WASHINGTON, December 17, 2013 – It’s with great pleasure—and some trepidation—that the Maven announces Part 1 of his Top-10 list of year-end bounce back stocks for 2014. As we’ve explained in other columns, year-end bounce back candidates are stocks, which, for varying and often irrational reasons, have been pummeled, sometimes to oblivion, during the current year, in many cases sinking below fair value.
The dumping of such stocks tends to intensify in the final quarter of the year, particularly in November and December. Individuals, funds, hedgies, you name them, get rid of a certain amount of underperformers, trimming their portfolios to winners and using the losses to offset at least a portion of the year’s presumed gains for tax purposes. And for tax purposes, this activity is all over on December 31 or the last trading day of the current year. (Which in 2013 is actually December 31.)
But if a given stock dumpee is bought right around the time former investors have stopped beating it up, it will often recover smartly right after the first of the new year, at least until it reaches the point where it’s once again achieved fair value on the market.
That’s where the bounce back investing phenomenon kicks in. As the theory goes, you pick up these sorry losers some time in mid-to-late December, hold them, and wait for the (hopefully) inevitable bounce upward, a quick snapback rally that often unfolds in such a stock between January 1 and roughly February 15 at the latest.
When the upward motion slows, ceases, or starts to reverse, you then dump the stock for a quick profit. Or, on some occasions, keep riding it if the underlying company’s fundamentals improve.
At least that’s the way the year-end bounce back theory is supposed to work. However, like every other market strategy, it works until it doesn’t.
But the Maven has played this game over the years with generally positive results. For that reason, he’s chosen a number of bounce back candidates for 2014 that have either been unjustly hammered, unjustly shorted, or, in a few cases, have simply gone nowhere in 2013 but boast underlying fundamentals that indicate their static price is a mistake.
If we’re right—a big if these days—our bounce back stocks could be the best Christmas present ever. If not, well, feel free to send the Maven a lump of coal. If President Obama and Nannie Bloomberg will let you.
Our 2014 list consists of 10 candidates plus an additional list of super speculations. We’ll list the stock name and symbol, the amount of appreciation we expect in a fairly short timeframe (completely unscientific but useful for establishing a sell objective), and the current dividend if any. We’ll also provide a short narrative providing our rationale for each and, in fairness, point out what if any stocks we’ve already taken a position in.
Since we hear that Internet readers don’t like to scroll a lot, we’ll present half of our list today and half tomorrow, plus an extra-added bonus spec column.
So here we go with Part I of our list, in no particular order:
2014 Year-end Bounce Back Stock Candidates Pt. I
Intel (INTC). 2014 Target Price per share (TP): $29. Current dividend (Div.): 3.68%. The rap against Intel over the past year is that nobody will ever buy PCs ever again, making Intel a lousy investment. This so-called reasoning is way off base for two important reasons: First, it’s intuitively obvious that, like physical books, PCs will continue to be important to users who employ them for far more than surfing the web. PCs will, therefore, continue to sell after sales get done flattening, which is likely to be fairly soon; Second, who said Intel only makes chips for PCs? (And Macs, too, lest we forget.) The company is still a leader in creating and producing chips for numerous other uses, including portable devices, so it’s not going out of business anytime soon.
Add in a nice, stable dividend, and this stock could very well be an upside surprise after that champagne buzz wears off.
iShares Mortgage Real Estate Capped ETF (REM). TP: $12. Div.: 14%. Well, that one’s a mouthful. But this is an ETF that invests exclusively in a basket of high-yielding mortgage REITs. Like those REITs, REM has taken a shellacking throughout 2013, largely driven down, big time, by the threat of the Fed taper.
With individuals scrambling to replace high-interest rate real estate loans with lower-rate loans, the portfolios of these REITs will yield less and less which then drops their book value, not to mention their phenomenally rich dividends. But in our opinion, the selloff has gone on way too long and with way too much intensity. Many, including those in REM’s portfolio, are likely to bounce, making REM likely to bounce as well.
Meanwhile, While-U-Wait, there’s that swell dividend to collect. Note that dividends will change, likely going somewhat lower but still quite high when compared to the average stock. In the meantime, since book values will likely remain somewhat stable, the stock will provide a minimal capital gain if this one works, and then, there’s always that dividend. We currently hold shares in REM and plan to buy more if it drops further.
John Deere (DE). TP: 95. Div.: 2.3%. Agricultural equipment and lawnmower king Deere actually didn’t do too well last year, justifying some of its selloff. But again, the selloff at this point was likely overdone, and this company is likely to start looking a lot better in 2014. Anticipating that, buyers should star coming back into the stock. Plus, for a blue-chipper like Deere, a 2.3 percent dividend isn’t too shabby either.
Exxon (XOM). TP: $104. Div.: 2.6%. Here’s another blue chip stock, this time in the oil patch. One of the few big integrated oil companies remaining, Exxon does it all: exploration, drilling, transport, refining, retail, and even natural gas, although it paid too much for XCEL a few years back to gain capacity in the latter. That said, margins are likely to improve for this huge company in 2014 with transport and pipeline situations improving along with refinery margins. Note that XOM already appears to be making some of its anticipated move even though we’re not into 2014 yet.
Frontier Communications (FTR). TP: $5.50. Div.: 9%. Here’s a small telecommunications company that’s had the bejeebers pounded out of it for over a year. It pays a high dividend that is likely to remain stable in 2014, but the shorts have been keeping it down, convinced that it will go the sorry route of FairPoint Communications (FPT), which, like Frontier, bought a chunk of assets Verizon (VZ) and promptly filed for Chapter 11 bankruptcy when it couldn’t handle the debt involved. Frontier, however, seems to have integrated its own batch of VZ assets relatively smoothly.
Plus, just this morning, FTR announced the acquisition of substantially all of AT&T’s retail assets in the state of Connecticut which will quickly give their balance sheet a boost. FTR’s stock has been withering away during December. But today’s AT&T (T) news really goosed the shares this morning, indicating that its 2014 bounce may have already begun. But if there’s a nice pullback before December 31—always a possibility, given that the tenacious shorts don’t want to get squeezed—this one could reverse trajectory in the upward direction in early 2014, particularly if it gains momentum and the shorts decide to bail. We currently hold shares of FTR.
That’s it for Part I. Look for the rest of our list tomorrow.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment ideas and decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.
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