By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — An old Wall Street adage says that time in the stock market beats timing the market. But in 2012, both of those strategies worked.
Many stock investors believe that 2013 will be their lucky number. They point to a menu of research reports lauding corporate America’s relatively strong financial shape and the prospects for the U.S. economy’s steady, however slow, growth. By this logic, even holders of low-yielding bonds can expect a steady road for non-government debt, as long as the Federal Reserve holds the line on short-term interest rates.
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That said, this bull market turns four years old in March — well-past the two-and-a-half year historical average for U.S. bull runs. Accordingly, next year the major market action may be outside of the U.S. Heading into 2013, the euro zone seems to have priced in its economic troubles for now, and Asia appears to be the growth engine of a global economy that is still debt-laden and disturbingly weak.
Some strategists in fact see non-U.S. stock markets, including the austere euro zone, besting U.S. equities in 2013. That’s saying a lot, given predictions for the benchmark Standard & Poor’s 500-stock index (SNC:SPX) to hit 1550 or perhaps 1600 (a record high) a year from now — an advance that would range between 7% and 11%, respectively, from the Dec. 20 close.
“Corporations have delivered the goods,” says Bob Turner, a veteran growth-stock investor and chief investment officer of mutual-fund firm Turner Investments. “Economic growth continues, moving forward, and corporations in the U.S. and globally are managing effectively.”
Yet looking ahead, investors would do well to remember the words of legendary American sports columnist William “Blackie” Sherrod, who said that “History must repeat itself because we pay such little attention to it the first time.” The coming year surely will be much like any other, with geopolitical conflicts and conflicted outlooks that will challenge investors’ resolve.
Before getting to 2013’s recommendations, let’s see how MarketWatch’s 10 investment ideas for 2012 fared: Pretty well, actually, given the surging S&P 500.
Many of the picks MarketWatch made in January, based on recommendations and research from investment professionals, turned in solid double-digit and high-single-digit gains.
For example, high-quality dividend-paying stocks and corporate bonds, along with real-estate investment trusts, European stocks and small-cap stocks, all delivered positive performances. While several recommendations — notably gold — lagged the S&P 500’s 17.4% gain for the year through Dec. 20, they did a good job diversifying portfolios. Read more about our 2012 investment ideas.
Which investments are poised for a strong 2013 showing? Here are 10 portfolio moves to consider:
1. Mega-cap stocks go big
“The new leadership within the equity market is mega caps,” Mary Ann Bartels, technical research analyst at Bank of America Merrill Lynch, wrote in a recent research report.
Mega caps — the top 50 U.S. companies by market value — are “reversing a bear trend that had been in place since 2000,” Bartels adds. “This reversal signals a new secular bull market is underway for the top 50, or mega caps.”
The U.S. market’s giants also have considerable foreign sales exposure, which favors them should non-U.S. economies shine brightest. Exchange-traded proxies for the group include Guggenheim Russell Top 50 Mega Cap ETF (NAR:XLG) and iShares S&P 100 Index Fund (NAR:OEF) . Both portfolios’ top-three holdings are Apple Inc., (NASDAQ:AAPL) , Exxon Mobil Corp. (NYSE:XOM) and General Electric Co. (NYSE:GE) , but the iShares fund, with 100 issues, is less concentrated.
“The bigger, the better,” says Paul Nolte, managing director at investment manager Dearborn Partners. “If we do wind up with a slowdown, a lot of these companies can withstand that.”
2. High-quality companies stay qualified
The definition of “quality” in this bull market is a large company with strong finances, visible earnings growth and a global footprint. A dividend makes the stock even more attractive.
High-quality stocks are “quite inexpensive,” Savita Subramanian, Bank of America Merrill Lynch equity and quantitative strategist, noted in a recent research report. Plus, she adds, “industry leaders with clean balance sheets in a wide variety of sectors rank well on the quality scale.” Top-flight firms on Merrill’s list include PepsiCo Inc. (NYSE:PEP) , IBM Corp. (NYSE:IBM) and Caterpillar Inc. (NYSE:CAT)
Quality plus growth equals stability, adds Brian Belski, chief investment strategist at BMO Capital Markets. “When things become more uncertain, investors tend to place a higher premium on areas of the market delivering consistent results,” he noted in a recent research report. Stocks rated “outperform” on BMO’s quality screen include Google Inc. (NASDAQ:GOOG) , Starbucks Inc. (NASDAQ:SBUX) and Gap Inc. (NYSE:GPS) Read more about Belski's money moves.
3. Dividend growth pays off
“Dividends still matter,” Nolte says. “There remains a lack of good choices for income investors,” he adds. Ultimately this quest for yield leads to stocks. Moreover, investors have no dearth of dividend-payers: 80% of the S&P 500 constituents now pay a dividend. Nolte’s favorites include multinational leaders Caterpillar Inc., Novartis AG (NYSE:NVS) , IBM and McDonald’s Corp. (NYSE:MCD)
That said, investors should focus on the business, not the yield. A high yield can reflect a poor-quality company, a troubled stock, and a dividend that could be in jeopardy.
Look instead for companies with a record of dividend growth, suggesting they are generating ever-larger amounts of cash to hand to shareholders. A broad proxy for the strategy is the exchange-traded SPDR S&P Dividend ETF (NAR:SDY) , which tracks an index based on the S&P Dividend Aristocrats — companies hiking dividends for at least 25 consecutive years.
Be mindful of valuation, too. Dividend-growth stocks aren’t undiscovered, and many have been bid up. Says Wally Weitz, a longtime value-stock investor and co-manager of the Weitz Value Fund (MFD:WVALX) : “If you pay too much for a stock just because it pays a dividend, you’ve still paid too much for a stock.”
4. Europe goes up
Euro zone worries for now seem priced into market valuations and expectations. The MSCI Europe ex-U.K. Index, a proxy for the euro zone, rose 19% for the year through Dec. 20.
Moreover, two-thirds of managers responding to the Russell survey, for example, do not see a euro-zone nation exiting the monetary union, and better than half are maintaining current exposure to the continent.
Says Nolte: “Valuations on a lot of those markets have gotten very inexpensive.”
5. China breaks out
China hasn’t taken part in the global rally this year, but that could change.
Strategists at Russell Investments predict a soft landing for China’s economy, with a cyclical recovery pushing 8% annualized growth for 2013. Managers polled in Russell’s most recent quarterly Investment Manager Outlook were also bullish, with, 62% of respondents expecting China’s new leadership to stabilize the country’s declining growth.
In addition, the Russell survey showed bullishness for emerging markets generally, with almost seven in 10 managers optimistic about the region’s development following 2012’s disappointment.
China will lead emerging market growth, according to Merrill Lynch economist Alberto Ardes. Merrill strategists see the strongest gains from consumer-related stocks across the emerging markets, and also favor emerging-market government debt.
Many exchange-traded funds and mutual funds cover China and other emerging markets directly, but investors can also look to funds that own shares of large multinationals based in the U.S., Europe and Japan, in particular, which also provide considerable exposure to emerging nations while cushioning some of that region’s volatility.
6. Go for the gold
How does $2,000 an ounce sound as a price for gold? That’s the target Merrill Lynch analysts have set for the yellow metal by year-end 2013 — about 20% higher than now.
The easy-money policies of the European Central Bank and the Federal Reserve will propel gold higher, according to commodity strategist Francisco Blanch at Merrill Lynch. Rising inflation expectations should also be supportive. Notably, Blanch sees gold at $2,400 an ounce by the end of 2014. Merrill’s commodity team is also bullish on other precious metals including silver and platinum.
7. Real estate builds
The U.S. housing market is laying a new foundation.
Supply and demand are finding greater equilibrium. Home sales are up, inventory is down, and mortgage rates are at historic lows. In Russell Investment’s most recent quarterly Investment Manager Outlook, 61% of respondents were most bullish on real estate for 2013, an all-time survey high. The housing recovery should create construction jobs and boost related sectors such as furniture, building materials and financial services, according to Merrill analysts.
Real estate investment trusts have been on a tear. Real estate mutual funds, many of which invest in REITs, were up 17% as of Dec. 20; much of that interest is driven by yield. Some broad-based funds did even better. Baron Real Estate Fund (MFD:BREFX) , for example, has gained 42% for the year so far.
“We’re in the early stages of a multiyear real estate recovery” for both residential and commercial property, fund manager Jeff Kolitch says.
His strategy includes owning shares of home-improvement companies and other real-estate related plays. Among his favorites: senior-housing provider Brookdale Senior Living Inc. (NYSE:BKD) , home-improvement retailer Lowe’s Cos. (NYSE:LOW) , commercial real-estate titans Jones Lang La Salle Inc. (NYSE:JLL) and hotel chains Hyatt Hotels Corp. (NYSE:H) and Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT)
8. Industrials steam ahead
An improving economy boosts cyclical sectors of the market, and industrials stocks are prime beneficiaries. These stocks rely on corporations’ capital outlays, and many analysts expect companies to spend more liberally with less uncertainty plaguing the global picture.
Industrials also have the greatest proportion of high-quality stocks of any other U.S. market sector, according to Merrill Lynch, and many of those have the added attraction of being mega caps; Caterpillar, for example. Plus, the industrials sector trades below its historical average P/E, Merrill notes, particularly conglomerates or companies in the machinery business.
At S&P Capital IQ, analysts single out building products, home repair and remodeling stocks as solid investments in the aftermath of Hurricane Sandy and due to the housing recovery.
Investors eyeing the industrials sector could start with the exchange-traded SPDR Industrials (NAR:XLI) or Vanguard Industrials ETF (NAR:VIS)
9. Technology plugs in
Technology stocks came under pressure late in 2012, but the sector’s oversized exposure to non-U.S. markets could work in its favor next year, according to Merrill analysts. Tech companies also tend to have strong cash flow, little debt and some pay dividends.
“Improved visibility on the domestic policy front coupled with signs that Europe is beginning to heal could have very positive implications for capital spending and global growth,” a Merrill research report recently concluded.
S&P Capital IQ sees improved demand for semiconductor equipment, considered one of technology’s most cyclical areas. Turner, the strategist at Turner Investments, is bullish on Qualcomm Inc. (NASDAQ:QCOM) based on its dominant share of the tablet computing market.
Turner also favors Apple now that the shares have been beaten down some. “The risk- reward is quite compelling,” Turner says. “Where else are you going to find 25% growth rates for 10 times earnings?”
10. ‘Dogs of the Dow’ have bark and bite
For a hefty helping of size and income that plays into both the mega cap and dividend themes, investors can scoop up the 10 highest-yielding stocks in the Dow Jones Industrial Average (DJI:DJIA) , also known as the “Dogs of the Dow.”
This value-oriented tactic calls for buying the index’s 10 highest-yielders at the start of each year. The Dogs didn’t hunt so well in 2012, gaining just over 7% on a price-only basis through Dec. 20 versus a 9% return for the 30-stock benchmark itself.
The 2013 Dogs won’t be unleashed until the calendar turns, but as of Dec. 20 the 10 would be AT&T Inc. (NYSE:T) , DuPont (NYSE:DD) , Hewlett-Packard Co. (NYSE:HPQ) , Intel Corp. (NASDAQ:INTC) , Johnson & Johnson (NYSE:JNJ) , McDonald’s, Merck & Co. Inc. (NYSE:MRK) , Microsoft Corp. (NASDAQ:MSFT) , Pfizer Inc. (NYSE:PFE) and Verizon Communications Inc. (NYSE:VZ) These stocks yield 4% on average, according to Merrill Lynch. Read more: 3 unloved dividend stocks to watch in 2013.
Two exchange-traded proxies for the Dogs strategy: Elements Dogs of the Dow ETN (NAR:DOD) , which is linked to the Dow Jones High Yield Select 10 Total Return Index, and ALPS Sector Dividend Dogs ETF (NAR:SDOG) , which actually picks from among S&P 500 stocks. In addition, Dogs account for six of the top-10 stocks in iShares High Dividend Equity Fund (NAR:HDV) .
Some of these Dogs fit the “safety and income at a reasonable price” theme that David Rosenberg has been vocalizing for some time now. The chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates Inc. tells clients to squeeze as much income out of a portfolio as possible, the better to handle an investment environment where slow-growth and austerity reign.
Says Rosenberg, writing in a recent research note: “A reliance on reliable dividend yield and dividend growth makes perfect sense.”
