Positioning Your Portfolio For An Early 2012 Rally

by: Spencer Knight

As 2011 officially winds down, investors should begin preparing their portfolios for an early 2012 rally. Early, in this sense, refers to the first quarter and possibly the second quarter of said year. This rally will occur for two reasons: 1) because of a seasonal pattern in the equities market; and 2) because several major companies will present strong earnings. This should not be taken as a recommendation that every stock will rally along with the broader indexes, but if the index leaders perform well, we will see a sustainable rally.

There will be at least eight stocks that will perform well, and each stock has a different reason to rally. These eight stocks are Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Nike (NYSE:NKE), Coca-Cola Company (NYSE:KO), Anheuser-Busch (NYSE:BUD), Verizon (NYSE:VZ), Darden (NYSE:DRI), and Primerica (NYSE:PRI).

Apple will see an early 2012 rally because of iPhone, iPad, and Mac sales. Even though analysts tend to have a firm grip on the sales estimates and expectations, Apple's stock will see a strong rally in the first quarter of 2012. Despite Apple's recent disappointment, Apple's stock will soar higher the days and weeks prior to the earnings release. Therefore as long as Apple does not miss, the share price will fly post earnings.

A second reason Apple stock will rally over the next few months is because recently the share price has been depressed due to investor pessimism and macro issues. Therefore, Apple's share price is set to move considerably higher during the first quarter of 2012; especially after an earnings blowout.

McDonald's is also in position to move considerably higher during the first few months of 2012 for two different reasons. The first reason is the promotion that allows customers to receive a free Coca-Cola glass with every Large Extra Value meal purchase. Customers are compelled to pay the slight increase in price for the free glass. Thus McDonald's will receive higher revenue, in turn sending the share price higher. It is important to note that this promotion will not lead McDonald's to higher sales than the Summer months.

The second reason McDonald's will see a rally is due to holiday shopping. While consumers shop for the holidays, they will be looking for fast food restaurants in order to continue shopping with the least amount of lag time. With McDonald's' footprint across the country, the fast food chain stands in prime position to capitalize from this trend. Again, this will cause McDonald's revenue to surpass expectations. This will cause investors to send the share price higher during the first few months of 2012.

Nike will also see a fairly strong surge at the beginning of 2012. This will be the first year Nike's share price surges at the beginning of a new year since 2008. It is important to note there are two reasons why this pattern will reverse course. The first reason is the fact that the NBA season began on December 25. Therefore consumers will be purchasing the newest line of shoes and jerseys to be ready for the NBA season. Since this is the first year the NBA season began so late, investors should expect to see the share price tick higher throughout the first quarter of 2012.

Another reason Nike's stock will move higher is because of a more health conscience society that is turning to running; including the the competitive nature of track and field. I personally come from a competitive track and field background, and I have seen the prominence Nike has within track and field first hand . Nevertheless, with the Olympic Games coming up in the middle of 2012, Nike's stock will perform very will during the first quarter of 2012 and this momentum will continue through the Summer.

The Coca-Cola Company will see a strong early 2012 rally as well. Coca-Cola has seen some strong momentum recently that has kept the value stock from plunging along with the broader index. This strength will continue through the first quarter of 2012. With that in mind, the most important reason Coca-Cola's stock will surge is because the holiday season is a time when families get together and often times choose non alcoholic drinks. Coca-Cola thrives in that market .

Therefore due to the depressed state of stocks recently, Coca-Cola's share price will move substantially higher throughout the first quarter; with help from the company's earnings report.

Another beverage company that will see upward movement in share price is Anheuser-Busch. Anheuser-Busch's share price will rally throughout the first quarter of 2012, for the same reasons as Nike and Coca-Cola. Similar to Nike, the first reason is the beginning of the NBA season as well as the ending of the NFL season. While the NBA officially kicks off during the holiday weekend, the NFL will see the season's most watched games come during the first quarter of the year. Therefore, investors will be looking to send the share price higher because fans will undoubtedly purchase Anheuser beverages at the stadium or at home parties.

Another reason Anheuser will see a rally is due to holiday parties throughout the fourth quarter. This will cause the company's earnings to be slightly higher than expected, leading to a slight boost in share price post earnings and throughout the first quarter. Combine this with the momentum Anheuser's stock has seen recently and long term shareholders will be greatly rewarded during the first half of 2012.

Verizon will also post a fairly strong gain throughout the first quarter of 2012. Currently Verizon's share price is spiking in a similar pattern to the beginning of 2011. Therefore, we expect the share price take a breather in the middle of January, but after this period Verizon's share price will move higher. The most important reason for a surge is because the company has seen an increase in smartphone and tablet purchases-- which often times require a two year plan. Therefore, Verizon should see slightly higher revenue than expected during the next year or so.

Part of the share price gain will come from the company's earnings release scheduled for January 24. Therefore Verizon's stock will have an exponential reason to move higher after the pullback from the late 2011 and beginning of January rally. It is important to note Verizon's guidance will be very important for the share price. Verizon will be announcing the company has increased the number of subscribers by a fairly substantial amount during the fourth quarter; which will give investors another reason to send the share price higher.

Darden's stock will also see a strong surge during the first quarter and into the second quarter of 2012. This move will be similar to 2010, when the share price soared 43.7% during the first four months of the year. We will not see Darden duplicate this move, but with the full year 2012 outlook downsized, the stock has fallen to a more valuable level. Ideally Darden's stock is a great buy under 40, but investors will not get this opportunity prior to the early 2012 rally.

It is important to note that the lowered EPS by Darden does not indicate a slowdown in operations. The decrease in EPS is because Darden has decided to pump as much money as needed to bring Olive Garden back to par with expectations. Therefore, Darden's stock has an added bonus to it because the company may have lowered expectations. But this means Darden may increase the same guidance next quarter; if operations improve.

One final stock trading with positive momentum is Primerica. Primerica's stock has been trading between a tight range since the IPO in April 2010, along with a $0.12 per year dividend. More importantly, the current momentum will continue through the first half of 2012. Therefore shareholders will see the share price eclipse the current 52 week high of 26.20 during this period.

Other than Primerica's momentum right now, the company's earnings report is scheduled for early February. This will give the stock some juice to move higher in the middle of the first quarter; which may be a pullback period. The company's earnings will be the biggest event for the company in the first quarter, therefore the majority of the share price movement will come from momentum. Even though the equity trades with light volume comparative to more popular equities; the share price will continue to trend higher throughout the first quarter of 2012.

There are many possibilities when it comes to creating a portfolio for a rally. It can even be difficult to choose a perfect portfolio for a big rally because it is difficult to correctly gauge which sector will lead the rally. Therefore, it is important to select equities that have a history of rallying with the market and a history of strength during weakness. By doing this, investors can expect to see positive returns for their portfolio during a rally.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.