My Sizzling One-Year Stocks powered to a 58% aggregate return in 2013. It’s only natural now to wonder how these same stocks will fare in 2014.
It seems that many in the market are looking at the current rally with skepticism. That makes sense, given the abuse investors have received over the last decade. The boom-and-bust cycles of the past suggest we are due for the bust part of the equation sooner than later.
But I am not buying that argument. Instead, I’m formulating a different view for the coming year – a view that has economic growth stronger than many currently expect.
That growth will be the tonic to calm investor worries over current valuations. Earnings in such a strong growth environment will be stronger than expected.
Even if price-to-earnings multiples stay the same, stronger-than-expected earnings have the potential to lift stocks by 10% or more in the coming year.
As always within that construct, individual stock selection can trump the macro environment. Some names will do better than others.
Will those stocks include the names that performed so well in 2013?
Let’s take a look at five of the biggest gainers from the list of 2013 One-Year Sizzling Stocks to find out:
The friendly skies were quite friendly to investors in 2013. Airline stocks soared this year thanks to rising prices, higher fees and heavy demand. In addition, competition shrank, thanks to mergers that left us with a handful of big carriers and a few discount airlines. That mix resulted in the best operating conditions possible. Delta shares gained 127% in 2013 and were the best-performing name in One-Year Sizzling Stocks.
Will Delta’s (DAL) run continue in 2014? For certain the same operating conditions that existed in 2013 will apply in 2014. In fact, you could argue that demand will be stronger given the global growth story. I see no reason why profits in the coming quarters won’t exceed current expectations. The problem, though, is analysts see profits slipping in 2014 from the 2013 numbers. As such, I see Delta shares trading with or below the market next year.
The maker of Ugg boots and Teva sandals defied expectations in 2013. At the end of 2012, Deckers (DECK) stock was in a bit of a tailspin. The worry was that consumer trends might be trending away from its products. Uggs had enjoyed a strong run, but perhaps that run had come to an end. From a valuation perspective I thought differently and made Decker one of my One-Year Sizzlers. I’m glad I did, as the stock is now up 109% for the year.
Can we expect a repeat performance from Decker in 2014? The contrarian story is now gone, but the brands might continue to sell. Will they sell enough to lift shares further? Analysts on average expect Deckers Outdoor to grow profits by 20% in 2014. At current prices, shares trade for 18 times 2014 estimated earnings. That is a very small discount to the expected growth rate, suggesting that shares could climb further in 2014. The big “if” is that any change in consumer behavior could result in the stock dropping hard. The valuation is not compelling enough, given the risk when looking at the stock for next year.
The truck-fueling company had a volatile year – mostly to the good side. Before the year was five months old, the stock jumped above $12 per share. That was good enough for a 155% gain. It would have been easy to say sell at that time, but such timing is nearly impossible to get away with. Instead I let these One-Year Sizzlers do their thing – for the entirety of the year.
Travel Centers of America
In the case of Travel Centers (TA), that looked like a big mistake as the stock tanked during the summer months and fell below $8 per share. Travel Centers then reversed course again, hitting $11 in the fall. A slight sell-off at the end of the year leaves us with a gain of 100%. The volatility was a bit nutty for sure, giving one pause for this name going forward. That said, the valuation is quite compelling. Analysts expect TA to grow earnings by 133% in 2014. At current prices, shares trade for only 9 times 2014 estimated earnings. TA qualifies as a potential One-Year Sizzler for 2014. I’d have no trouble owning or buying this stock at current levels.
The steel industry struggled for much of 2013. Late in the year, Goldman Sachs (GS) upgraded the entire sector, including names like AK Steel (AKS). That was enough to lift this stock from the doldrums and make it one of the best-performing One-Year Sizzlers. The stock is up more than 70% so far this year, with most of that gain coming in the last two months.
Have we come too far too fast, or is this just the beginning of a rally that will continue in 2014? Analysts expect AK Steel to move from a loss in 2013 to a small profit in 2014. At current prices, the stock trades for 72 times 2014 estimated earnings.
I like the steel sector for many reasons looking ahead. China looks like it will be a big winner in the coming year and that will be good for steel. What I don’t like is the valuation for AKS, comparatively speaking. There are more interesting steel names to consider for 2014. In fact, one of those names made the cut for 2014 One-Year Sizzling Stocks.
This one was a contrarian pick for 2013. In 2012, negative publicity and financial obligations from the less-than-perfect coming-to-market of Facebook had investors selling shares of the exchange. As per usual, the selling went too far. As investors returned to the market in 2013, profits at Nasdaq increased. So too did the shares, with gains now touching 60% for the year. Analysts expect the company to grow profits by 16% in 2014. At current prices, shares trade for 13 times 2014 estimated earnings. The contrarian trade here is gone, but the stock still looks cheap.
I expect Nasdaq OMX (NDAQ) to trade higher in the coming year, thanks to increased volume in the markets and a continuation of the bull market rally. That said, the valuation is near fair value, thus the gains are likely to be similar to the major indexes. While there is nothing wrong with that, the stock does not make the cut for the 2014 One-Year Sizzling Stocks list.