JP Morgan (NYSE:JPM) has come up with a list of stocks in the consumer space that it thinks will outperform their respective industries as well as the market. Here are highlights of the top picks:
Based on trends and historical data JP Morgan doesn’t expect the airline industry to return to profitability in 2012. The first half of 2009 was an economic low where the airline industry was close to collapse and current trends are showing similar results. This time, though, JP Morgan says that the industry has improved despite the bankruptcy filing by American Airlines (AMR). This is seen as a beneficial outcome for the industry where profits will grow in the long term.
United Continental Holdings (NYSE:UAL) is JP Morgan’s top pick for the airline industry due to a number of reasons. The primary reason is the increase in UAL’s market share as a result of AMR’s bankruptcy filing. UAL’s revenue is expected to increase by $500 million and costs will decrease by approximately $100 million. The current share price of $20.13 is expected to go north of $27. UAL has a market capitalization of $6.7 billion and it has earnings per share of $1.43. Paul Reeder's Par Capital had nearly $300 million invested in UAL at the end of September.
Autos & Auto Parts
The auto sector markets are currently showing mixed signals. The U.S. SAAR has been moving upward, however, the Western European PV SAAR has shown adverse results. Suppliers and manufacturers are forecasting conservative measures in 2012. JP Morgan suggests companies such as Visteon Corporation (NYSE:VC), Tesla Motors (NASDAQ:TSLA), and Harman International (NYSE:HAR) because they are non-SAAR dependent. The global tire companies are also recommended due to stabilization in prices.
Visteon Corporation (VC) is a leading global automotive supplier and the best idea for investment in the autos related industry. JP Morgan feels that the company is confident about its portfolio restructuring actions due to the hiring of a former U.S. Auto Task Force Member, and keeping Rothschild and Goldman as financial advisors. The company is currently trading at $56.30, which is expected to go north of $76. Visteon has a market capitalization of $2.9 billion.
There has hardly been any growth in the beverages sector with no signs of profits. Demand is at an all-time low with both non-alcoholic and beer companies showing a decrease in customer base. High unemployment rates, coupled with a decrease in customer loyalty, have led to a slowdown of growth in this industry. Also, the raw material sector did not benefit from favorable hedges. JP Morgan has advised investors to remain underweight the entire industry.
PepsiCo (NYSE:PEP), being one of the only three overweight-rated companies, is the best pick for the beverages sector. While the company did not meet expected targets, JP Morgan believes that PepsiCo will increase its advertising support, thus putting growth in the 4%-5% range. PepsiCo’s stock is currently trading at $64.65 and is expected to trade in the range of $58.50 to $71.89. The company has positive earnings per share of $3.99 and has a market capitalization of $101 billion. Boykin Curry's Eagle Capital had nearly $350 million in PEP at the end of September.
The food manufacturing industry faces a mixed outlook for the year 2012. Cost inflation is expected to decline in the upcoming year and will prove beneficial for the industry. There will, however, be a slowdown in sales and earnings growth if exchange rates remain relatively flat. Hoarding of food and trading down will be detrimental to this sector along with government austerity programs. Lastly, competitive behavior has been observed in Australia where sales have decreased as a result.
J.M. Smucker Co. (NYSE:SJM), the branded leader in the industry, has been picked as the best stock in the food manufacturing industry. The company is expected to have a positive earnings growth in 2012 due to a decrease in the cost of raw materials, benefits from its restructuring program, and share repurchases. Its stock is currently trading at $76.67 per share and is expected to go north of $80. J.M. Smucker has a market capitalization of $8.7 billion and has earnings per share of $4.
With the worst of the inflation behind it, the food retail sector can finally enjoy low single-digit cost inflation in 2012. This will help the industry grow as observed in past low inflationary trends. An expected decrease in prices next year will likely slow down the growth in revenue. Retailers will be worthy investments for the upcoming year due to a forecasted price increase by large supermarkets.
The Fresh Market (NASDAQ:TFM) is a chain of specialty food stores. JP Morgan has nominated it as a strong company with potential for growth because it has dug into a lucrative niche; higher-income consumers looking for some quality shopping experience. Its stock is currently trading at $40.55 and is forecasted to remain between $30.86 and $46.85 in the upcoming year. Earnings per share are $0.33 and market capitalization is $1.95 billion.
The gaming sector has seen positive outcomes in Asia where competition is scarce. The revenue growth has increased in Macau and is forecasted to stay in the 15%-20% range for 2012. This value is higher than in the U.S. where macro trends have slowed down the economic recovery. The Singapore gaming market is increasing its share in the U.S. and will maintain solid growth.
Las Vegas Sands (NYSE:LVS) is an integrated resort company based in the U.S. It has been given an Overweight rating due to superior growth expectations and a solid risk-reward proposition. Its price per share is trading at $45.48 and is expected to go north of $51. It has a market capitalization of $37.4 billion and earnings per share of $1.43.
Homebuilding & Building Products
The homebuilders will continue to see a detrimental macro environment as well as depressed valuations for the upcoming year. JP Morgan suggests careful selection of stocks due to the adverse economic conditions for this sector. The best stock ideas in homebuilding and building products are Lennar (NYSE:LEN) and Owens Corning (NYSE:OC), respectively.
Lennar has been given an Overweight rating due to its consistent earnings per share and an accretive Rialto segment. Lennar’s higher margins and profitability will be beneficial for investors in the upcoming year in addition to accretion from its Rialto segment. Its stock is currently trading at $19.27 per share and can trade north of $21. It has a market capitalization of $3.46 billion and earnings per share of $0.48.
Owens Corning is an attractive valuation play for the upcoming year. One of its main segments, namely Insulation, shows signs of recovery and, thus, becomes a great investment opportunity. Its other segments (Roofing and Composites) show consistent and improved margins. Currently, the company’s stock is priced at $28.98 per share and is expected to remain between $18.67 and $38.94 in the upcoming year. Owens has a market capitalization of $3.5 billion and earnings per share of $0.94. Lee Ainslie's Maverick Capital is the most bullish hedge fund about OC with a $154 million position at the end of September.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.