Seeking Alpha
, Small Cap Gems (626 clicks)
Long only, contrarian, special situations, value
Profile| Send Message|
( followers)  

"Any change, even a change for the better, is always accompanied by drawbacks and discomforts" - Arnold Bennett

Being an investor is a bit like being a race car driver. There are times one needs to open the throttle and other times when one needs to tap the breaks. In 2013, with the Federal Reserve providing ~$1T in liquidity measures and a rapidly improving housing market, equities delivered a better than 30% overall return. It was the best year in the markets since the late 90s, and an investor was best served by pushing the pedal to the metal.

2014 is starting out to be a very different year. The Federal Reserve has started its long awaited 'taper,' the economy seems to be decelerating from the 3% GDP growth turned in during the back half of the previous year and turmoil in emerging markets (Ukraine, Turkey, Argentina, Venezuela, etc) is increasing.

The low beta/high yield stocks and sectors that underperformed the market significantly in 2013 are some of the strongest areas in the market in 2014. I believe this will continue for at least the first half of the year, while market consolidates its gains from 2013 and we get some confirmation that the economy is not providing another one of its "false starts" that have been so prevalent during the past five years in the weakest post recovery on record.

This shift in market sentiment calls for investors to shift gears as well. Most of my "dry powder" is going into income producing/low volatility plays on pullbacks in the overall market. I am looking for stocks with at least a ~3% yield, a valuation less than the market multiple and decent growth prospects. Here are three plays that meet these criteria.

Microsoft (NASDAQ:MSFT) is typical of the large cap stock I think makes for a good equity selection for 2014's market environment. It provides a yield right at three percent, and shareholders can probably expect a dividend hike in the mid-teens around this time next year, looking at recent historical patterns.

Just as importantly, the stock is much cheaper than the overall market. The overall market multiple right now is approximately 15x forward earnings. Microsoft is selling at just over 13x forward earnings. This does not take into account the over $60B in net cash and marketable securities the company has on its balance sheet. Doing so, it sells for ~11x forward earnings.

The company has blown through bottom line estimates each of the last two quarters. Microsoft also has two 'cloud' businesses (Azure and Office 365) that are racking up more than $1B in annual sales each and growing exponentially. Hopefully the new CEO can highlight the company's growing cloud presence as well as take some additional shareholder friendly actions such as an accelerated stock repurchase program and/or special dividend.

Summit Hotel Properties (NYSE:INN) is a more traditional dividend play in the real estate investment trust [REIT] space. This entity focuses on upscale and upper-midscale select-service hotels on a national basis. It has ~90 hotels, with more than 11,000 rooms.

The shares provide almost a five percent yield (4.9%). Summit should benefit from Average Daily Rates (ADRs) and Revenue Per Room (RevPAR) numbers that continue to rise as the economy recovers. This should continue as little hotel construction happened during and for a few years after the financial crisis, constraining supply even as travel picks up.

Finally the shares are cheap at under 10x forward FFO (Funds from Operations) and go for under book value. After posting revenue gains of over 60% in FY2013 due to some acquisitions as well as organic growth, analysts project more than 20% sales increases in FY2014.

A slightly more volatile income pick is Calumet Specialty Product Partners (NASDAQ:CLMT). Calumet is organized as a limited partnership and produces specialty refined hydrocarbon products in several facilities with a ~160,000 barrels per day of capacity.

CLMT provides a robust yield of 10.8%, which compensates for the additional bit of volatility present in the refining sector. Longer term, it should continue to benefit from the huge domestic energy boom going on in the country. The company has approximately $500mm in new projects that should be completed by early 2016, and which should boost sales and cash flow. Calumet expects another $190mm to $215mm in adjusted annual EBITDA when all projects are completed.

Calumet is also benefiting from the EPA's recent decision to relax biofuel and ethanol mandates for 2014, which has drastically reduced the compliance cost for refiners. The shares go for 7x 2012's peak earnings. S&P has a 'Buy' rating and a $33 a share price target on CLMT. The stock currently sells for just over $25 a share.

Investors should be aware that the rules of the road have changed in 2014. A strategy of "Keep it Simple, Keep it Safe" seems prudent until conditions change once again.

Source: Shifting Gears And Embracing More Dividend Stocks