vigor than 2012. Residential housing markets will exhibit meaningful recovery throughout most of the nation.
  • Gold will continue to rise.
  • U. S. equity markets will trend modestly higher; put another way, I postulate a greater chance of upside versus a major move down. That said, I make no numerical predictions on the market averages. I do premise that 2013 will be a reasonable year for corporate earnings. However, Washington-manufactured "fiscal cliff" crises will dog the averages, along with both the reality and threat of higher taxes. Cuts and threats to cut various government programs will likely impact the situation negatively.

My 2013 Investment Plan


The plan is constructed to play to a backdrop of low-interest rates and decent corporate earnings. My approach continues to rely heavily upon selecting undervalued, well-run, multi-national large-cap stocks with good balance sheets that pay dividends. In 2013, I would also like to increase exposure to smaller cap equities. My broad allocation targets are 60 percent equities, 25 percent fixed income, and 15 percent cash.

I am not keen on the overall fixed income markets with interest rates so low, but I always maintain asset class diversification.

Finally, my personal style entails maintaining a healthy cash balance. Typically, I target 10 percent cash, but this year, I will be comfortable if that figure drifts up, as I'm not particularly sanguine on bond investments. I'd rather have a little extra in cash versus piling into the crowded fixed income space.

By premising an improved up-cycle sector rotation, I continue to favor companies that are positioned to capitalize upon general economic expansion.

2013 Plan Strategies

Concentrate equity investments in global Industrial, Financial and Energy sectors. I also carry over moderate exposure to the Materials sector. My go-forward rationale is that 2013 will see a marked improvement in many global economies. However, continued monetary tinkering by reserve banks and associated political wrangling have muddled the picture.

I plan to maintain an overweight position in two cyclical Industrial companies. These are Caterpillar (NYSE:CAT), and Eaton PLC (NYSE:ETN). I believe both these companies are undervalued, best-of-breed that pay good dividends. I envision Caterpillar breaking through the $115 a share ceiling it hit last year on any inkling of a 2013-14 recovery in the U.S. and China. Eaton has already had a great run going into the year, so I'm more cautious going forward. However, the Cooper Industries merger and a dash of global recovery may be just the catalyst the stock needs to keep the uptrend intact.

Last year, my plan was to underweight Financial stocks. However, as the year wore on, I began to find real value in the sector. I added significantly to my top banking stock, Wells Fargo (NYSE:WFC). I own both the common shares and the 2018 warrants. Wells Fargo is one of my absolute favorites and one of my largest single positions. The company has quietly captured a third of the U.S. mortgage and stands at #1 in the commercial loan market. I like the bank's strong management team and clear strategy. I also took up a position in Aflac Incorporated (NYSE:AFL). I suggest it's undervalued and a serial dividend grower: my kind of stock. I plan to add to the position on any weakness.

My Energy investments are centered around Royal Dutch Shell (NYSE:RDS.A), Halliburton (NYSE:HAL), and Energy Transfer Partners (NYSE:ETP). Shell is an undervalued "super major" energy company that offers a generous 4.2% yield. I believe its linkage to Europe has curtailed the shares, despite the fact that less than 15 percent of its revenues are derived from there. Halliburton is a another beaten-down favorite of mine. Management is ready to capitalize on the global need for energy services, especially in North America. I suspect it will put several lingering overhangs behind: the redeployment of rigs from dry gas to liquids sites, the guar gum snafu, and the BP/Macondo incident. I also like Energy Transfer Partners, a pipeline MLP that has transformed itself from a regional natural gas transportation company into a national, integrated gas and liquids enterprise. ETP offers nearly an 8 percent distribution yield. I believe their board will bump that up during the first half of 2013.

Basic Material picks include long-time favorites Nucor (NYSE:NUE) and International Paper (NYSE:IP), both sporting good yields, strong balance sheets, and superb CEOs. I took some profits in both names in late 2012, but retained core positions. I'd love to buy back into these stocks if they fall back under $40 and $35, respectively. I also have a modest position in DuPont (NYSE:DD). I like the broad storyline and the 3.5% dividend yield, but I view this "chemical company trying to tell me they are not a chemical company" as more of a suspect than a prospect. I'll have a quick trigger finger on the sell button if management doesn't project a more coherent future state.

Reduce holdings of selected Tech stocks. My two core investments in the Tech area have long been Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC). I've owned shares of both corporations for many years. I'd like to trim my exposure to both stocks, but I'll patiently wait for the right price. I plan to take some profits in AAPL if it breaks $600 again. I've seen the company as an investment, not a trade, and have a large gain booked. I remain positive on Intel: notwithstanding its legions of naysayers. The balance sheet, cash flow, and yield are outstanding. I'm watching for a decent forward catalyst. If nothing materializes, I may lighten up if the shares firm up to $24 or so.

Get into Health Care. Simply, I missed the boat on this sector in 2012. My cupboard is bare for the Healthcare sector as we enter 2013. Boy, does that bug me. Politics aside, I premise that ObamaCare will be a boon for select health care stocks. My problem is finding value. I don't like the picture for many of the large pharma stocks, despite the conventional wisdom that ObamaCare will be a bonanza for them. I do have my eye on Johnson & Johnson (NYSE:JNJ), Abbott Labs (NYSE:ABT), and a few smaller healthcare names. I want in, but won't chase.

Underweight Utilities and Telcom. During 2012, I accumulated positions in Telecom giant Vodafone PLC (NASDAQ:VOD) and Utility stinker Excelon (NYSE:EXC). I'm happy with Vodafone, despite last year's lackluster share appreciation. It's an out-of-cycle, beaten-down global telecom with its business concentrated in Europe. Conversely, the company pays out a large and growing dividend, plus it owns 45 percent of Verizon Wireless. On the whole, I don't mind hanging around patiently for eventual business stabilization and turnaround.

On the other hand, Excelon was my Dog of 2012. I've lamented the purchase of these God-forsaken shares for several months. I've carried them over into this year on the premise that the stock was oversold in 2012 and will see a modest rebound. I'd like to cut out and take my losses if the share bump up to $32 (I'm in at $37); that's assuming they don't drop another bomb on shareholders during the 1Q earnings telecom.

Furthermore, since I assume moderate economic growth in 2013, I see no need to bulk up on either of these two sectors. Indeed, whereas Utilities used to be considered safe, slow-growers, I am growing more convinced this is too often not the case. De-regulation, government over-regulation, and energy conservation initiatives suggest few catalysts for now. I find most Utilities neither safe nor cheap. U.S. telco giants Verizon and AT&T are overpriced.

Look for bargains in Consumer Staples. Given my premise that we will see moderate economic growth in 2013, I suspect the Consumer Staples sector may lag the averages. Therefore, this will be precisely the time to look for some bargains. I currently hold a solid position in stalwart General Mills (NYSE:GIS); I'm happy to add to the position if the stock gets oversold. I also have a small position in tobacco company Lorillard (NYSE:LO). I like the 5.25% yield and watch with interest the company's foray into eCigs (electronic non-tobacco cigarettes).

I have a few other stocks in this sector to keep an eye on, but I have no urgency to buy unless the merchandise goes on sale big-time.

Hold my position in Consumer Discretionary. I carried over a solid stake in Consumer Discretionary stock TRW Automotive (NYSE:TRW), a global manufacturer of automobile safety systems and equipment. I like the stock, but it's approaching what I believe is $55 to $60 full value. If I get my price and sell out, I would be very selective about another Consumer Discretionary stock. I do see some decent value in certain retailers, but I envision too many other stocks in other sectors that trump the category.

Hold some bonds as a placeholder. Last year, I re-learned a valuable lesson: no matter how upbeat or bleak the situation for any class or sector, stay diversified I thought bonds would go nowhere in 2012, but these investments turned out to be a very pleasant surprise.

In 2010, I exited bond funds with a few exceptions. I still like the PIMCO Total Return Fund (MUTF:PTTRX), managed by the legendary Bill Gross. He has consistently demonstrated he can make investors money in any interest-rate climate. For 2013, I increased my exposure to the Templeton Global Bond Fund (MUTF:TGBAX) and accordingly reduced my holdings in the Pimco High Yield Fund (MUTF:PHYAX). I believe these three well-run funds offer diversified fixed income exposure.

Rounding out this asset class, I have retained a sizeable position in the bond hybrid Vanguard Convertible Securities Fund (MUTF:VCVSX). I've also increased my 2013 investment allocation in a TIPS ETF. Finally, I'll continue to collect interest on a various corporate, municipal, and I-bonds purchased back when rates were better.

Hold Gold. Increase Real Estate. I believe that the yellow metal should always be a part of my portfolio. Hey, it's currency. While I premise that gold will rise yet again in 2013, I am satisfied with a maximum allocation limit of 5 percent via the iShares Gold Trust (NYSEARCA:GLD).

I plan to increase my interest in income-producing real estate and the mREIT Annaly Capital (NYSE:NLY). Annaly hit a rough patch of late. However, as an investor with a long view, I see the dip in share price as an opportunity. I intend to continue to reinvest the dividend, and selectively buy a few more shares on major market weakness. My opinion is that what plagues Annaly isn't a broken business model nor poor management: they are simply fighting a losing battle with the Fed over NIM (net interest margin). This conflict will not last forever. Eventually, the Fed will take their foot off the pedal and interest rates will rise. When they do, margins will drift back to historic norms and Annaly will recover nicely. I will have bought on the cheap.

Cash is king. I tend to target about 10 percent of my portfolio in cash; this year I may permit the figure float to as high as 15 percent. I'm here to say that it doesn't bother me one iota to live with today's ultra-low interest rates. Holding some cash permits me to sleep easy at night. I simply ladder one-year CDs, even if the interest rates are barely above one percent.


Disclaimer: These views are my own. I am not trying to sell anything, nor providing specific investment advice to readers. Indeed, I simply enjoy sharing / exchanging views with fellow SA investors, based upon my nearly thirty years of practical experience.

Good luck on all your investments in 2013.

Disclosure: I am long AAPL, DD, GIS, IP, NUE, WFC, ETN, GLD, RDS.A, AFL, ETP, HAL, LO, TRW, CAT, EXC, INTC, NLY, VOD. I also have an interest in the mutual funds mentioned in the article.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.