Investment styles and trends come and go like coastal breezes. That's why I like fundamental analysis and true bottom-up investing. However, it's a fools game to ignore the macro environment completely. Even the best bottom-up investors need to at least be aware of global economic trends. With that said, there are several trends that I see beginning, or continuing in 2013. These trends certainly don't encompass all that is happening in the world today but I see them as important to the global picture in 2013. There are plenty of companies that are benefiting now or will benefit in the future if these trends prove true. I have included five that I believe will be solid investments for the long-term, not just 2013.
China's Economy Picks Up Steam
Much has been said about the slowdown in China's economic activity over the last year. While China's GDP had only grown by 7.4 percent year on year in the third quarter of 2012, quarterly trends have been positive. Many economists believe that China can return to 8-9 percent growth in the near future.
Caterpillar Inc. (CAT), the world's largest mining and machinery manufacturer, should benefit. The company only gets about 3% of its sales from China, but has an intense focus on growing in the country. China is seen as Caterpillar's "land of opportunity." Also, faster economic growth in China is good for the global economy; which in turn, is good for Caterpillar. I wrote a positive article about Caterpillar in another forum last month (Digging For Deep Value In Caterpillar).
Caterpillar's stock is cheap, weighed down by concerns over the global economy. The stock trades at only 9.7 times earnings. Based on Caterpillar's forecast of earning potential and some P/E expansion, the stock should trade near $130 a share within the next couple of years. Caterpillar pays a dividend, yielding 2.2% annually.
The Battered Consumer Continues To Lead The U.S. Economy
''Reports of the death of the consumer are greatly exaggerated'' - to twist an old quote of Mark Twain's. Certainly the U.S. consumer has been battered in recent years and the distrust of Washington and higher taxes don't instill confidence. However, the consumer has held up remarkably well given the circumstances. Consumer confidence has been all over the map lately but spending patterns have remained relatively strong. Initial retail sales for the holiday season look to be up around 3%. This isn't great, but it's certainly not a disaster either. Most high-end retailers are fairing alright. The higher payroll tax may hurt the low-end retailers such as the dollar stores. Most consumers won't pull back spending much at all.
In the consumer discretionary category I continue to like The Walt Disney Company (DIS). Disney is as much a media company as it is a consumer discretionary company. Disney just invested $4 billion to buy Lucasfilm Ltd. With the purchase, Disney gained access to the powerful Star Wars franchise and has plans to release additional films. Disney's ESPN may be the crown jewel of the empire. ESPN, along with its namesake brethren, make up a media powerhouse. The television channels command the highest premium of any other cable network. That means more of your cable bill goes to Disney than any other media company. The ESPN franchise continues to grow by leaps and bounds with popular networks and mobile channels. By the way, the company also owns several very popular theme parks and a cruise line.
Shares of Disney aren't exactly cheap. Not far off its 52-week high, Disney trades at an above-market multiple of 16 times earnings. With its current earnings growth, and expected earnings of $4.33 per share in 2014, Disney could trade above $60 over the next year. Disney's annual dividend yields investors 1.48%. Because of its earnings potential and continued growth prospects, Disney is one of my core long-term holdings.
The U.S. Housing Market Continues To Recover
Signs point to a bottoming of housing and an emerging recovery that began in 2012. CoreLogic reported a 7.4% year-over-year increase in housing prices in the month of November. That was the largest annual increase in home prices since May 2006. November 2012 Building permits for new home construction were at their highest levels since July 2008.
There are many different ways to invest in a U.S. housing recovery. Investors have poured money into homebuilder stocks over the last year, doubling or even tripling share prices of some of the major builders. At this point, their shares look over-bought.
Berkshire Hathaway (BRK.A) (BRK.B) appears to be one of the best ways to invest in the recovery. Sure, Berkshire is a conglomerate of many companies operating in many different sectors, but it has a direct relationship with housing. Berkshire owns Shaw Industries, a leader in flooring and carpet. Berkshire's Benjamin Moore & Co. produces paint and wall coverings. Of course the famed Nebraska Furniture Mart, the largest single furniture store in the U.S., will benefit. Berkshire also owns Clayton Homes, a producer of manufactured homes.
Berkshire trades at 17.7 times earnings, but a better way to measure its value is book value. It's trading at a very reasonable 1.3 times book value. Warren Buffett has stated that he is willing to buy back shares at 1.2 times book value, helping mitigate downside risk. With Berkshire, investors get an added bonus; Warren Buffett invests their money for them.
Weyerhaeuser Co. (WY) is a Real Estate Investment Trust specializing in timber for building and paper products. The company manages 6.4 million acres of private commercial forestland and has long-term licenses on 13.9 million acres of forestland. The company's net asset value is $16 billion, right around the same as its market cap. Lumber prices can be volatile, which increases short-term fluctuations in the company's stock price. However, over the long-term Weyerhaeuser is poised to directly benefit from the recovery in housing. Shares of Weyerhaeuser yield 2.2%.
The Global Economy Continues To Expand; Increasing Energy Demand
Europe's economy will probably improve in 2013 as it emerges from its own financial crisis but it's likely to still be the laggard of the global economy. Re-acceleration of growth in emerging markets such as China and Brazil as well as moderate growth in the United States will power the global economy forward in 2013. Continued expansion will increase energy demands across the globe.
U.S. and global energy demands keep oil refiners like Phillips 66 (PSX) pumping out refined petroleum products. Phillips 66 purchases, refines, markets, and transports crude oil and petroleum products in the United States, Europe and Asia. The company is operating its refineries between 90% and 100% capacity. Management is implementing a number of changes to increase efficiency of the transportation of raw product into its refineries and increase margins. It has the ability to do this because it owns most of its own transportation assets and pipelines. In fact, Phillips 66 plans to create more value for shareholders by spinning off these transportation assets and pipelines into a master limited partnership sometime this year. Most refiners enjoyed a prosperous 2012, but because of its excellent management team I prefer Phillips 66.
Shares of refiners are cheap and Phillips 66 is no exception. The stock trades at 6.3 times earnings. Management boasts a return on equity of more than 23%. The stock has a dividend yield of 1.9%, which is likely to grow considerably. With the probability of a U.S. led global recession relatively low, the refiners should have another prosperous year ahead of them.
There are plenty of other trends occurring in the economy today but I see these four trends as positive opportunities for these five great companies. All five are large, U.S.-based companies that are poised to benefit from global trends. Most of them have worldwide reach and give investors exposure to markets outside the United States. There are certainly companies that will outperform these over the next several years but I chose these five due to their solid fundamentals and positive risk/reward profile. All five companies are in my personal portfolio.
Additional disclosure: Disclaimer: Mr. Constantino is a proprietary investor and does not provide individual financial advice. The stocks mentioned in this article do not represent individual buy or sell recommendations and should not be viewed as such. Individual investors should consider speaking with a professional investment advisor before making any investment decisions.