5 Sturdy Stocks That Can Weather a Bumpy 2014
Solid fundamentals, attractive valuations will propel these stocks above the market
While I don’t expect the S&P 500 to run another 30% in 2014, I am expecting a decent year for stocks.
We need to be ready for some bumps early in the year as the Fed starts to taper quantitative easing and stocks take a well-deserved breather, but I plan to use that as a buying opportunity. I would avoid some of last year’s momentum plays that soared to lofty valuations, and instead focus on attractively valued companies with solid fundamentals and catalysts on the horizon to drive them higher.
But which stocks meet those qualifications in 2014? Here are five on my radar:
ABB Industries (ABB)
I’ve followed this Swiss-based company for years. ABB Industries (ABB) is a diversified manufacturer, making process automation equipment and power systems used to help create the “smart grid” along with other power transmission-related products. Results in recent years have been hurt by the recession and debt crisis in Europe, but earnings have begun to come alive. Earnings per share grew 9% in the third quarter, and expectations are for 22% growth for the full year.
Management feels the short-term outlook remains somewhat clouded by the economic climate, but secular growth is firmly in place. Valuation is very reasonable at 15 times 2014 estimates of $1.64 per share, and a nice dividend yield of 2.7% provides income as well as support for the stock.
Mylan (MYL) is one stock that has done well in 2013 and still has solid potential for next year. The company makes generic drugs, and I like that the pipeline is very full.
There are 179 new drug applications outstanding, the branded versions of which have current sales of $24.1 billion. Specifically, launches of new generic versions of Lidoderm (shingles pain relief) and Herceptin (breast cancer) should drive solid results in 2014, with earnings expected to grow 19% on a 12% increase in sales.
MYL sells for 12.3 times 2014 estimates of $3.40 per share, which is a significant discount to the overall market multiple of around 15.8. I also like the company’s $500 million share buyback, which adds support to the stock.
Intervest Bancshares (IBCA)
Intervest Bancshares (IBCA) is an attractive play on rising interest rates. IBCA is a regional bank whose stock has stayed between $7 and $8 for the past five months, which is a large discount to tangible book value of $8.77. Earnings have been pressured due to low interest margins, but an eventual rise in interest rates could raise margins meaningfully from current the depressed level of 2.32%.
In the company’s last quarterly report, I was encouraged to see loans outstanding increased from the previous quarter to $1.1 billion from $1.05 billion. In addition, the bank is well-capitalized (with a Tier One Common ratio of 14.87%), and most loans are for commercial real estate and well-secured by property values, so credit losses should remain minimal.
Euronet Worldwide (EEFT)
You would never guess it from the name, but Euronet Worldwide (EEFT) is based in Leawood, Kans, although it does operate one of the largest ATM networks in Europe. It also operates the world’s largest payment network for prepaid mobile top-up and is the third-largest money transfer company in the world.
Growth was very strong in the third quarter across all three operating segments. Overall, revenues rose 14% to $316.4 million, earnings (adjusted EBITDA) jumped 28% to $53.8 million, and cash earnings per share soared 33% to $0.56.
Several growth drivers are well-established for 2014: The company is expanding its ATM network in developing markets, it has begun to fill prepaid cards beyond mobile phones, and is on pace for a 22% increase in money transfer locations. Add it all up and cash EPS is expected to grow to $2.33 from $1.99. With the stock at about 20 times those estimates, EEFT is an excellent “growth at a reasonable price” pick.
Nice Systems (NICE)
“Big Data” is a game changer, and Nice Systems (NICE) is an interesting player whose solutions analyze information through varying media, from emails to phone calls.
The core business, which accounts for 65% of revenues, comes from technology that allows customers to maintain business-to-business relationships. However, the remaining 35% is the real driver of growth. This part of the business helps fight financial crime and provides security to prevent cyberattacks.
Revenues have grown about 15% per year recently, which has allowed NICE to build an annuity-like stream of service and maintenance revenues that account for 58% of sales. In addition, I do not think the market properly values the potential of the security and compliance businesses, and earnings for 2014 could be closer to $3 per share than current estimates of $2.83. The stock is cheap at just 13X my expectations for 2014 and at 2.3 times enterprise value/revenues, so it’s also a potential takeover candidate.
I’m looking at Fortegra Financial (FRF) as a breakout candidate for 2014 thanks to its strong business, predictable earnings model and potential as a takeover target.Continue Reading