As 2012 comes to a close I have been researching the different market segments for strong, undervalued equities poised to pop in 2013. Based upon this research I have picked my top five favorites with what I view as having the highest potential for gains over the next 6 months.
Before I begin, it is important to keep in mind that the looming fiscal cliff is bound to manipulate the markets over the next few weeks until a final resolution is eventually hammered out. This has become evident based upon the market's reactions over the last week. On Thursday, President Obama began negotiations with an initial proposal seeking to increase the tax revenue on the wealthiest 2% of Americans by a total of $1.6 trillion over the next 10 years. This offer was combined with minor spending cuts far below what was expected from the GOP. The Republican House Speaker, John Boehner, responded to this proposal stating that, "Unfortunately, many Democrats continue to rule out sensible spending cuts that must be part of any significant agreement that will reduce our deficit." As this debacle continues over the next few weeks the markets are likely hang on every word coming from Washington. In the end, however we will have a resolution that could send the markets back up and over their previous 52-week highs. When this moment comes you will want to be in these stocks for the ride.
So what are my top 5 value picks you ask? Simple: American International Group, Inc (NYSE:AIG) Caterpillar, Inc (NYSE:CAT), Bank of America (NYSE:BAC), Freeport-McMoRan Copper & Gold Inc (NYSE:FCX) and Citigroup, Inc (NYSE:C).
Everyone remembers the infamous beating AIG has taken over the past four years, dropping from its price adjusted highs of over $1150 in January of 2008, to its most recent close at just over $33. If you take a closer look at AIG today however, I see a whole new opportunity for some pretty radical recovery in 2013. Looking back over the past four years I found that on September 16, 2008, the Fed initiated its bailout package consisting of slightly more than $182 billion, which began a massive exodus of its shareholders. Fast-forward four years later and the government has not only recovered $197.4 billion from its original investment but still owns approximately 16% of the company. This is too shabby of a return for Uncle Sam. On top of this, AIG's cash flow has increased dramatically throughout 2012 and its liabilities have been on a steady decline every quarter since 2009. On top of this, AIG is still trading at a price tag that is less than 55% of its price-to-book value. This makes it extremely attractive for future growth.
CAT has recently dropped back down near its 52-week lows due to the slowing of the industrial sectors worldwide. Its 52-week range has been between $78.25 to $116.95 and it is currently priced just above $85. This company has a history of success and brand recognition worldwide that associates it with the highest quality. Its balance sheets are the top in its sector and over the past year it has seen earnings rise close to 50%. It has an attractive P/E ratio of 8.73 and yields a 2.4% dividend making it a key equity play for the average long-term investor. In addition, it also stands to reap addition revenue this quarter due its involvement in repairing the most recent damages resulting from hurricane Sandy. In my opinion, by next quarter's earnings we will see this one back up near the $100 range.
BAC has been one of my favorite stocks over the past year, rising from $5.80 in January to its most recent close of $9.86 on Friday. Even with this dramatic increase over this past year, BAC still remains one of the best value-plays on the market today. It trades at a market cap that is less than 50% of its shareholder equity. It has settled the majority of its lawsuits that have held it down over the past three years while its peers have seen higher gains. And ultimately, it has generated a respectful amount of cash from the sale of its non-core assets. This makes it the best capitalized company in the financial sector signaling a possible dividend hike and/or share buyback sometime in the near future. I like the direction this company has been heading and I will continue to maintain my stake in this company far into 2013.
C shares a similar profile to BAC. Over the past year it has seen over a 30% growth in its share price and it's now trading back up near its 52-week high. At the same time however, its 52-week high is still only 70% of its tangible book value, leaving plenty of room for an upside as the market recovers.
The last stock on my list is FCX. Freeport-McMoRan has ranged from $31.08 - $48.96 over the past year and it has most recently closed at $39.01. The company has had a very strong P/E ratio at 12.62 and currently yields an EPS of $3.09. Combine all this with a strong 3.2% dividend and the foreseen rising prices of copper and gold and this stock should see $45 by end of 2013.
So in short I expect a lot of action in the markets this December but in my opinion all five of these companies should be strong enough to withstand the volatility and come out strong on the other side. So enjoy these Christmas picks and hopefully they will lead you to a very happy New Year.
Disclosure: I am long AIG, BAC, C, CAT, FCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.