Happy New Year! I’ve spent the last few issues looking back at 2011, and the trends and stocks that dominated the year. Now, it’s 2012, and it’s time to look ahead.
Over the last couple weeks, submissions have been rolling in for The Dick Davis Digests’ upcoming Top Picks for 2012 issues. As I’ve mentioned here before, in addition to representing the very best investing ideas of proven experts, the Top Picks can also offer an in-a-nutshell glance at what analysts are expecting in the coming year.
In addition, many editors have laid out their expectations for the New Year in their own letters. Combining these sources gives a pretty good picture of what Wall Street is expecting in 2012.
Given the lousy last year, many of the predictions hinge on resurgences, revivals and rebirths.
The first rebirth could come from the housing sector, which, as everyone knows, has been a dead horse for the last five years, since the housing market collapsed. But 2012, some experts are saying, could be the year that these stocks begin to come back to life.
Most of these experts are careful to add that they’re not predicting a recovery in the housing market itself: home prices could stay depressed for some time. Rather, they say, stocks of companies that are finding success in the new, smaller housing market will cease being punished for the past. That includes homebuilders that have streamlined themselves to bare bones, as well as retailers, construction suppliers and other companies leveraged to housing that may have been oversold. You can already see the beginning of this resurgence in the stocks of Home Depot (HD) and Lowe’s (LOWE), both of which have pulled off a gains of about 30% over the last three months, significantly beating the market.
One of the proponents of this school of thought is Michael Cintolo, editor of Cabot Market Letter. In the December 28 issue, he wrote:
“On the fundamentals, the big idea is just how bad the housing bust has been, and how little improvement it would take to result in huge growth. Consider that from 1959, when the U.S. began measuring new housing starts every month, the figure rarely dipped below one million units on an annualized basis; it only did that for a couple of months here or there, and only at the tail end of the worst recessions like early 1975, late 1981 and early 1991. During a 45-year period, housing starts averaged close to 1.5 million per year.
“Now compare that to the current downturn, which hasn’t seen housing starts north of 700,000 in more than three years, averaging under 600,000 during that time! As we wrote above, no one is convincingly calling for a new housing boom—but even if housing starts rise back into the lower-end of their long-term range during the next couple of years, it would represent a doubling of activity. Combined with the massive cutbacks by housing-related firms, any sizable pick-up in demand would fall right to the bottom line.
“Of course, all that does is speak to upside potential, which has existed for a couple of years to no avail. But now we’re seeing actual signs of improvement—during the last four months, year-over-year housing starts were up 10%, down 5%, up 8% and up a big 21% in the most recently reported month. September saw the largest number of housing starts (658,000) in 17 months. And perhaps most important, individual homebuilders like Toll Brothers (TOL) are beginning to talk encouragingly, with cancellations down, prices up and stable-to-growing backlogs during the last quarter or two.”
Putting his reputation where his mouth is, Cintolo has nominated a homebuilder (not TOL) as his Top Pick for 2012. The same stock (which I can’t tell you the name of because the Top Picks issue hasn’t been published yet) was actually just in the Digest in November, recommended by Bernie Schaeffer in Option Advisor, so I’m looking forward to seeing how it does.
The second revival experts are calling for comes from the emerging markets. Powerhouses for a decade, emerging markets stocks suddenly took a break last year. Since most of the fundamental factors driving growth in China, India, Latin America and other fast-growing economies are still in place, several analysts expect the emerging market bull to resume in 2012.
Yiannis Mostrous, editor of Global Investment Strategist, is cautiously bullish on emerging markets this year. On December 14, he wrote:
“Investors are pessimistic and there’s not much in the way of excitement when it comes to the stock market. Although such anxiety is understandable and justified, it sets the stage for contrarian calls. In other words, if the majority of investors expect a negative outcome, the markets may surprise by posting strong gains.
“The global economy will not enter a recession in 2012 and will post decent economic growth of about 3.5%. This means that the valuations in emerging markets, particularly in Asia, are relatively supportive; although current valuations already discount the chance of a recession, they haven’t priced in a total collapse of the global financial system. This means that emerging-market stocks should be able to deliver positive returns next year. … Given the short-term and long-term challenges facing developed economies, emerging markets look like relative bastions of stability and growth. This is particularly the case for the larger emerging-market economies. The main developing economies, especially those in Asia, currently boast the fundamentals for solid growth, combined with low levels of sovereign debt. The strength of these economies will eventually be reflected in the performance of their stock markets, especially when investors allocate more funds toward stocks.
“Emerging markets underperformed developed markets this year for two reasons: Europe’s sovereign-debt crisis and concerns over high levels of inflation. In times of distress, investors reduce their allocation to what they perceive as risky assets, and emerging markets suffered as the E.U. debt crisis battered sentiment and roiled markets–an understandable repercussion of the turmoil on the Continent. On the other hand, concerns that rising inflation in Asia would derail the global economy proved to be overblown. The most important emerging economies, with the exception of India, have been able to address this issue decisively. This is the reason that emerging markets have performed so strongly since October.”
Walter Frank, editor of The Moneyletter, is more thoroughly optimistic. In his December 23 issue, he wrote:
“Looking at next year, virtually every 2012 forecast that we have seen makes the point that emerging market stocks will be the year’s winners. The argument for emerging markets is certainly compelling. T. Rowe Price held an Investment Symposium recently and the summing up statement reads, ‘We currently favor investment in the developing world. The long-term growth outlook remains particularly strong for emerging markets, which are sup- ported by minimal debt burdens, healthy employment levels, rising wages, and growing consumer demand.’ In particular, it was pointed out that emerging market stocks are selling at a lower P/E than developed market stocks. Moreover, the P/Es of both are below their long-term median level.
“This is the case in a nutshell. Still, if you look at the funds in our portfolios, emerging market funds are not prominent among them. This is simply because, emerging market funds have had a terrible year. For example, Fidelity Emerging Markets is down 22% for the year-to- date, while Vanguard Emerging Markets is off 20%. This is going to change. Our view is that this year’s selling will represent next year’s buying opportunity. Before we act on our view though, we need to pick up evidence that the market is coming to the same conclusion. We think that will happen next year, but it will take time.
“What went wrong? Basically the two giant emerging market countries, China and India spent last year fighting inflation. Both tightened monetary policy severely to slow things down. India is still engaged in the fight. China has made more progress and recently signaled a turn in policy. We see this as opening the way for renewed investor interest in China. We do not see China or the China region as offering the opportunities of old. China’s growth, for example, will probably be in the 7%–8% range rather than the red hot 8%–10% of former years. But we are still talking solid growth and far better than the developed world promises to achieve.”
The third and fourth popular predictions for 2012 are not underdog stories. Unlike housing and emerging markets, the energy and metals sectors were outperformers in 2011—and many experts expect them to keep that status in 2012. I’ve already written about their dominance of the past year, from North American natural gas drillers to South American gold miners. It looks like next year might be another banner year for all these miners, diggers and drillers.
On the metals side, the Top Picks include three gold miners (one of which also mines platinum-group metals and one of which also mines copper), a leading aluminum play, a silver miner, a rare-earth play and a gold ETF.
On the energy side, there are two oil and gas exploration & production companies (one of which was was also a Top Pick last year), a petroleum refiner and two mid-stream energy MLPs (master limited partnerships).
Unlike housing and emerging market stocks, no one will be the least bit surprised if these companies outperform in 2012. But that doesn’t make their growth potential any less exciting.
The final high-potential sector for 2012 is somewhere in between and underdog and an outperformer. The consumer sector couldn’t make up its mind in 2011, between rising consumer spending and low consumer sentiment. But there were select winners, as subscribers to Louis Navellier’s Blue Chip Growth know. Navellier made money in the consumer sector in 2011, and expects to make even more in 2012. He recently wrote:
“If you have been a Blue Chip Growth member for a year or more, you’ll know all too well that while the experts on Wall Street were warning everyone about the troubled retail sector and proclaiming that the American consumer is dead, we picked up shares in select retailers and amassed some of our most outstanding profits. Here is a look at some of the one-year returns of our retailers and consumer-based stocks:
Apple Inc. (AAPL) +18%
AutoZone Inc. (AZO) +20%
Limited Brands Inc. (LTD) +27%
McDonald’s Corp. (MCD) +31%
O’Reilly Automotive Inc. (ORLY) +25%
“Our 12-month gains came in the face of extreme market pessimism, but that is about to change. We are now seeking the biggest surge in consumer confidence in eight years, strong consumer spending (including strong holiday sales) and, as we already talked about, steadily improving job growth. So, in the coming months, I am going to continue to look for opportunities to capitalize on this powerful trend. … We’ve enjoyed some remarkable returns in select consumer-based companies, and I believe the best is yet to come in 2012.”
Other experts share his optimism, as evidenced by the consumer sector’s good representation in the Top Picks. The handful of consumer-sector picks do lean toward blue chips and dividend aristocrats, indicating that there is still an abundance of caution when it comes to the sector. However, there are a couple turnaround plays and bargains too. Although they’re not jumping in head first, 2012 could be the year investor confidence in the consumer sector finally catches up to the reality of consumer spending.
That’s it for my predictions for 2012. Once again, happy New Year, and here’s hoping it will be a happy, healthy and wealthy year for us all.
Wishing you success in your investing and beyond,
Editor of Investment of the Week