10 stocks for the economy's revival in 2014

Even with the market on a huge bull run, certain sectors look poised for more growth. Here's how to cash in.

By MSN Money Partner Dec 30, 2013 2:42PM
A sign outside the fast-food chain McDonaldBy Diana Furchtgott-Roth, MarketWatch

With the stock market achieving record highs at the end of 2013, some might think that it is time to take their winnings and go into cash. 

But over the long term, stocks have always had the highest return, and now certain sectors of the U.S. economy look poised for growth. Stocks also offer more protection against inflation than bonds do.

With that in mind, here are 10 stocks to watch in 2014:

1. Devon Energy Corp. (DVN) 

North America is in the middle of an energy boom, and Mexico has just ended the state monopoly on oil production. That will send ripple effects to the United States, and perhaps to Canada.

Devon Energy develops and produces oil and natural gas, primarily in the United States and Canada. It also invests in energy exploration. As a large-cap energy producer, Devon is a low-risk investment. The U.S. energy boom shows no sign of slowing, and the energy sector could grow even faster if federal regulations are relaxed.

Last month, Devon acquired assets in the Texas Eagle Ford shale fields.

2. Chesapeake Energy Corp. (CHK)

Chesapeake Energy is another large-cap energy producer, with a similar business model to Devon Energy's. Chesapeake produces about 3.5 billion cubic feet of natural gas daily. Its sales have grown 195% in the past year.

3. AES Corp. (AES)

AES is an international energy-generation and energy-distribution company. It generates power with plants it owns or operates, and it distributes the power through its utilities business. As developing countries come out of stagnation and grow, especially in Latin America, companies such as AES are poised to benefit, since growth needs reliable energy.

4. McDonald's (MCD)

McDonald's is a large-cap company with low volatility compared with the overall U.S. market (beta: 0.28). While the company’s stock is not undervalued, it is still a strong investment that offers an appetizing 3.4% dividend yield.

Because the Fed has announced low interest rates for the foreseeable future, established, dividend-paying companies such as McDonald's are often more attractive than fixed-income securities for investors seeking low-risk, steady returns.

Many recent McDonald's product innovations, such as McCafe and real-fruit smoothies, have been very successful. One warning: "Living wage" campaigns for at least $12.50 an hour have received a lot of attention. If McDonald's is forced to increase spending on labor, its profits will suffer, since only so much of the increase can be passed on to consumers when the company competes heavily on price.

5. Pfizer (PFE) 

Pfizer is a pharmaceutical company with a diversified global health-care portfolio. As the U.S. population continues to age and live longer, innovative, well-managed pharmaceutical companies such as Pfizer will be poised to benefit. While some of its cash-cow drug patents have recently expired or are expiring, the company's focus on research and innovation remains strong, and management has also bought back shares. Pfizer had the largest amount of share buybacks in the third quarter of 2013. The company had 8 billion outstanding shares in 2010, but now that number is 6.5 billion and falling.

Health care is undergoing a revolution, with new frontiers for providing personalized treatments based on individuals' genetic makeup. Pfizer has the cash and low-interest borrowing available to acquire start-up companies that take advantage of this new technology.

6. Intel Corp. (INTC

Intel operates in the design, manufacture and sale of integrated technology platforms. As an international company, Intel is poised to continue its success as customers look to improve their enterprise solutions and technology performance. Many forms of technology, such as personal computers, data centers, tablets, smartphones, automobiles and medical devices, rely on Intel processors. This is a low-risk investment that generally moves with the market (its beta is 0.84).

7. Kratos Defense & Security Solutions (KTOS) 

Kratos Defense & Security Solutions works primarily with the U.S. on matters of national security. The company provides intelligence, weapons, surveillance, and network technologies. This is a microcap company with opportunities for growth. Even though the military-industrial complex is shrinking, lean-running companies such as Kratos are going to win more government contracts as the military continues to evolve.

8. Microsoft (MSFT

Microsoft develops, licenses and supports software products and services, and continues to reinvent itself to compete with Apple, Samsung, Google and Sony on many different fronts. The successful rollout of Xbox One is a positive development, since the gaming console relies on an integration of entertainment services. This could be Microsoft's opportunity to win over consumers to its Windows operating system. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Microsoft has struggled on mobile, but its purchase of Nokia could allow it to compete with the Apple and Android mobile operating systems. The challenge for Microsoft is to innovate and to attract household consumers while remaining secure and reliable as a business platform. The latest iteration of the Surface tablet is helping the company do just that. While Microsoft is still searching for a new CEO to replace Steve Ballmer , the long-term outlook for the company has many upsides, with few major risks. Plus, the long-term earnings, sales and dividend outlooks are all optimistic and should create positive momentum.

9. Wells Fargo (WFC)

Dodd-Frank regulations are going to make it more difficult for small, community banks to remain competitive against large, multinational corporations. Wells Fargo operates in community banking and wholesale banking, along with providing wealth-management, brokerage and retirement services. The company boasts a well-diversified business model and strong positive cash flow, and it’s in a good position to attract business from smaller, more localized rivals.

As the Volcker rule is finalized, there is still much uncertainty for the financial sector, but Wells Fargo stands to gain. About 175 of the 398 Dodd-Frank required rules still have not received a proposal. Dodd-Frank is 828 pages long, but the law is brief when compared with the regulations that follow. Small banks are going to have a tough time studying all the regulations and complying with them -- meanwhile, Wells Fargo could be a winner.

10. Wal-Mart Stores (WMT

As Wal-Mart continues to build its international expansion through Wal-Mart International, there is room for growth.

Wal-Mart U.S. accounts for almost 60% of sales, whereas Wal-Mart International produces about 30%. Moving into international markets, especially emerging ones, takes patience, and Wal-Mart can afford to be patient with its available cash and access to cheap credit. Unlike McDonald's, Wal-Mart pays above the federal minimum wage, and so its costs will not be as affected by potential increases in the minimum wage. 

Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute.

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