Inside Wall Street: 3 low-profile stocks for 2012
Satellite television, railroads and beverage packagers should be early beneficiaries of any recovery.
The market could have done better in 2011, but, frankly, it didn’t do too badly either, considering the tumultuous challenges it had to overcome. Rather than collapse under numerous burdens -- including a wayward Europe, a tsunami in Japan and discombobulated leadership in the U.S. Congress -- it still ended higher, with the Dow Jones Industrial Average ($INDU) up 5.5%.
Taking a closer look at market activity, almost all of the brand-name stocks -- like McDonald's (MCD), Apple (AAPL), Google (GOOG), IBM (IBM) and Pfizer (PFE) -- excelled over the year. It might be time now to revisit the non-brand stocks, at least for the intermediate term.
The easy conclusion that many market forecasters have advanced this early is that the market will see harder times ahead. I agree that there will be headwinds in the new year. However, the better bet is that the Dow will roar ahead from current levels and approach its all-time high of more than 14,000 sometime in 2012.
Let's first consider what large institutional investment managers are worried about in 2012. Robert Doll, the chief investment officer at BlackRock, told The Associated Press that "there are constraints and headwinds that prevent us from having the typical bounce-back recovery that you'd like to see after a recession." What's important for the U.S., he added, is to maintain respectable growth. "Our economy is not yet strong enough to withstand any financial contagion that spreads from Europe."
That's the prevailing macro-fundamental view of many institutional investors, buffeted as they have been by the market's volatility. Now let's consider the technical picture as seen by some respected analysts.
"After last week's strong rally, we believe the stock market is poised for continued strength in 2012," says Mark D. Arbeter, the chief market technical analyst at Standard & Poor's MarketScope. The major indexes have now "traced a higher high and higher low, indicating that a new intermediate-term uptrend has started." The S&P 500 is working on "bullish inverse head-and-shoulder formation," and a strong break above the 1,260 level would complete this pattern. The S&P 500 closed on Dec. 30, 2011, at 1,257.60. Arbeter sees a measured move up toward the 1,350 to 1,370 region sometime in the first quarter of 2012.
Right now the stock market is "building energy like a volcano before it finally blows its top," Arbeter says. The market has been percolating for five months now, trapped in a narrow range and waiting to take off on any decent speck of news out of Europe or positive news on the U.S. economy. He sees a strong technical base for the various market sectors and individual stocks as well.
"Look at the charts, they are telling a bullish story in our view," says Arbeter. He argues that if you remove the constant blather of the talking heads and all the factors that would doom the market, "we are very close to seeing a lot of confirming signals that the next big intermediate-term move will be to the upside."
What would be the drivers of a rally? A couple of major trends that pulled down the market are about to reverse themselves, according to Arbeter and other market analysts. The dollar is one of them, which they say has hit a resistance level and is expected to drop in value. In recent years, a declining dollar has been consistently bullish for equities. The other trend that's reversing involves the euro, which has been strengthening -- very often a bullish sign for stocks as well. The smart money is shorting the dollar and is long the euro, according to Arbeter.
Another major trend that will aid equities is the projected weakening of U.S. Treasurys, after a long, vigorous rally in recent months. "We think the money coming out of Treasurys could be fuel for higher stock prices," says Arbeter.
So let's talk about non-household-name stocks that show great promise of outperforming the market indexes in the year ahead. Here are three that some of the smart-money crowd are betting on, largely because they are major plays on an economic recovery: DIRECTV Group (DTV), the provider of direct broadcast satellite television service to nearly 18.9 million subscribers in the U.S. and 8.2 million subscribers in Latin America; Norfolk Southern (NSC), a railroad company that operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada; and Ball Corp. (BLL), one of the world's largest producers of metal beverage cans.
"DIRECTV is a major play in the expanding use of satellite TV services in Latin America, where almost all of the company's key operating metrics are at or close to their record highs," says John Maloney, CEO of investment firm M&R Capital Management, which owns shares. He figures its stock, now trading at $42 a share, is worth about $60. He notes that subscriber growth in both the U.S. and Latin America has been accelerating.
Analyst Bryan Kraft of Evercore Partners says DIRECTV has good momentum going for it in 2012, driven by secular growth in Latin America and new product launches in the U.S. "The increase in the subscriber growth outlook has driven our revenue and EBITDA forecasts higher," says Kraft, who rates the stock as "outperform" with a 12-month price target of $59. He expects earnings to jump to $4.46 a share in 2012, up from an estimated $3.42 in 2011. DIRECTV earned $2.48 a share in 2010.
Norfolk Southern, whose stock has driven up to $72 a share from a 52-week low of $57, is worth $95, argues Cherilyn Radbourne, analyst at TD Securities, based largely on volume growth that's ahead of its peers. The transport of coal accounted for almost 45% of year-over-year sales growth. Coal is Norfolk's most profitable segment, generating 28% of freight revenues in 2010, and 23% of carloads.
Norfolk is also benefiting significantly from the U.S. railroad industry's oligopoly-like structure, with more than 80% of revenues coming from the four largest railroads: Norfolk and CSX Corp (CSX) operating on the East Coast, and Union Pacific (UNP) and Burlington Northern Santa Fe concentrating on the West Coast.
Earnings at Norfolk have been strong over the years. For 2013, Radbourne figures Norfolk profits will jump to $6.99 a share, up from an estimated $6.03 in 2012, and a projected $5.35 in 2011. The company earned $3.98 in 2010.
Ball Corp. has benefited from the improving global trends for beverage cans and a better cost structure. Analysts estimate sales in 2011 grew about 15%, driven by increased demand for metal beverage packaging in China and Europe, offsetting some weakness in the U.S. But a pickup in volume in North America is expected in 2012. "Gross margins will continue to widen somewhat through 2012, up from 18% in 2010," says Stewart Sharf, analyst at Standard & Poor's, who rates Ball, trading at $35 a share, as a "buy" with a 12-month price target of $43 -- higher than the stock's 52-week high of $40.56. Part of his target is based on his earnings forecast of $3.15 a share in 2012, up from an estimated $2.80 in 2011.
Two beverage companies, SABMiller (SBMRF) and Pepsico (PEP), account for a substantial part of Ball's packaging sales. Its packaging products include aluminum and steel two-piece beverage cans and two- and three-piece steel food cans. Ball's long-term earnings strategy is to maintain a 10% to 15% annual growth rate as it focuses on expanding its global beverage can business. Ball will look for opportunities to invest in equipment to produce different sized beverage cans globally, especially in Europe, Asia, and South America, Scharf said.
Surely when the U.S. economy finally revs up in 2012, as some economists and analysts expect, these three low-profile stocks will be among the early big beneficiaries.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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