J.P. Morgan (JPM) recently published its outlook for basic materials and pharmaceuticals. Basic materials stocks are cyclical and may be perceived as somewhat risky in this environment. Pharmaceuticals are defensive and should be included in a diversified portfolio. J.P. Morgan is a little bit cautious about both sectors, but there are a few stocks that they think will outperform peers in 2012.
Specialty, Commodity and Agricultural Chemicals:
The agricultural markets are expected to perform well in 2012 due to high crop prices, rising profitability of farmers and low stocks-to-use ratio. This makes this market segment more resilient to macro uncertainties. Commodity markets, on the other hand, saw sharp declines in 2011 due to seasonal factors, low export demand, and decreasing prices. Specialty markets have suffered from sluggish volume growth and a slowdown in demand expansion for emerging markets.
DuPont (DD) is the best stock pick for 2012 because its Agricultural and Performance Chemical segments are still performing well, despite adverse economic conditions. Seed prices are expected to grow by 5% and a better product mix will be the ground for higher revenue growth. The next few years are expected to show better performance growth for the company’s construction and auto-related operations. Currently, its stock is trading at $47.94 and is expected to reach a target price of $57 in 2012. During the last 52 weeks, stock prices have fluctuated between $37.10 and $57. Market capitalization stands at $45.3 billion, and earnings per share of $3.30 are expected to reach targets of $4.10.
Prices in the coal industry (including thermal coal) will continue to be under pressure, as long as the disruptive Australian floods do not occur. A decrease in steel prices is sending cautionary signals to J.P. Morgan. On the other hand, colder weather may increase demand of coal in China, where the prices are relatively higher, resulting in higher imports. The eurozone crisis and a tighter domestic fiscal policy may pose risks to the industry.
CONSOL Energy (CNX) is JP Morgan’s top pick for 2012, as it has the best remaining coal assets in Appalachia, as well as a gas business with large reserves in Marcellus, Utica, and other shales. Also, the company has relatively low cost coal operations as compared to its peers. The stock of CONSOL Energy is currently trading at $40.80 with a price target of $79 in 2012. During the last 52-week period, its stock has traded between a range of $30.56 and $56.32. The company has market capitalization of $9.25 billion and earnings per share of $1.98, which are expected to reach $4.08 by the end of next year. Sonterra Capital initiated a brand new $154 million call position in the stock during the third quarter.
Gold and Precious Metals:
J.P. Morgan thinks that, despite the macro uncertainties, precious metals will remain an attractive investment. Also, gold equities have shown a continuous positive trend, outperforming the S&P 500.
Goldcorp Inc. (GG) is the best pick for this market segment, as it is least affected by geopolitical risk and has shown consistent production growth. By 2015, Goldcorp has forecast an increase in growth by up to 60%. Coupled with an expected increase in valuation of stock, J.P. Morgan has given the company an Overweight rating. Its shares are currently trading at $52.11 and are expected to reach a target price of $63. Over the last 52 weeks, Goldcorp’s stock has fluctuated in the range of $39.04 and $56.31. It has market capitalization of $42.36 billion and its earnings per share of $1.36 are expected to double by the end of 2012.
Metals and Mining:
J.P. Morgan expects 2012 to be more beneficial for the Metals & Mining industry due to a positive growth in the global GDP decreasing inflation in China. It is expected that companies with high levels of fixed costs will perform better with integrated producers to performing better in the steel market.
Freeport-McMoRan (FCX) is J.P. Morgan’s top pick for 2012 as J.P. Morgan believes that its current stock price does not reflect the strong balance sheet. The net cash position of $1.6 billion is expected to grow to $2.7 billion by the end of the next year. The stock of the company is currently trading at $40.54 and is expected to reach a target price of $61. During the last 52-week range, the company’s stock fluctuated between $28.85 and $60.75. FCX has market capitalization of $38.43 billion and its earnings per share of $4.65 are expected to reach $5.08 by the end of 2012.
Paper and Packaging:
J.P. Morgan recommends a cautious approach in the Paper & Packaging market segment due to a consistently sluggish growth in GDP in 2012. Prices are expected to remain constant for the paper industry, while packaging will see an outperformance because of an increase in the market penetration.
Crown Holdings (CCK) is expected to show lower volatility in earnings, and has thus been selected as the best stock pick for 2012. The company may show mid- to high-single-digit organic growth in the upcoming years. Also, Crown Holdings will gain key market shares in emerging markets. Coupled with the dominant market share in the Middle East and SE Asia, long-term earnings are expected to rise substantially. The stock of Crown Holdings is currently trading at $33.14 and is expected to reach $44 in 2012. Over the last year, its stock has fluctuated between $28.68 and $41.58. The company has market capitalization of $5.01 billion and earnings per share of $2.24.
As old patents expire and new ones surface, pharmaceutical companies will see changes in their earnings growth in the upcoming year. With the cost-cutting measures in place, the market segment will be able to maintain its operating margins. J.P. Morgan also forecasts multiple expansions in this market segment.
Pfizer (PFE) was picked as the best stock for 2012 due to its inexpensive valuation, limited earnings risk, and the start of a new product cycle. The company had positive results from its Aristotle study, and Xalkori was also approved. Coupled with the pending approval of Prevnar 13, Pfizer will continue to benefit from positive catalysts. Currently, its stock is trading at $20.23 and is expected to reach a target price of $25 by 2012. Within the last 52-week range, its stock has fluctuated between $16.59 and $21.45. Pfizer has market capitalization of $155.51 billion as well as earnings per share of $2.23. Frank Brosens’ Taconic Capital has the largest stake in PFE among the 350+ hedge funds we are tracking.
With the launch of new products and a series of ongoing favorable pricing, this market segment is expected to see accelerating growth in 2012. J.P. Morgan has given an Overweight rating to companies such as Mylan (MYL), Teva (TEVA), Watson (WPI), and Hospira (HSP) due to continuous improvements in the businesses throughout the year. In-market assets will be further consolidated in 2012 as seen by historic merger activity over the previous years.
Mylan (MYL) is the best stock pick for 2012. The company is ready for a new product cycle in the coming year, and earnings per share are expected to grow in the mid-teens. Mylan’s stock is currently trading at $19.81 and is expected to reach a target price of $28 by 2012. During the last 52-week range, its stock fluctuated between $15.49 and $25.46. Market capitalization is currently $8.45 billion, and earnings per share of $1.62 are expected to reach $ 2.46 by the end of next year. Billionaire hedge fund manager John Paulson is very bullish about MYL, boosting his stake by 67% to more than $400 million during the third quarter.