5 stocks for a summer rally

The bull market has legs: The economy is showing resilience, valuations are still attractive, and the US looks like a haven to global investors.

By Forbes Digital May 31, 2013 1:03PM
A woman in a swimming pool copyright Liam Norris, Cultura, Getty ImagesBy Ben Marks

In each of the last two years, domestic equity markets have sputtered during the summer months, giving credence to the old Wall Street adage "Sell in May and Go Away." 

Even though May has been anything but bad for stocks, market skeptics point to high unemployment, uncertainty about the Fed with respect to interest rates and further quantitative easing, continued turbulence in European markets, and what appears to be an ongoing economic slowdown in China.

My outlook is more optimistic. Look for domestic markets to maintain their gains and rise over the balance of the year. Two years ago, the debt-ceiling debate reached crisis levels and was quickly followed by Standard & Poor's downgrade of the U.S. government's credit rating. Last summer investors faced the uncertainty surrounding a tightly contested presidential election and the looming threat of the fiscal cliff. Such issues are now in the rearview mirror.

Here are other reasons why equities will sustain their momentum:
  • Falling commodity prices -- While this trend is not great for investors with broad exposure to commodities, there is an upside: Lower grain, energy and gas prices act as an economic stimulus, providing consumers with more discretionary income, and, in turn, greater profit margins for publicly traded companies that utilize such raw materials.
  • Recovering residential real estate market -- Over the last seven years, sagging home valuations and a moribund construction industry have been major obstacles to prolonged economic growth. But with home prices appreciating in major metropolitan markets across the country and builders ramping up new construction projects in response to better job numbers and improved credit worthiness, we believe the housing recovery is far more sustainable this time around.
  • Attractive valuations -- Compared to the pre-recession market highs reached in October 2007, corporate profits have risen 34% and price/earnings ratios for stocks are lower. Short-term bond yields, meanwhile, are exceptionally low and many fixed-income securities will lose some of their market value once interest rates inevitably begin to rise. Relative to bonds and cash, equity valuations remain reasonable – if not outright attractive.
  • U.S. becoming a safe haven -- More than ever, domestic equities and fixed-income securities are now considered safe havens for global investors. In particular, the ability of U.S. markets to shake off the recent banking crisis in Cyprus, continued bailouts in Greece, and the murky future of the euro currency is a clear sign that international investors have faith in the enduring strength of the American economy.
Combined, these factors make for a much more positive environment for U.S. equities than many observers are willing to acknowledge. With that said, some sectors are certainly better positioned than others to capture additional gains. Health care and consumer staples, for example, are among the top-performing sectors year to date, but more economically sensitive sectors such as financials, industrials and technology will make a greater push during an extended bull market run.

Here are some companies positioned to do well in the second half of 2013:

  • Hertz Global Holdings (HTZ) -- The world's largest rental car company has been the beneficiary of a consolidating sector, fleet optimization, improved re-sales, as well as an emerging trend toward outsourcing. With global travel on the rise, both core revenue and profits are expected to grow by as much as 13% this year.
  • Fidelity National Financial (FNF) -- Fidelity National Financial is the leader in a highly fragmented mortgage title insurance sector, which has benefited from an uptick in mortgage applications nationwide. After having made several investments that are expected to go public via IPO's in coming quarters, the firm is a in a great position to grow moving forward – especially relative to its peers in the industry.
  • Johnson Controls (JCI) -- Johnson Controls stands to benefit from improving conditions in auto production and greater building efficiency. Although we have not observed a high correlation between housing starts and auto sales, as has typically been the case in the past, we are beginning to hear that factories are planning on expanded hours this summer. On the heating and cooling side, there has been an acceleration in architectural billings, a leading indicator.
  • 3M Company (MMM) -- The company has a diverse product line that generally grows at the rate of US GDP growth, plus a couple of points. Its industrials group should benefit from improving auto production, while its electronics division could be lifted by increased wafer demand and capacity utilization, as well as increased semiconductor orders.
  • Net App (NTAP) -- Revenues are accelerating on new, higher-margin clustered products, and general growth trends for cloud services are positive. The richer mix of products is driving gross-margin expansion, while accelerating cash flow has resulted in the initiation of a dividend and further share repurchases. We believe this year’s EPS growth estimate of 16 percent is conservative.

Although the "Sell in May and Go Away" theory has some historical merit, stock market performance ultimately has more to do with the current economic conditions than the calendar.

Ben Marks is president and chief investment officer of Marks Group Wealth Management, a Minneapolis-based registered investment advisory with approximately $475 million in assets under management. Marks Group owns certain aforementioned stocks on behalf of clients.

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