2 Stocks To Keep An Eye On For 2013

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The United States Federal Reserve Bank just announced another round of stimulus for the economy, and it looks like it will last until 2015, by the Fed’s estimates. The Federal Reserve issued a statement indicating it would keep rates near 0% until unemployment fell below 6.5%. More specifically, they plan on buying $45 billion in longer-term Treasuries each month, in addition to the already $40 billion in mortgage-backed securities (MBS) per month they purchase.

What does this mean exactly? Essentially, the Federal Reserve will be pumping Wall Street banks with cash to increase liquidity and lending, and historically, this will result in the inflation of all asset classes. Real estate, commodities and equities will increase in value, while your cash in the bank will likely decrease. These ripple affects, of course, are theoretical and are the results we should see, not necessarily with certainty. As of late, one of the major obstacles in the way of a prosperous 2013 is the fiscal cliff. Without rehashing all the economic repercussions if Washington doesn’t come up with a suitable agreement before the New Year, it suffices to say 2013 may not offer the positive returns investors are hoping for. Regardless, as a cautious value investor, we think 2 stocks may be poised to deliver 50% returns over the course of the next 2-3 years.

Apple (AAPL) – $540

Like you, we are tired of hearing the debate about this company, but when a stock has the potential to boost your portfolio’s returns, its hard not to hear the reasons to buy this company’s shares. Barron’s Andrew Bary offered a wonderful cover story this last weekend, highlighting the magazine’s top “10 Favorite Stocks For 2013”. He duly pointed out that “None of the recent investor concerns – lower margins, supply constraints, management changes, iPad competition, and the iPhone 5 map fiasco – are major”, and I completely agree. It’s understandable that some investors might be skittish given that revenue and earnings growth from new products is unforeseen at the moment. Chances are, as many point out, the Apple TV will not make a debut in 2013, and the lower-margin iPad Mini will cannibalize profits from the iPad 3.

Nonetheless, from a valuation standpoint, Apple is almost a steal. The stock currently trades about 11x fiscal year projected profits of $49/share, and back out the company’s enormous cash holdings of $128/share, and we’re talking about a P/E of 8. Combine recent reports of a cheaper priced iPhone 5S for emerging markets, a deal with T-Mobile to bring the iPhone to the 3rd largest carrier in the U.S. midway through 2013, and that China Mobile, the largest mobile phone network on the planet with more than 700 million total subscribers, is in talks to offer the iPhone in the future, we’re not sure how you could go wrong with owning Apple.

JPMorgan Chase (JPM) – $43

As every news outlet has highlighted in recent months, the housing market appears to have bottomed and is making a slow recovery, and what do most home purchases require? A lender offering you a mortgage. With the Federal Reserve keeping interest rates low and the economy and labor market improving, home loan lending will offer banks huge returns.

Moreover, JPMorgan is a best-in-class bank trading at one of the lowest multiples among major banks, slightly over tangible book value. With a great reputation and strong market share in asset management, investment banking, consumer banking, credit cards, and processing services, JPMorgan is poised to grow their earnings.

Since no industry or company is without its potential downside, it is important to note the overhanging negative catalyst on all bank stocks: regulation. With consumer advocate and Wall Street critic Elizabeth Warren, who helped create the Consumer Financial Protection Bureau, in the running to get a seat on the powerful banking committee, banks and Wall Street should fear her role in creating regulation that may hurt their profitability.

With a multitude of analysts, as well as Jamie Dimon, CEO of JPMorgan, already calling for 2013 to offer superior returns, I agree with Lloyd Blankfein, CEO of Goldman Sachs, who warned that “The next 12 months will be tricky”. So invest selectively and with caution.

This was a guest post by Gary, who blogs at Gajizmo.com, a personal finance blog focused on investing, real estate, insurance, debt, and money.

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{ 5 comments… read them below or add one }

Mike January 9, 2013 at 3:00 pm

Both stocks are solid options but Apple is my favorite one. Apple’s stock has great momentum, is stronger than any competitor and has so many consumers that are actually followers. I can’t see how these things can change unless something extraordinary happens which is not so likely!

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MikeG December 17, 2012 at 9:30 am

I am personally staying away from Apple. I support mobile devices at my place of employment and I have to say that ever since Steve Jobes passed on, the products coming out of Apple are slipping when it comes to quality. We have never had a DOA iPhone before and within the past few months we’ve had two. Their stock may fluctuate between what it is now and $600, but I doubt it will be the powerhouse it once was and it will eventually slip far below its current price when enough “issues” become public with the company’s products.

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Primus December 17, 2012 at 10:24 am

Hold on…iPhone 5 was developed under Steve Job’s supervision. Also, the recent for the recent fall off is more due to people wanting to take the capital gains before the rates go up next year. The stock will pop in 2013 as the underlying busines is solid

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Gary December 16, 2012 at 10:29 pm

The concerns about Apple are not to be dismissed. As with any company, there are pros and cons, and in the case of Apple, on a purely valuation basis, it seems that there is more upside than downside risk. At a current stock price of about $510, I am willing to take on the risk of owning the stock. It is just a price level that I am comfortable with. Additionally, take into consideration that most of your largest tech stocks have a higher forward-looking multiple attached, and none of them are 100% foolproof to offer positive gains next year. So, in relation to most of its peers, I would prefer Apple as well. The 50% return in the next 2 or 3 years was arrived at using a DCF (discounted cash flow) analysis, taking into consideration average multiples for Apple and the industry. Too complicated to get into here, but even a stock-market rally in 2013 would make it easy for Apple to touch its recent highs of $700, and give you close to a 40% return at these levels. I am actually waiting for fiscal cliff fears to hurt the market a few more percentage points before I do my “Christmas shopping”.
I never said the housing boom will offset regulation, but I’m not sure how critically hurt banks will be by regulation. Let’s face it, banks have a very cozy relationship with Congress, the SEC, and the Federal Reserve. It can be argued that one of the reasons Elizabeth Warren was ousted from the Consumer Financial Protection Bureau is because of her very tough stance against banks. So the point is, do we really think banks will be crippled by forthcoming regulation? I say, play the rise in the tide by buying best in class, and wait for further clarity in the future. As long as Congress doesn’t pass crippling legislation pertaining to the fiscal cliff, chances are we will have a strong rally early 2013. Again, these are my opinions and investments/risks I am comfortable taking.

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Gail December 16, 2012 at 10:22 am

Gary – nice article. But why are the worries about Apple to be dismissed? Of course, there is a link to another article, but explain why you think Andrew Bary’s analysis is sound. The claim is made that these 2 stocks will increase 50% in the next 2 to 3 years. How was that number arrived at? Explain how the housing boom will offset the problems JPM will face from regulations. More specific information is needed

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