4 Investment Themes and 4 Stocks to Benefit

 |  Includes: CMI, DEER, EFA, IAC, MAN, SPY
by: Steve Reitmeister

As I look out over the investment landscape for the New Year, I see four profitable investment themes playing out. Each offers upside potential for investors. Blending all four into your portfolio this year should lead to strong outperformance. Here are those themes:

Theme #1: Developing Markets

This is the most obvious of the themes that has been paying off handsomely for the past few years. Since there are no signs of slowing, then I think investors should stay on board.

In essence, developing nations like China, India, Brazil etc. will be devouring massive amounts of resources to build out their infrastructures to support a booming economy. Certainly one can play commodities like copper or oil to benefit. Yet I think industrials offer the most profit leverage to this trend. Meaning companies that produce machinery that helps keep these new economies humming is where to place your bets.

My favorite industrial to benefit from this trend is Cummins Inc. (NYSE:CMI), which makes engines that go into almost every type of large transportation vehicle. As you might imagine their engines are in high demand for all the new trains, trucks, and ships needed to move all the resources that these emerging economies demand. One Wall Street analyst is pounding the table that earnings could nearly double to $11 per share by 2013. That is quite possible making the current share price very attractive.

Theme #2: Improving Employment Picture

When the weekly jobless claims started coming in under 450,000 on a regular basis it was clear the tide was starting to turn for employment. Then the final weekly report before the New Year came in under 400,000 for the first time since the onset of the Great Recession. The cherry on top of this treat is Wednesday’s ADP reporting showing 3X more jobs gains than expected in December.

This news is very positive for the economy as a whole with many beneficiaries. The most direct beneficiaries are staffing firms who will help corporations fill the growing list of job openings.

There are a lot of attractive names in the group, but it’s always best to go for quality first. In this case, Manpower (NYSE:MAN) is the clear choice. On the ADP news it sprinted to a new high, but don’t let that scare you away. They have great leverage to this improving trend and could easily be 30-50% higher a year from now.

Theme #3: Advertising Budgets Expand

This is probably one of the lesser followed trends, but no less powerful than the others. Consider this. When the economy tanks the first thing most businesses do to help the bottom line is cut marketing expenses (the next thing they do is fire massive amounts of employees).

So as the economy rebounds it often takes some time until companies can stomach the risk of adding to their marketing expenditures. Gladly there are already signs of this taking place with online advertising showing the most robust gains.

That is why I am selecting InterActiveCorp (IACI) as my pick to benefit from this trend. With top web properties like Match.com in their fold they will benefit from this healthy pick up in advertising spending. Fundamental investors may also want to note their sparkling balance sheet with over $1 billion in cash.

Theme #4: More Risk Appetite = More Gains for Riskier Stocks

When the market tanked in 2008 it scared away many individual investors from the stock market. Some who ventured back in 2009 and 2010 may have been scared off by the extreme volatility. Yet as things continue to settle down. And as more headlines read like “Stocks Highest in 29 Months!” then some of that investor fear will turn to greed.

That pendulum swing may not fully happen until later in the year, but when it does investors will not be satisfied with boring S&P type returns. They will venture into smaller and riskier stocks to get some upside potential.

My pick to benefit from this trend is Deer Consumer Products (OTC:DEER). In fact, this emerging Chinese maker of kitchen and household appliances benefits from 3 of the themes mentioned. Yes, they are a small cap stock (#4) that has most of its sales in developing nations (#1) and their products are aimed at the consumer market (#2 since rising employment = stronger consumer).

I hope you appreciate the validity of these investment themes and will align your portfolio to benefit from them in 2011.

Disclosure: I am long CMI, OTC:DEER, IACI, MAN.