I am making a bullish prediction for the month of December. I believe the Dow Jones will test 52 week highs by the end of the month, which is 12,876. To some, this prediction may sound crazy -- there will even be some who believe I'm overly optimistic following a rally within the market. However, I've been bullish on this market since August, and I've loaded up on undervalued stocks every time the market's fallen and presented what I believe to be value. And I can honestly say that I've returned higher gains in the last 4 months than in the year by simply playing the emotion of the market.
There has been very little to validate the market's price swings and high volatility over the last four months. Some suggest it's because of Europe, and they would be correct; however, what event in Europe has affected companies such as General Motors (GM) which has lost 33% of its value since July while posting its best sales since cash-for-clunkers? Or how does Europe affect regional banks such as Huntington (HBAN) which is driven by the region in which it serves?
The truth is that the problems in Europe are devastating and could affect global trade, however, all data from the U.S. suggests the economy is growing and the largest of companies are posting record earnings and are growing at an incredible rate regardless of the problems within the eurozone. Yet, U.S. progress has been overshadowed by Europe's financial crisis, which probably affects less than 5% of all companies that trade in our markets. Therefore, I believe the loss has been exaggerated and is more fear than fundamentals, and that the market's fear related loss will now present the perfect opportunity for large gains throughout this holiday season.
Although I'm sure that more volatility will plague the markets in the future, I strongly believe that December will provide gains as the markets react to U.S. data and set aside the European crisis. The three major indices each posted gains of more than 4% on Wednesday and it was a well-deserved gain. The private job sector added 206,000 in November and showed strong growth in small businesses. Black Friday and Cyber Monday were at record highs which could indicate that this holiday season will be exceptional and third quarter productivity rose to 2.3%. However the big news of the day is that Europe will get the funds to at least quiet the global markets for the next couple months which means U.S. markets can trade off fundamentals.
There are stocks being traded with large losses since July for no fundamental reason. These stocks have lost value out of fear and speculation that conditions in Europe could carry into the U.S. There is no reason for these stocks to be trading lower, and although I doubt these stocks will regain all of their loss during the month of December, I expect that several will post large gains over the next few weeks. Therefore, I have listed 5 stocks that have upside of at least 20% during the month of December. These stocks are actually trading with better fundamentals than in July, when its stock was trading higher, which makes these stocks even more undervalued.
I remember when Citigroup (C) first began to fall; I kept saying there is no way it will fall below $40 -- and then I knew it wouldn't fall below $30 -- then I was speechless when it nearly fell below $20. Citigroup is one of the more damaged stocks over the last 6 months and has lost 31% of its value, nearly $37.5 billion, since July 21. In my opinion Citigroup is one of the strongest of the large money center banks being traded in the market. The company's given investors no reason to believe its been negatively affected by the events in Europe, and although it does have a presence in Europe the bank is more commercial driven than consumer.
Citigroup, along with several other large banks, has been picked apart and analyzed a hundred times with people that are just looking for something to be wrong, when the bottom line is that Citigroup is a good company in a bad industry. If the markets were to trade lower in the month of December so would Citigroup, regardless of its fundamentals, yet I believe the market will trade higher in December which means I expect C to post large gains. The stock trades 155% more volatile than the market which should allow it to continuously ride the market higher. At $27.48 the stock presents significant upside with limited downside and if the market were to continue rising, Citigroup could test its previous resistance of $35, which is a 28% upside during the month of December.
I view JPMorgan Chase (JPM) very similar to Citigroup and believe it's a good company in a bad industry. And much like Citigroup, investors have desperately attempted to explain its loss and find few problems within this company that operates very well despite economic hardships. I believe the stock is a little safer than C because it only trades 22% more volatile than the market which protects investors from the wild swings that other large money center bank stocks can bring. However, the stock has still lost 24% of its value since July 21 with no fundamental cause. In fact, the company actually beat earning estimates by a significant margin during its last quarter. And although the pessimistic investor will argue that there is more to investing in banks than just the top and bottom line numbers, the market reacts to a company's overall performance by its earnings and JPM has been among the best and most consistent of the large banks.
And if it weren't for the negativity in the market during the last four months, the stock would be trading near $60 a share because of its strong earnings. The bottom line is that now may be the time to invest in the fundamentally strongest banks within the market and ignore the pessimism and other investors who are simply trying to find something wrong with the companies. Because the truth is that I could probably find something wrong with a $5 million home, but chances are I'm going to find more positives than negatives, and the same analogy can be used when investing in large money center banks. You can always find something wrong in the best of situations but you have to try and look at the glass half full to make money in this market or you'll be left behind.
Caterpillar (CAT) is another stock that I'm certain would be trading at new highs if it weren't for the market conditions of the last four months. The company has shown remarkable fundamental progress which include revenue gains of more than $4.5 billion and income gains of 44% year-over-year during its most recent earnings report. However, the stock is trading with a loss of 13% since July 21. The stock is currently trading at $97.88, after a 8% gain on Wednesday, and I believe that if the market continues to trend higher this stock could easily surpass $125 and create new all-time highs with a gain of 28%.
Sirius XM (SIRI) is trading with a loss of 20% since July 21, yet, there is no reason that it shouldn't be trading at new 52 week highs. The company's had bad luck over the last four months; most would agree that both of SIRI's last two earnings reports were exceptionally strong, yet both times the company announced its earnings the market was trading substantially lower. Therefore, SIRI traded lower and its strong earnings weren't enough to overshadow the issues and fear that was caused by Europe at the time.
I have no doubt that if the market would've been trading higher or even flat over the last four months that SIRI would be a $3 stock. However, the stock's posted large losses and has been stuck under $1.85 for the last three months. I believe the stock is well positioned for gains, yet it must first surpass its $1.85 resistance, and if the market continues to trend higher, SIRI will surpass this level and if so its next resistance will be $2.25, which I believe can easily be reached for a gain of 25% from its current price.
Alcatel-Lucent (ALU) has been the most difficult stock to predict because of its trading range over the last 6 months. As of now the stock is showing no resistance at neither the bottom nor top because the stock's been trending lower on a consistent basis. The stock has posted a loss of 68% since July 21 which has been a result of two events: a significant presence in Europe and lowered guidance in Europe. Yet, the company has a substantial presence in the U.S. and its lowered guidance was more of a precaution because of events that should've been incorporated into the stock because of its loss.
The stock's reaction is now presenting incredible value, the company is developing its network in some of the most populated underdeveloped countries in the world and has the lowest valuation compared to book value per share within its industry. In fact, most of its competitors trade at least 50% greater than book value per share while ALU now trades even to its book value. The short-term upside for this stock is hard to predict because of its recent trend, however, I believe that it will surpass $2 which would be a gain of 25%.