In talking to others about the current concerns facing our economy, I’m often asked questions such as how one should play the high oil prices, where do I see potential fallout from the financial sector, and, most often, how am I positioning my personal portfolio? My answers, like most solutions, are simple: Exposure to emerging markets, good fundamentals, deep value, and growth potential.
With a declining dollar, and a potential slowdown looming the in U.S. economy, exposure to emerging markets can still provide the type of steady, sometimes even explosive, growth you are looking for in your growth and value portfolio. While some prefer to play those markets directly, I prefer to temper my exposure by going through U.S. multinationals with strong overseas markets or through foreign companies who have listed on the NYSE. This strategy lends itself well to strong growth while providing a level of regulatory security and transparency. My favorite companies in this category are Cummins (NYSE:CMI) and LDK Solar (NYSE:LDK).
CMI is in the midst of the best year in company history, beating guidance and delivering stellar earnings. With a growing foreign market and improving fundamentals, CMI will be a strong asset providing steady growth to a portfolio over the next year.
LDK is a vertically integrated provider in the hot Chinese Solar sector. Enjoying strong margins and 100%+ growth, it is well positioned to be the big beneficiary of China’s push to develop alternative energy solutions within their borders. Recent allegations of a former employee coupled with strong short selling have made this company a strong discount to its peers. While bad news has been abundantly priced in, this stock could easily double in the next 6 months, and provides a real opportunity for a 4-bagger in 18 months with the completion of its new facility, and the addition of capacity that comes with this expansion.
Another strong play with a declining dollar is commodities. Again, I prefer to stick with equities rather than playing commodities directly. While there are several very strong companies, my favorite is Southern Copper (PCU). With PCU pulling back to less than 12 times P/E while offering better than a 7% yield, this company provides deep value with excellent growth. Recent sell-offs by financials sent them downward, thereby offering a great entry point. My 12-month target for PCU is 168 – offering a solid 30%+ return before dividend reinvestment.
With the current political environment, rising energy costs, and global warming, those who enjoy investing green are poised to reap great profits as well. While there are many plays out there, I prefer geothermal.
U.S. Geothermal (UGTH) is a producer of electricity and has already completed its first phase of testing for the new plant. It is slated to be online, at full production, by the late fourth quarter or early Q1 of ’08. This small company is ahead of the curve in this field already having wells drilled, a plant coming operational, and contracts in place. Financial backers of UGTH include Goldman Sachs (NYSE:GS). With a rapid move to production and profitability, this is my penny pick of the bunch. Having closed at $3.98 Friday, this one should easily be at $15+ within 12 months.
So there you have it - the skinny on where my money will go this year:
Company ----- Current Price - One year target
CMI ------------ $112.62 ---------- $175
PCU ------------ $110.02 ---------- $168 – along with 7% yield
LDK ------------ $35.13 ----------- $135
UGTH ---------- $3.98 ------------ $15
Disclosure: The author has a long position in LDK.