Our Top 5 stock picks for Christmas. The festive season is typically associated with carols, nativities, gift giving, bad knitted jumpers and an overabundance of food that will keep you couch bound for at least a week. But while majority of investors will be forgetting the euphoria or pain the markets have generated for them during 2012, there will be those investors who will use this traditionally quiet market period to set themselves up for the first months of the year. In this article, we’ll take a look at 5 of our top stock picks heading into January 2013.
1) Technology – Apple Computers Inc (AAPL – US)
The Technology sector in the US has outperformed the broader market in every facet. Led by Apple Computers (Code AAPL), the Technology sector has greater opportunity for growth than any other sector.
AAPL is an extremely strong company fundamentally. Revenue’s continue to increase with a product line that includes the iPhone, iPod, iPad, and Macintosh computers. As a leader in the hand held device and phone product lines, AAPL is the largest listed company in the US.
Many analysts are bewildered that the stock price has retraced from its peak above $700 in late September to the recent short-term low of $500. This occurred shortly after their 3rd quarter earnings report, which by all accounts was a stellar performance. And one would expect that revenue will increase through the Christmas period with the release of the mini-iPad. So look out for price performance heading into the next earnings season late January.
There are no signs of a buyer turn around yet, although we have signs of the selling pressure weakening. A consolidation above $500 would provide better evidence that investors perceive AAPL to be at “fair value”. We will then be monitoring for signals of bullish trend changes to enter Long.
Investors and traders could approach this in numerous ways:
- Buy stock – this requires capital as the share price is above $500 per share
- Buy CFD – provides leverage to capitalize on stock price gains. Be aware, if the share price falls you could be losing more than the invested capital. Hence, an exit strategy is imperative.
- Purchase Call options – ensure you buy enough time to be right. This might mean purchasing a longer dated option.
- Adopt a Risk reduced option strategy – this includes a Debit Spread or Credit Spread strategy, or a Calendar Spread against your longer dated bought option as per above.
Global economics have slowed in 2012, reeling from the double impact of the US GFC (Global Financial Crisis) in 2007/08 and the European Sovereign debt issues that continue to influence world economies. Even though Chinese growth has declined, the country continues to grow at an annual GDP (Gross Domestic Product) rate of 7.40% – better than most western developed countries.
The jury is still out whether China has turned the corner and if it will grow in 2013. Some analysts state existing data out of China does not reflect the true economics of the country, whereas others stipulate China depends on Europe and the US for future growth.
Fact is, there are billions of Chinese who are shifting from low class living into the middle class, and that alone will spur on consumer spending. Add to this the government expenditure on infrastructure and the development of power stations across the nation, and growth is clearly going to continue.
At the very least, China is showing signs that it is consolidating around that 7.5% annual growth and unless there is some major negative event in the US or Europe, has greater potential of increasing its growth rate rather than declining even further. Analysts are calling it a Soft Landing compared to the previously expected Hard Landing. IE; it’s closer to the bottom than it is to the top!
How we will play this China growth is to trade FXI which is a listed Exchange Traded Fund (ETF) on the US stock market. This index is already in an upwards trend, hence we need to look for short-term retracements to form higher lows for our next entry point.
Investors could use the stock to accumulate, but options are also available on this stock.
3) Energy – Woodside Petroleum (WPL – ASX); Exxon Mobil (XOM – US); Energy SPDR Index (XLE – US); Paladin Energy (PDN – ASX)
New sources of crude oil and natural gas (coal seam) have changed the dynamics of the US and Australian energy markets. Stock prices have been underperforming the broader markets, but we haven’t seen the cost of energy decreasing for the consumer despite greater supply and decreased demand. This is mostly due to increasing infrastructure costs and taxes due to carbon emission laws.
Peak Oil, which is the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production is expected to enter a terminal decline, has been pushed further back with the new sources of extraction and production. This means, oil will not run out sooner than expected. But the plain fact is that we are a society that needs energy. Just imagine trying to live without electricity or fuel for a week!
Crude Oil, Natural Gas, Coal Seam Gas and Nuclear energy are the key components for future energy growth. Coal, which is the cheapest and most common, will be phased out over the coming decades, but for 2013 will continue to be the largest means of energy production.
In the Nuclear space, there are over 430 commercial nuclear power reactors operating in 31 countries, producing 13.5% of the world’s electricity. Currently, there are over 60 reactors under construction in 13 countries, mostly in the Asian region. Demand for uranium will increase, despite the 2011 Fukushima Daichi disaster which sent uranium mining companies plummeting. We believe this is a space for future growth.
To play the energy sector, you could consider the major players such as WPL on the ASX or XOM on the US markets. Alternatively, you could consider the XLE Exchange Traded Fund (ETF) on the US markets or something more specific such as PDN for a pure uranium play on the ASX.
4) Retail – XRT (US)
The US economy is stabilizing, but not out of the woods just yet. Our expectations for the US are for continued consolidation in economic data, as the government and Federal Reserve continue to push for improvements in Unemployment and in managing the sovereign/government debt.
Where this will see growth is in the Retail sector. Certainly, consumers are suffering but Americans spend whether they have cash or not. Their economy is built on debt. Hence, following a period of increased saving, any sign of positive improvement in the economy and spending will increase.
The chart of XRT, which is an Exchange Traded Fund (ETF) for the Retail sector has been one of the better performers through 2012, and is currently shaping up for the next potential bullish run. Citing a similar movement at the end of 2011, a short-term resistance level had been met through December, only for an upwards break in January as earnings season proved a relatively prosperous Christmas shopping season. We expect the same again in early 2013.
Instead of choosing specific Retail companies to beat expected sales and therefore drive their stock prices up, we are looking at the Retail Sector index which we can trade through XRT. Investors could buy the stock or consider Option strategies to manage their Risk.
5) Emerging Markets
The recent global economic slowdown has released a parachute on the Emerging markets, which include China, Brazil, Russia, India, Mexico, Indonesia and Turkey. An Emerging market is a nation with social or business activity in the process of rapid growth and/or industrialization.
Despite the broader problems of Europe and the US, the emerging markets have continued to show growth, albeit at a slower rate. We’ve already discussed the China story above.
Should the global economic picture begin improving through 2013, then the Emerging markets will again find favour from global investors. Especially as Europe and the US are not expected to provide strong potential returns.
There are a number of ways you could play the Emerging market story. You could consider investing directly into individual companies in the specific country’s market. This has some risks and requires a broker that can place trades internationally. Alternatively, you might consider a locally listed company that derives its revenue from the emerging economy. But that has its owns risk as those companies will usually operate in specific industries.
Where we see opportunity is in trading specific Exchange Traded Funds (ETF’s) for countries that are showing growth potential. Some of these include:
- VNM (Vietnam)
- EWZ (Brazil)
- ILF (Latin America), or
- EEM (Emerging Markets)
Each of these ETF’s is a listed stock and can be purchased for longer-term investment, and have options available for adopting Risk management strategies.