US share tips: Blockbuster stocks for the New Year

published 10 January 2006

There are scores of analysts out there "betting against Hollywood wisdom" and expecting a "dazzling sequel" to an uninspiring picture. So far, the US market has risen under 5% in 2005, but in 2006 "the bulls are expecting stocks to climb anywhere from 5% to 25% next year". Are they right?

The jury is out, says Jim Jubak on MSNMoney.com. Which way stocks go depends on the answers to these questions: will the Fed overdo its rate increases? Will petrol prices shoot up again? What will happen to growth in Europe? What will happen to growth in China and India? And, finally, how resilient will investors be to surprises? Right now, we don't know the answers to any of these questions for sure, so the best thing investors can do is to stock-pick very carefully indeed.

One place to start the search is in the industrial goods sector. With corporate balance sheets "in good shape" (cash on the balance sheets of non-financial companies in the S&P 500 hit a record $638bn in November) and profit margins solid, the scene is set for companies "that have been reluctant to spend on expanding capacity or adding new equipment for the last few years to put a bit of those profits to work". Early evidence that they might be doing just that came in the form of the 3.4% increase in durable goods orders in October, says Frank Benassi on BusinessWeek.com. This might not sound like much, but it's "a huge rebound from the 2% drop in September", and with a predicted $200bn stimulus from post-hurricane rebuilding and clean-ups on the go, it is likely to keep rising.

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Orders for non-defence capital goods were even better up 7%. Two good stocks to buy to take advantage of this shift in spending from consumers to corporates are Middleby (MIDD, $85.07), which makes cost-saving capital goods for the restaurant sector, and General Cable (BGC, $19.81), says Jubak. Michael Sivy writing on CNNMoney.com also points to Illinois Tool Works (ITW, $90.04).

Traditionally closely aligned with capital goods in the economic cycle is basic materials. This was the best-performing sector of the US market by far in 2005 thanks to the sharp increase in the price of oil. And for 2006, the sector and oil in particular still has plenty of supporters. S&P's energy analyst, Tina Vital, has strong buy' recommendations on Chevron (CVX, $57.51), Conoco-Philips (COP, $57.53), Exxon Mobil (XOM, $58.06), Total (TOT, $129.03), and Valero Energy (VLO, $52.27), notwithstanding her projections of a fall in the price of West Texas Intermediate to $52 per barrel in December 2006 and then to $45 per barrel in December 2007. Jubak picks Noble Corporation (NE, $71.89), with an $84 price target, Ensco International (ESV, $45.77), with a $58 price target, and Marathon Oil (MRO, $61.79), trading on less than ten times consensus earnings estimates for this year. Justin Perucki on Morningstar.com picks TC Pipelines (TCLP, $33.00) and Northern Border Partners (NBP, $42.51).

Oil's principal partner within the basic materials category metals and mining meanwhile, is something of a curate's egg, says Benassi. While the near-term price outlook for copper, gold and nickel remains strong, conditions in the steel market remain volatile and those in aluminium are downright challenging, given higher power and alumina costs and, "in some cases, the risk of capacity closures". Believers in gold, says Andy Serwer on Fortune.com, can satisfy their lust via exchange traded funds, such as StreetTracks (GLD, $50.09), or pure equities. National Bank Financial's Toronto analyst, Tanya Jakusconek, tips Barrick Gold (ABX, $27.06) and Glamis Gold (GLG, $25.15); Jim Jubak picks Goldcorp (GG, $20.04). For base metals' exposure, Jon Birger and David Stires of Fortune.com highlight Phelps Dodge (PD, $141.00) as offering "the best copper exposure of any mining stock". It trades on a current p/e of less than ten times.

Ignore the Dogs, buy the Comeback Kids

If you want to take a slightly different approach to investing in 2006, says Harry Domash on MSNMoney.com, then consider the following variation on the Dogs of the Dow' strategy.

Instead of buying equal dollar amounts of the highest-yielding stocks in the Dow Jones Industrial Index at the end of the year (the Dogs), buy the ten Comeback Kids' of the S&P 500. These are the ten worst performers in the index that have a market capitalisation above $10bn and a share price above $5. It lacks the long-term pedigree of the Dogs' strategy, but adopting the Comeback Kids strategy over the past year would have meant outperforming the S&P by 100% so far.

Current candidates for 2006 are: Symantec (SYMC, $17.10), Ford (F, $8.30), GM (GM, $21.89); Fannie Mae (FNM, $47.51), Avon Products (AVP, $29.30), Biogen (BIIB, $45.31), Dell (DELL, $32.55), Zimmer Holdings (ZMH, $71.55), Gannett (GCI, $61.82) and Boston Scientific (BSX, $25.64).

Charles has previously written for the MoneyWeek, giving readers his share tips regularly and covering other topics on the side such as stock markets and the economy. He has also written for The Business, Shares, Investors Chronicle and The Evening Standard, and Charles has presented on LBC and been a guest on BBC One and BBC World. Aside from his journalist background, Charles graduated as a chemist from the University of Oxford specialising in ligand gated ion channels.