12 Winners To Carry Into 2012

by: Kinetic Investments

While the Dow, Nasdaq, and S&P have all been essentially flat on the year, in 2011 the markets have played host to remarkable volatility. The year has given us an inordinate and record number of trading days where we have seen triple digit moves on the Dow and some intense see-saw action between the months of July and November.

Click to enlarge:

Dow,S&P and Nasdaq YTD Chart

There have been unusual and interesting couplings and decoupling between commodities, equities, currencies and global markets, in general. With so many quality U.S. equities seemingly outrageously undervalued, many have taken profits in precious metals to take advantage of the low multiples and reinvest those monies by getting defensive or bullishly positioning for what looks to be a promising year ahead for U.S. equities.

Analysts and U.S. companies in general have complained about the current U.S. government's disconnect or seeming anti-Wall Street sentiment, while many major components of the U.S. indices have posted record profits and margins due to consolidation, streamlining, job eliminations and general strides towards increased efficiency.

For the better part of the year traders were reactive, making their moves primarily based on news coming out of the troubled and dysfunctional EU. Many hedge funds were left chasing profit as they headed into year's end, looking for a Santa Claus rally that has yet to materialize. Most positioned themselves for year's end in October. And with many market participants being absent in the short week ahead, we may see yet more volatility as the result of thin trading, with bulls and bears alike putting the final touches on their respective 2011-headed-into-2012 strategic positioning.

The market volatility has been quite beneficial to many of the consummate day-traders and swing traders out there, as well as the momentum and triple leveraged ETF players that knew what they were doing. The often-complained about double and triple leveraged instruments such as TNA, TZA, FAZ and FAS were among the most heavily-traded and greatest profit generators for many savvy market participants.

Amidst all of the year's chaos, ups and downs, and general global economic uncertainties, there are only a couple of U.S. market sectors I like for 2012 that have outperformed the S&P this year. And there's more than a handful of names within those sectors that have seriously outperformed their industry peers in spite of the flat year, which also seem to have going-forward power for the soon-to-be new year. There are also a couple of sectors that have underperformed the market this year that I expect to fare much better next year.

Utilities have outperformed the S&P by more than 8%. Within the sector there are some standouts from 2011 that show strong future performance potential, such as Dominion Resources (NYSE:D), Consolidated Edison (NYSE:ED) and American Electric Power (NYSE:AEP). All three tickers are up between 15% and 25% on the year with forward P/Es between 13 and 17.

Consumer Non-Cyclical has outperformed the S&P by a little more than 1%. Colgate-Palmolive (NYSE:CL), Altria Group (NYSE:MO) and General Mills (NYSE:GIS) are three of the big cap companies in the sector with strong continued growth potential that had nice double digit percentage gains on the year and have relatively low P/Es. All three of the names can be considered safe places to park long-term money and see some nice paper gains over the next year.

Though Energy has underperformed the S&P by more than 5%, I am anticipating a nice rebound in that sector next year. Big names like The Southern Company (NYSE:SO), Pinnacle West Capital (NYSE:PNW) and Duke Energy (NYSE:DUK) are all up well over 15% on the year with forward P/Es well under 20 and all seem poised for continued market outperformance for 2012.

The Services sector has underperformed the S&P by more than 2%, yet there have been some tremendous winners, particularly in the restaurant industry. Domino's Pizza (NYSE:DPZ) is up a whopping 112% on the year with a forward P/E of 18. Shares of McDonald's (NYSE:MCD) are up over 30% year to date and sport a forward P/E of just 17.5. Yum Brands (NYSE:YUM) is up a little over 20% on the year with a forward P/E of 18. I like all three for 2012, as well.

While I am certainly no perma-bull, I do have a bullish outlook for 2012. I expect the early part of the year to demonstrate a continuance of this year's wild volatility as the economy continues to muddle along, but see the volatility settling down quite a bit well before mid-year. By then the U.S. markets should be much less driven by the EU news and hopefully somewhat less tied to the euro. Withstanding any serious economic setbacks or crises, U.S. equities should continue to be seen as safe-havens for global investors and traders alike, as valuations for them are currently extremely attractive.

My portfolio is pretty well set heading into 2012, but I will certainly be looking for opportunities to add over the next two weeks, should the right opportunities present themselves. Happy holidays and happy trading to all.

Disclosure: I am long AEP, DUK, MO, DPZ, SO, MCD.