"A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." - Wayne Gretzky
This is a great quote from Gretzky. I believe it pertains to the current situation in the equity markets. I posit 2013 will be a great year for the stock market. Several indicators are flashing that global growth is for real and 2013 could be another great year for stocks. For instance, Alcoa (AA) stated on its recent earnings conference call that the outlook for Chinese growth is much improved. Furthermore, global growth bellwether Danaher Corp. (DHR) predicts higher than expected core revenue growth.
Global growth appears to be on the upswing based on recent positive news coming out of China, no bad news coming out of Europe and a positive uptick in U.S. economic indicators, most likely due to a turnaround in the housing market. Based on these facts, I have selected five fundamentally solid stocks I feel have substantial potential upside in 2013.
In the following sections we will perform a review of the fundamental and technical state of each company to determine if this is the right time to buy. The following table depicts summary statistics and Thursday's performance for the stocks.
The global money center banks are the source of funding for global growth. You cannot have a true bull market rally without the banks starting off the party. The uptick in the housing market and the steepening of the yield curve due to demand for long-term capital are strong buy indicators for these banks.
Bank of America Corporation
The company is trading 5% below its 52-week high and has 4% potential upside based on a consensus mean target price of $12 for the company. BAC was trading Thursday at $11.55, up over 1% for the day.
Fundamentally, BAC has several positives. The company has a forward P/E of 8.92. BAC has a net profit margin of 5.03%. BAC is trading for approximately 52% of book value. EPS next year is expected to rise by 32% and the company pays a dividend with a yield of .35%.
Technically, BAC looks good. The coveted golden cross was fulfilled earlier this year. The stock has been in a solid uptrend since mid-July. The stock recently pulled back to the midpoint of the uptrend channel which I consider a buying opportunity.
Bank of America has a fortress balance sheet. BAC's success at cutting costs, improved capital position and the likelihood of higher capital returns are all huge positives going forward. The stock is a solid buy at this level.
The company is trading 2% below its 52-week high and has 12% upside potential based on the analysts' mean target price of $47.59 for the company. Citigroup was trading Thursday for $42.56, up over 1% for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 8.08. Citigroup is trading for 66% of book value. The company has a PEG ratio of 1.60 and a net profit margin of 11.27%.
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 pulled back slightly, yet is still in a solid uptrend.
Citigroup is in the same boat as BAC. They both should benefit greatly from an upturn in global growth and the US housing market. The upcoming Fed stress test should be a near-term catalyst for the stock. I am long Citigroup.
Ford Motor Co. (F)
The company is trading 3% below its 52-week high and has 11% upside based on the analysts' mean target price of $15.35 for the company. Ford was trading Thursday for $13.88, flat for the day.
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.
The probabilities of a rebound in the US housing market coupled with the fact that the average age of cars on the road is 11 years should provide a significant catalyst for the stock. The company reports earnings next week. To reduce risk, wait until after earnings are released to open a position.
Cisco Systems, Inc. (CSCO)
The company is trading 1% below its 52 week high and has 4% potential upside based on the consensus mean target price of $21.79 for the company. Cisco was trading Thursday at $20.99, up almost 2% for the day.
Fundamentally, CSCO looks solid. Cisco has a forward P/E of 9.77. Cisco's quarter over quarter EPS and sales growth rates are 20% and 6%, respectively. Cisco's net profit margin is 17.90%. Cisco has a dividend with a yield of 2.72%. The company is trading at 13 times free cash flow.
Technically, Cisco is has been performing well since bouncing off a low of 15 in late July. The stock has posted higher highs and higher lows since that time. The coveted golden cross has been achieved. The stock has broken out above the resistance at the top of the uptrend channel.
Cisco is trading at a low price to earnings multiple even when taking into account lower earnings expectations. Furthermore the stock is trading several multiples below the long-term norm.
The proliferation of smartphones and other mobile devices should be a major profit driver for the company. I posit the need for network improvements as the growth of people transacting on their mobile devices will soon reach a tipping point and Cisco will be there to provide solutions. The tide has turned for Cisco. Cisco is a long-term buy.
General Electric Company (GE)
The company is trading 4% below its 52 week high and has 12% potential upside based on the consensus mean target price of $24.71 for the company. GE was trading Thursday at $22.08, up almost 1% for the day.
Fundamentally, GE looks solid. GE's forward P/E is 11.92. GE's quarter over quarter EPS and sales growth rates are 10% and 4%, respectively. GE's net profit margin is 10.11%. GE has a dividend with a yield of 3.46%.
Technically, GE is has been in an uptrend since bouncing off a low of $18 in June. Recently, the stock has broken out to the upside after testing the 200-dqy sma twice in the last quarter.
GE looks poised to take advantage of an upturn in growth in the emerging markets. If global growth does improve, GE will definitely grow along with it. The stock gapped up recently. I would wait for a pullback prior to starting a position.
The Bottom Line
I posit these stocks present excellent buying opportunities. The potential is great for them to rise significantly from current levels as the markets gain their footing. Markets incessantly gyrate, the only constant is the fact that they always go up over the long haul.
These are long-term investments. If you try to trade the market during these volatile times, you will most certainly get crushed. The risk reward ratio for a long position in these stocks is currently favorable. There will be more volatility in the market going forward though. Remember, we are sitting at five year highs.
If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk and setting a 5% trailing stop loss to minimize losses even further if you wish.
Disclosure: I am long C.
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.