My Top 10 Stock Predictions For 2012 And Some Options Plays

by: Kevin M. O'Brien

In 2011, the stock markets had another wild ride. This seems to be the case every year since 2008. Between the eurozone crisis on a daily basis, politicians caring more about their own agendas than the public's, and also then Steve Jobs passing away; there were plenty of stories in 2011.

For this article, I would like to get into how I think some stocks will perform and the markets as a whole will perform, both positive and negative.

Here is what to look for in 2012:

  1. Apple Inc. (NASDAQ:AAPL) will reach $500.00/share at some point in 2012. I view Apple as trading at an extreme discount right now. I am expecting to see a run-up in price ahead of the company's next earnings call on January 17, 2012. I am also expecting that this earnings release is going to be absolutely fantastic. It would be a wise choice to block out all the negative rumors and sentiment surrounding Apple right now. This is a stock that is so attractively priced right now that it will not stay at this level for very long. Check back with me after January 17th next year.

  2. Research In Motion (RIMM) will go private. The stock, rightfully so, has been completely crushed in 2011. The negative sentiment surrounding this company makes it hard to envision the stock price recovering anytime soon. Their two-CEO structure has been a major problem. Concerns with Research In Motion are plentiful. This was once a great and innovative company. It actually makes sense to take it private sooner rather than later as the stock price looks to be headed to the single digits unless a buyout could happen, which I do not see taking place.

  3. InterDigital Inc. (NASDAQ:IDCC) will be sold for the highest amount ever paid for Intellectual Property (IP) patents. Whether it is a consortium or single company that buys InterDigital, the price should exceed what was paid for the Nortel (OTC:NRTLQ) patents in mid-2011.

  4. Google (NASDAQ:GOOG) will surpass $725.00/share. Google has a lot of trouble over the last few years maintaining its all-time highs. I do not think this will be the case in 2012. The stock is really starting to show strength of late and I do believe this carries over into next year.

  5. The Dow Jones Industrial Average (DJIA) will reach 13,000.00. Yes, I am bullish on the markets overall for 2012. Once the eurozone worries subside (and they will sooner rather than later), this should take a lot of the daily strain off the U.S. markets. In some ways, it has been remarkable how well some stocks have held up despite this.

The following stocks that have been hit extremely hard by market conditions lately that should see their share price increase are the following:

  • Ford Motor Company (NYSE:F)
  • Alcoa (NYSE:AA)

  • Citigroup (NYSE:C)

  • EMC Corp. (EMC)

  • JP Morgan Chase (NYSE:JPM)

  • Apache (NYSE:APA)

The jobless rate seems to be improving, albeit slow, and this should be great for the markets as a whole.

  1. How Bank of America (NYSE:BAC) will perform next year definitely makes it a stock to watch in 2012. After the markets closed on Wednesday, it was announced that the company and its Countrywide financial unit agreed to pay a $335 million dollar settlement over discrimination against minority homeowners. This is probably the least of Bank of America's lawsuit worries going forward, as I have written in previous articles here and here.

However, should the company weather the storm, there is tremendous upside in owning the stock or by purchasing call options. One strategy that I wrote an article about on Seeking Alpha that minimizes risk if you would like to take advantage of a possible upswing, but one that can also profit should the stock fall further, is the 'short call ladder' options strategy. Bank of America's stock is either going to really take off in price from its current price or it will completely tank in 2012. Using a neutral-bullish strategy is a smart move.

  1. There are a several stocks that I am very bearish on for 2012. As I wrote here an article that highlighted five overpriced stocks, I still maintain that the following stocks are due for a drop in share price:
    • (NYSE:CRM) - Oracle's (NASDAQ:ORCL) horrible earnings and estimates released after the market closed on Tuesday does not bode well for Salesforce. This company has an extremely high price-to-earnings ratio and should definitely fall more, even after a large sell-off on Wednesday.

    • Chipotle Mexican Grill (NYSE:CMG)

    • Bed Bath & Beyond (NASDAQ:BBBY)

  1. What happens with Netflix (NASDAQ:NFLX) in 2012 is certainly going to be very interesting. This stock saw one of the quickest falls in recent memory in 2011. At one point, Netflix was trading over $300.00/share. In the span of a couple of months, the stock was well under $100.00/share.

Currently trading at $70.97/share, the debate on where this stock is going will continue in 2012. My recommendation is to be very careful if you choose to short this stock. While I am not necessarily bullish on this stock, it is a very dangerous stock to only take a downside position with.

Two options strategies that I feel will work great with a stock such as Netflix is the 'strap' and 'strip'. Using the minimum number of contracts needed to place this trade accurately for explanation purposes, the 'strap' involves purchasing two (2) at-the-money call options and also buying one (1) at-the-money put option. The 'strip' strategy would be the opposite, which is buying one (1) at-the-money call option and two (2) at-the-money put options.

  1. Chinese solar companies will have a huge recovery in 2012. My two favorite Chinese solar stocks are Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL). Since the United States has shown virtually no interest in expanding solar, these underpriced Chinese solar companies will be the beneficiaries. Hedge funds have shorted so many solar stocks, which in turn has really depleted their share price. American-based First Solar (NASDAQ:FSLR) has plummeted and continues to issue lowered earnings estimates. First Solar has also had some major shake-ups in management. Value and upside are the key points here, and both Yingli Green Energy and Trina Solar have both going for them.

  2. Finally, my top stock pick for 2012 is VirnetX Holding Corp. (NYSEMKT:VHC). VirnetX engages in developing and commercializing software and technology solutions for securing real-time communications over the Internet. Its software and technology solutions, which include secure domain name registry and GABRIEL Connection Technology, facilitate secure communications and create a secure environment for real-time communication applications, such as instant messaging, voice over Internet protocol, smart phones, eReaders, and video conferencing. The company focuses on commercializing its technology to original equipment manufacturers within the IP-telephony, mobility, fixed-mobile convergence, and unified communications markets.

I wrote about VirnetX back in September. This company is an Intellectual Property (IP) diamond in the rough. It currently has patent infringement claims against Apple, Cisco (NASDAQ:CSCO), and others that will hold up in court, even though the above named companies are trying to fight it. Please see the following links here for more information on VirnetX patent claims and the United States Patent and Trade Office (USPTO) decisions.

VirnetX, along with InterDigital, is a strong cnadidate to be bought out in 2012. The company owns many strong security patents that will be very lucrative for a company in the coming years.

I am expecting this stock to double by the end of 2012, if not sooner.

I wish everyone Happy Holidays and a Happy New Year.

Disclosure: I am long AAPL, GOOG, CF, F, EMC, AA, APA, C, JPM, CSCO, VHC, IDCC.

Additional disclosure: I own call options on AAPL, GOOG, IDCC, F, AA, C, EMC, JPM, APA and VHC and put options with RIMM, CRM, CMG, neutral on BAC ,