If The Fed Surprises To The Upside, These 12 Stocks Will Soar

by: Marc Courtenay

"A good new chairman of the Federal Reserve Bank is worth a $10 billion tax cut." (Paul H. Douglas, U.S. Senator, Illinois, 1892-1976).

No, I'm not calling for a replacement for Dr. Bernanke, but I'm calling attention to the Federal Reserve Bank's Open Market Committee's (FOMC) apparent dilemma.

As we all witnessed last week the FOMC and Dr. B. chose to "kick the can down the road" once again by dropping hints, making promises, and in effect doing nothing new.

Many an investor is fed up with the Fed, as I reported after the FOMC released the policy statement on August 1st. Perhaps its more like frustration and we think we know what the Fed will eventually do.

That's why it wouldn't surprise me if the FOMC and Dr. B. knows exactly what they're doing. Speaking of surprises, they evidently don't want to give the markets any, either negative or positive.

That may be because it's such a politically charged year and the FOMC may want to give investors the impression that it is non-partisan.

Yet if it and the European Central Bank (ECB) want to keep the stock markets afloat and heal the badly mangled sentiment of investors, they're going to need to exceed expectations on their next round of what I call "Massive Quantitative Easing" (MQE).

If the Fed and ECB don't at least slightly exceed the market's expectations (expectations that the FOMC keeps leaking to the financial news media and in policy statements), the reaction might be catastrophic to the current lofty stock market averages.

The Fed's Dilemma Casts Hope for These Hated Stocks

Call me an eternal optimist, or call me late for dinner, but I think the FOMC and Dr. B. will eventually exceed expectations and deliver.

When they do we'll see a powerful rally, similar to the one we just tasted on Friday, August 3, but much more sustained.

Besides the usual suspects, we'll see three currently despised and untrusted sectors take-off like a Polaris missile. The three sectors are technology, industrial metals and precious metals.

For example, we saw LinkedIn (LNKD) soar over 16% last Friday by exceeding Wall Street's 2nd-quarter expectations and raising its full-year forecast. Does anyone really believe LNKD is worth 88 times forward earnings?

Even scapegoat Facebook (NASDAQ:FB) bounced over 5% higher last Friday on just one analysts upgrade. It "only" trades at 33 times forward earnings.

With a nice injection of monetary velocity by the FOMC, what would happen to proven money-makers like EMC, which develops, delivers, and supports the information and virtual infrastructure technologies with storage plus many other solutions.

EMC owns another key tech company that operates as a subsidiary, VMware (NYSE:VMW). VMW develops, delivers, and supports the IT operations and virtual infrastructure technologies of big global companies.

VMW is about to launch its own public cloud infrastructure-as-a-service, which is being enthusiastically received as a potentially huge cash-generating coup.

Just look at the phenomenal product family that EMC has amassed, and you can see why its earnings per share and revenue have been steadily growing.

Another company in the tech sector that could launch is Apple supplier Broadcom (BRCM). It designs and develops semiconductor solutions for the mobile device industries. It provides a portfolio of system-on-a-chip (SoC) and software solutions.

Broadcom recently introduced the BCM4335, the industry's first complete 5G WiFi combo chip for smartphones, tablets, ultrabooks and other mobile devices.

BRCM recently reported total revenue for the second quarter of 2012 was $1.971 billion. This represents an increase of 7.9% compared with the $1.827 billion reported for the first quarter of 2012.

BRCM has a PEG ratio (5-year expected) of 0.79 and a forward PE ratio of 11. These metrics indicate undervaluation and plenty of upside price potential for the stock.

The industrial mining and metals industry, especially the bigger names, "...are retrenching, reconsidering plans to invest billion of dollars on new projects," and as the Wall Street Journal reported recently, "in some cases cutting output-as they adjust to flagging demand, lower prices and higher labor costs".

This and many other stock-depressing news has left names like BHP Billiton (NYSE:BHP), with its 3.2% dividend and the world's largest steelmaker, Arcelor-Mital (NYSE:MT) with its 4.2% dividend, down in Wall Street's bargain basement.

BHP trades at around 9 times projected earnings and MT at less than 7 times forward earnings. S&P cut MT's credit rating to junk status last Thursday, and BHP has been closing plants and reducing production.

This indicates the stock price of both these behemoths may be going lower before their eventual and unexpected reigniting.

Speaking of industrial metal companies, AK Steel (NYSE:AKS) said August 6, that it will increase current spot market base prices for all carbon flat-rolled steel products by $30-a-ton, effective immediately with new orders.

Other steel names powered higher on the news with U.S. Steel (NYSE:X) up almost 7% on Monday. AKS shares were up almost 8%.

Other "hated" companies in this sector that have been hammered include Freeport-McMoRan Copper & Gold (NYSE:FCX) and Vale S.A.(NYSE:VALE), the Brazilian basic metals powerhouse that pays a 6% plus dividend.

Perhaps the stock market is pricing in a worst-case-scenario for these companies, and there may be lower prices in the immediate future.

Yet a worldwide, carefully coordinated economic stimulus program (which would include central banks in Asia and especially China) may catch investors by surprise and goose these depressed sectors higher.

That would include the sector that seems to be touted as "dead-on-arrival"...the precious metals sector.

After the big shake-out of CEOs from golden stars like Barrick Gold (NYSE:ABX) and lesser-respected mid-tier producer Kinross Gold (NYSE:KGC), too many are shouting dire predictions and have horrible expectations.

KGC might be getting ready to put itself up for sale, and companies like ABX are nearing their 52-week low ($31) and priced below 7 times next year's dismal earnings anticipations.

An aggressive way to play the unexpected turnaround in the precious metals markets is with well-managed silver producers like Pan American Silver (NASDAQ:PAAS) which is priced at barely 5 times earnings, and, my current favorite, First Majestic Silver (NYSE:AG).

AG has $16 million in debt and PAAS has $105 million in debt. AG has around $96 million in total cash and PAAS has over $594 million. PAAS is selling for 5 times current earnings and AG a little above 16 times.

PAAS announced that it will release its unaudited 2012 second-quarter results on Tuesday, August 14, 2012, after the market closes. A conference call to discuss the results will be held on Wednesday, August 15, at 11:00 am ET ( 8:00 am PT ).

First Majestic has not yet indicated when it'll release its next quarterly earnings report. On July 20, TheStreet raised the rating on AG from a sell to a hold.

Compare risks, key financial statistics, current news and market expectations in determining which of the precious metals stocks have the best potential.

If you insist on diversity, buy the Market Vectors Gold Miners ETF (NYSEARCA:GDX), especially if it tests its 52-week low of around $39, holds, and bounces higher.

Virtually all of the above stocks with the exception of BRCM were rallying with vigor on Monday August 6, in eager anticipation of the Fed's next move. There may be one more correction ahead.

In the meantime there's a sale ongoing in these sectors that the market has been tossing in the waste bin. I've given you some prime stock examples, and with a little effort you may even find better ones.

All I know is with perfect hind-sight, MQE is a distinct possibility. We also know that one of the best times to be shopping is when uncertainty is high and right before the FOMC and Dr. B. deliver the goods.

If you think there's a 50-50 chance of them disappointing, why not buy half-a-position now in your favorite bargains and the other half after the news hits the streets.

As the 3rd President of the U.S., Thomas Jefferson once remarked, "Nothing gives one person so much advantage over another as to remain always cool and unruffled under all circumstances."

Keep your cool, have courage, and be ready to scoop up the best bargains the markets will offer in the days and weeks ahead.

Buy the best of the hated sectors and stocks. At some point, while others are wishing they'd had the same insight and vision, you may find yourself watching your gains with well-deserved glee.

Disclosure: I am long ABX, AG, FCX, GDX, KGC, PAAS.