10 Themes for 2013
Now that we've reviewed the shallowness that characterized market discourse last year, let's move on to the 10 big themes I've observed in 2012, all of which are poised to remain robust well into 2013.
1. The Housing Resurgence
First, and predominant, is the return of housing as a major driver to the U.S. economy. A lot of different people will give you a lot of different estimates as to how impactful housing is on the U.S. economy. To that I say: If I were an economics professor, I would be all over trying to figure out that correlation. But I am not. I am a stock-picker, and all I care about is what this means to the stocks in the sector -- and, for them, this recovery has been nothing short of amazing.
We had the homebuilders, led by Pulte (PHM) Lennar (LEN) and Toll Brothers (TOL). We had the housing-related retailers -- Home Depot (HD), Williams-Sonoma (WSM), Pier 1 (PIR) and Lowe's (LOW). We had the building-products companies -- Louisiana-Pacific (LPX), Weyerhaeuser (WY), Rayonier (RYN), Plum Creek Timber (PCL), USG (USG) and Owens Corning (OC). We had the suppliers, like Whirlpool (WHR), Newell Rubbermaid (NWL), Masco (MAS) and Mohawk (MHK). All of these will also be helped by the eventual rebuild that must happen in the aftermath of Hurricane Sandy -- which, while not as big as that following Katrina, will help spur the second quarter's gross domestic product growth.
Then you have ancillary plays from new-household formation -- companies like Discovery Communications (DISCA), Time Warner (TWX) and Comcast (CMCSA) -- or from road-building, such as Vulcan Materials (VMC). Finally you have the stealth housing play, Berkshire-Hathaway (BRK.A),which really took off in the fourth quarter because it also participated in the next theme, insurance.
Can this move continue? How many times have we heard that question? How many times has it been answered negatively? How many times have we heard that it is only a matter of time before the Federal Reserve turns off the juice, even though Chairman Ben Bernanke just told you last month that he's going to keep money easy until unemployment reaches 6.5%?
Here's why I am not concerned. During the sector's heyday, homes were being built at a rate of about 1.5 million a year. OK, maybe that's not sustainable. But it dropped to 400,000 a couple of years ago, back to levels of the 1950s, when the U.S. had half as many people as it does today. Talk about unsustainable. That's ridiculous. Of course, the bears told us it didn't matter, given the shadow inventory of homes owned by banks.
But, in about a year's time, a combination of factors ate through that shadow inventory once pricing came back: banks working with underwater lenders, a pro-homeowner Washington and the annual destruction of homes through fire and flood. The rally in the bank stocks tells you fears about the underwater owners will not be realized. Those homes are roaring back in value, too -- and they are still good, affordable buys!
That's especially so given these low rates and high rents. I think that, unless you are in the real estate market, as I am, you have no idea how ridiculously high rents are. It is still quite difficult to get a loan to buy a place. But, as housing goes up in value, you will see the major banks lend again -- just as Bank of America (BAC) CEO Brian Moynihan told you would happen last Friday.
That's why I think we have multiple years -- not one year, but multiple years -- of housing strength ahead of us. This remains the go-to group for 2013, and Washington's debt-ceiling talk will be terrific for opportunities to buy.
2. The Insurance Comeback
This insurance group performed remarkably well in 2012, be it in Genworth (GNW) or Travelers (TRV) or Hartford (HIG), Allstate (ALL), Berkshire-Hathaway or AIG (AIG).
I think several things are at work here. First, there have been enough catastrophes out there to take out a lot of capacity, and insurance rates are going up. Second, the group's just done nothing for ages, and it is way behind the broad market. Finally, and most important, the asset side has come back to life with a vengeance. These companies owned a ton of miserable, awful housing-related paper -- and, as housing increases in value, this paper's coming back.
To me, AIG is the best way to play it, because this company has pretty much everything that had been negative, but is now good.
3. Ne'er-Do-Well Banks Recuperate
A third theme is right there with the insurance companies: the banks. I think people don't understand that this group is so far behind the market that we tend to think that it is never coming back -- at least if you think about the book values.
But something happened in this market in the fourth quarter: The book value started to come to relevance as a measure of worth. If that's the case, you're going to see some remarkable moves in everything from Regions (RF), First Horizon (FHN) and Zions (ZION) to Morgan Stanley (MS) and Goldman Sachs (GS), to Bank of America and Citigroup (C). These are the companies for which the book value had been suspect -- and it may no longer be suspect amid recovery in the kind of paper that is also owned by the insurers.
I know that you could argue I am leaving out the best three -- Wells Fargo (WFC), U.S. Bancorp (USB) and JPMorgan Chase (JPM) -- all of which I like. But the theme here is not "best of breed," which is more of an evergreen concept. The theme is the cyclical recovery of the portfolios of the ne'er-do-well banks. I wouldn't overlook Capitol One (COF), either, because its credit-card business is hot. Also recall its purchase, for very little money, of the ING Direct business from ING Group (ING) -- a business that is humming.
4. Ascending Autos
The fourth rising tide? Autos. This group has been tough, because we've been in an American-related renaissance as auto production in the Great Recession has dropped almost 40%. We just can't talk enough about that decline in build, as well, which is almost as shattering as the plunge in housing starts. We just didn't see it in the stocks because the major players, Ford (F) and General Motors (GM), are huge international companies and they were being pulled back by Europe and even China.
In 2013, China stands to be a tailwind and Europe will be cordoned. That means Ford and GM are going to be huge stocks.
They should be terrific -- particularly Ford, which keeps refinancing and refinancing, and just refinanced a gigantic piece of paper last week. No one even notices anymore. They should. They will when the company reports. Meanwhile, GM has bought a big piece of the U.S. government's stake, which is going to set up this stock for a terrific 2013. I would buy both.
The ancillary auto plays make sense here, too -- like Goodyear (GT), Cooper Tire (CTB) and CarMax (KMX). These shares all rise with auto builds, which I think could be up to 16 million this year. The consolidation in rental cars, coupled with destruction from Superstorm Sandy, will mean that Hertz (HTZ) and Avis Budget (CAR) should go still higher as a huge wave of consolidation sweeps over the group.
5. The U.S. Energy Revolution
When you speak of big themes, you have to be focusing on the domestic revolution in energy, my fifth focus group. We in the U.S. have so much of it, and so much natural gas in particular, that this will be a multiyear game-changer. The principal winners are the companies that use natural-gas-related chemicals as a feedstock -- namely, Dow Chemical (DOW), Westlake (WLK), Eastman (EMN), PPG (PPG) and LyondellBasell (LYB) (even if the last company's headquarters are located overseas).
Right now, only Dow has really done much to capitalize off the cheap energy. It's almost as if the other companies don't really believe natural gas will stay down. But I believe that, in 2013, they will start building the plants needed to take advantage of the inexpensive food stock. For those who think this play is chimerical -- sorry, but the U.S. is burning off or flaring more natural gas than we use, and that's maybe all you need to know. The companies that build the most capacity here are the ones that will make the most money.
The refiners -- HollyFrontier (HFC), Valero (VLO) and Phillips 66 (PSX) -- are also huge beneficiaries of the new finds. Their costs are so low and their prices are still, outrageously, linked to the much-higher price coming from overseas. Good for them; bad for us.
Furthermore, it's an open secret that the U.S. has too much crude oil -- not just natural gas -- even as we continue, as a nation, to import it. Because of a weird mismatch between U.S. oil-refining capacity and the new kind of crude, light sweet from the Bakken and Eagleford, we will have to export crude starting next year. That's right. The U.S. will need to export natural gas because we'll have no place to put it -- that's what Cheniere Energy (LNG) will do -- and we'll need to export oil because we don't have the refining capacity to use it.
If we had an actual energy policy, we could straighten this out. We don't. So we will just have to make money off of it until we do.
On the production-and-drilling side, there are very few actual winners in the U.S. because of the twin gluts. The oil drillers are all very hard to own. That's with the exception of Ensco (ESV), which is purely offshore, where there's tremendous amount of activity because of the higher price of crude vs. nat gas. But the nat gas drilling market, itself, is in the doldrums because of the $3-per-MMBtu price tag for the fuel, and the surfeit of storage place, and the lack of surface vehicle or chemical use.
The only oil company with tremendous growth prospects is EOG (EOG), which has substantial positions in the two biggest shales, the Bakken and the Eagle Ford. It's the only one I would buy up here. The natural gas company I like is Southwestern (SWN). But I am early to like it, unless a takeover or the cessation in nat gas drilling gives you a marginally higher price for it.
6. China's Return
My sixth theme is the return of China. You saw this come up literally right at the end of 2012, when Cummins (CMI) began coming back and Caterpillar (CAT) put in a bottom and Emerson (EMR) started to rally. Joy Global (JOY) is the one to watch here, as electric use is accelerating in China -- which means more coal use, which means more coal mining, which means better orders for this very inexpensive stock. The best way to play China, alas, is China, with the iShares FTSE/Xinhua China 25 Index (FXI). The ETF comprises a very big position for my charitable trust at Action Alerts PLUS.
7. The Aerospace Recovery
The seventh theme has to be the amazing aerospace recovery. What I find incredible about this one is that the companies involved -- mainly Boeing (BA), Honeywell (HON) and United Technologies (UTX) --have big defense businesses, yet these stocks didn't even blink when defense cuts were standing right in front of them. These three, plus Precision Castparts (PCP), are the obvious plays. United Tech is perhaps the one with the most upside potential, now that it has bought Goodrich.
You have to own one of these. When the risk-off crowd swarms, and when the sell-everything-because-of-Washington group grabs the mike, think aerospace.
8. The 4G Build-Out
I wish I could be more bullish on tech, but way too much of it is still personal-computer-centric, and I don't think this will be the year of the PC. -- nor next year, for that matter.
However, it will be the year of the 4G build-out. Unfortunately, there are very few ways to play this beyond the continual theme of the towers -- American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC). Still, lately we've seen some optical plays do well, and I am encouraged by the continued growth of video. Two I am watching and willing to pounce on are JDS Uniphase (JDSU) for fiber and fiber testing, and Akamai (AKAM) for video on demand. Lots of people want to play the component companies for cell phones. Too hard for me. Learned that lesson.
As for as the rest of tech? Sure, I suspect we will see money continue to come in to Facebook (FB) and Google (GOOG), but they are battlegrounds. Apple (AAPL) remains a hold, and so does Amazon (AMZN). I wish I could be more enthusiastic, but when you are, you get your head cut off for it.
What I like about my themes is that they can be bought on weakness. However, the weakness that could bring down a company like Google or Apple or Amazon or Facebook is a type of weakness that has to be studied and examined, and is distinctly company-specific, and that's what I am trying to avoid by focusing on themes and not individual stocks.
9. The Government Made Me Do It
My ninth theme? I'm calling it "the government made me do it." These are stocks that are related to the costs of the new healthcare system that kicks in next year, and the chits are already being played. The temporary-staffing companies, like Robert Half (RHI), Manpower (MAN) and Insperity (NSP) were red-hot coming into the year, and I think they will stay that way. That's because temporary staffing is a way to beat the new taxes businesses might have to pay because of the government mandates.
The hospitals also work -- notably Tenet Healthcare (THC) but also Community Health Systems (CYH) -- because they're doing much better under the Affordable Care Act. Those are winners and will remain winners, because the law pretty much mandates that they have to be.
10. Don't Just Stand There. Do Something.
Final theme? I am calling it the "Don't just stand there, do something" theme. I am seeing the companies that buy other companies, and the companies that split themselves up into separately traded parts, really bring out a lot of value. When PVH (PVH) bought Warnaco to create a Calvin Klein house of brands, shares vaulted much higher and never came back. After Hormel's (HRL) deal to pick up Skippy, the stock immediately gained altitude and didn't surrender it. ConAgra's (CAG) deal to buy Ralcorp (RAH), and Eaton's (ETN) purchase of Cooper? These were all tremendous moves. As were the break-ups of MeadWestvaco (MWV), Abbott (ABT), Marathon Oil (MRO), ConocoPhillips (COP) and Kraft (KFT).
All of these deals brought instant valuation hikes. They are a reminder that when companies sit there and wait for things to get better, they miss the best opportunities. I believe we are at the infancy of a new merger wave because of all of the cash on the balance sheets -- as well as a new break-up wave, because so much value has been created from those that have already done so.
This is a market desperate for conviction -- desperate to find stocks that can be bought on weakness without worry about Washington. But when that weakness comes, more people leave stocks than return to them. I hope this list helps to remind you what worked in 2012 under those circumstances, and which I believe could work again in 2013.
