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"Never make predictions, especially about the future." - Casey Stengel

In my previous article I presented some of the "expert" predictions made a year ago. As a reminder, many experts had a 12 months target price of $18 for Bank of America (BAC) and $60 for JPMorgan Chase (JPM). Goldman Sachs (GS) said in its 2011 Yearly forecast that "it sees the S&P gaining nearly 25% to a level of 1450 in the next 12 months." (The index ended the year essentially flat.) Many experts still think they actually know what the future will bring. They don't seem to be embarrassed by their past predictions and don't let the facts confuse them.

"An optimist stays up New Year's Eve to see the New Year in. A pessimist stays up to make sure the old one leaves." - Bill Vaughan

After checking some of the 2011 predictions about some of the most widely held stocks, I decided to check the 2012 predictions for the same stocks. Remember, all projections and price targets (PTs) are for a 12-month period.

  1. Bank of America ended the year at $5.56. Average one-year PT is $9.58 with very wide range of $6.00-14.50. JPMorgan has a PT of $13.
  2. Microsoft (MSFT) is down 4% in 2011 from $27.01 to $25.96. Average one-year PT is $30.93. Goldman Sachs has a PT of $29, JPMorgan $28, while Stifel Nicolaus is more aggressive with a PT of $32.
  3. Cisco Systems (CSCO) is down 15%, from $20.91 to $18.08. JPMorgan upgraded CSCO with a PT of $21 and FBN Securities raised the PT to $25.
  4. JP Morgan Chase fell 25% from $44.04 to $33.25. The average PT is around $46, with estimates ranging from $35 to $56. Morgan Stanley has the highest PT of $56 while Goldman Sachs has a more realistic PT of $43.
  5. General Electric (GE) is down 8% for the year, from $19.46 to $17.91. Sterne Agee has a PT of 22.75. The range is much more narrow for GE at $19-25.
  6. Apple (AAPL) has seen its stock rising 19% to $405. Piper Jaffray reiterated its $607 PT, Evercore Partners has a PT of $600. Most other firms have PTs in $500-540 range, with average PT of $505 based on 47 analysts.
  7. Google (GOOG) price increased 7% to $645.90. The average PT for GOOG is around $725, but the range is especially wide - $400-850. (Jefferies has the most aggressive PT of $850.)
  8. McDonald's (MCD) was among 2011 stars, rising 40% to $100.33. Most of MCD analysts see the stock price almost unchanged in 2012.

Here are some of the other favorite stocks for 2012:

Barron's "10 favorite stocks for 2012" include Berkshire Hathaway (BRK.A), Comcast (CMCSA), Daimler (OTCPK:DDAIF), Freeport McMoRan (FCX), MetLife (MET), Procter & Gamble (PG), Royal Dutch Shell (RDS.A), Sanofi (SNY), Seagate Tech (STX) and Vodaphone (VOD). Barron's admitted that 2011 picks have trailed the market - the 10 stocks were down an average of 6.9%, versus a 1.9% drop for the S&P 500. Should we trust them this year?

Forbes' Experts Top Stock For 2012 include Caterpillar (CAT), FedEx (FDX), Hershey (HSY), Capital One Financial (COF), Mako Surgical (MAKO), Microsoft, Arcos Dorados (ARCO), Turkcell (TKC), Alcoa (AA) and Banco Santander (STD). Will they do better than 2011 Picks?

And what do the "experts" think about the S&P 500?

"We have already seen the peak for equities for this cycle, back in April 2011. We should have a range of 1000-1350, with more room to the downside than the upside." - Bob Farrell, ex-Merrill Lynch analyst and forecaster

"Market strategists predict the S&P will stay in a range of 1100-1500. The finish for 2012 in this range depends on how investors balance economic growth, fiscal policy, corporate earnings and the European debt crisis, as well as the potential for change after the November election." - New York Times outlook

Wow! The S&P is now at 1250, it doesn't take much intelligence to predict it will be between -20% and +20%.

Goldman Sachs sees the index ending 2012 at 1250. After being wrong by 25% in 2011, will they do better this year?

So next time you decide to rely on analysts in your investment decisions, remember how they performed in 2011. Do you have any reason to believe that 2012 will be different? However, if you don't want to try and predict where the stocks will go, there are some other ways to trade. I'm talking about options of course, my favorite way to trade. I think even if you own stocks, you need some options in your portfolio to manage risk. In my opinion, owning stocks alone is like driving a car without insurance.

I outlined some of the option strategies I'm using in my previous articles. Even for directional trades, options might be a better bet. For example, the Google and Apple trades that I shared three weeks ago used a bull credit spread as a bullish strategy that makes money if the stocks stay above $555 and $365. Both the trades are already up 15%.

If you still want to stay non-directional, here are some simple ways to use options as a non-directional play or protection, without trying to predict the future equity prices:

  • If you own shares of a beaten down stock like Bank of America, you can check here how you can recover some of your losses at no additional cost.
  • If you like trading earnings but don't want to predict the direction of the stock, check here how you can trade pre-earnings volatility of the options without taking directional risk.
  • If you think the markets are trading in a range, there is a way to profit from it by constructing an Iron Condor or Butterfly trade on one of the indexes.
  • If you own a stock but are concerned about a short-term pullback, you can buy a short-term protection using puts.
  • If you want to get some additional income from the stock you own, you can sell Covered Calls against your stock. If you are ready to take some more risk, you can substitute the stock with LEAPS as described in the McDonald's trade.
  • If you want to lock your profits in a stock but don't want to sell it now due to tax considerations, you can use a collar.
  • If you want to buy shares of your favorite stock below the current market value, you can sell naked puts. In fact, I think this should be the only way to buy your favorite stock. Why to pay a full price if you can buy it at discount?

My final quote for today:

"Trying to predict the future is like driving down a country road at night with no headlights on and looking out the back window." - Peter Drucker

Source: A Review Of 2012 'Expert' Predictions