13 for '13: Thirteen Market-Beating Investments for the New Year

Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Every investor dreams of beating the market.  While speculators like to shoot for the moon, wise investors first try NOT to lose money, and second, try to compound safe, robust returns over time.  

This new year, take control of your money and your investments.  Don't let the market "game" you into paying lots of handsome fees to buy stupid stocks.  Instead, look for great, shareholder-friendly companies selling at good prices as well as alternative investments with safe, substantial yields.  

Also, pay attention to what the government and the Federal Reserve are doing.  Whether you care or not, Ben Bernanke's actions are not inconsequential.  His money printing policies are enormous and will have an incredible impact over the ensuing years on investors of all stripes--including average investors like us.

And have you considered the shale revolution, compliments of hydraulic fracturing and other recent technological advancements?  Are you aware that the United States will become the world's leading producer of oil and natural gas by 2020--and that's a conservative estimate?  This has huge implications on world energy flows, political alliances, and, yes, investors like us.  Start learning about this new revolution and position yourself to profit from the unfathomable amount of cash that will trade hands as new energy infrastructure is necessarily developed.

In addition, the housing market is slowly but surely recovering across the nation. 2012 was possibly the best year in American history to purchase a house for yourself or to earn extra income as a rental property owner. Sadly, if you're like most Americans, your skepticism and/or lack of savings have probably caused you to miss the "house" boat. Thankfully (for average investors), some cash-rich companies did not miss the boat.  I'll help you figure out how to take advantage of the companies that took advantage of the housing collapse and its subsequent recovery.

In light of this, here is the first article in a three-part series on 13 practical investment opportunities for you to understand and initiate in 2013.  Not only do I think these picks and asset allocations have similar (or lower) risk than buying general stock market index or mutual funds, but I believe they have great potential to outperform the general market in 2013, and (more importantly) in the decade to come.  So, without further introduction, I offer you the first three of 13 for '13.

1.  McDonald's (NYSE: MCD)

After a stellar 2011, in which McDonald's crushed its fellow Dow Jones compatriots and returned nearly 32%, the stock had a painful 2012.  In terms of performance, the stock went from being the #1 performer in 2011 to #29 (of 30) in 2012.  Starting the year at $101.33, it fell all the way to $88.21 on December 31, 2012.  This means that, according the Wall Street Journal, had you invested $1,000 in MCD at the start of the year, you'd be left with about $900 at year end. Ouch.

But what's amazing about McDonald's is its resiliency--its staying power. Do you think the creator of the ubiquitous "Golden Arches" will be selling more burgers and fries to consumers in 10 years, or fewer? The way investors have abandoned the stock this year, you'd assume the latter. However, you'd assume wrong. Historically, MCD has returned 15% annually for its faithful investors--a fantastic return. With a 5-year average price-to-earnings ratio of 17.33, the current stock price is on the cheap side, trading at a P/E of 16.65. MCD's return on assets (ROA) is 16.4% and its return on equity is 38.7%--solid numbers. Finally, with a relentlessly growing dividend currently at 3.5%, MCD is a compounding dream machine.

While the market is holding out on this "Dow Laggard," do your portfolio a favor and start investing in MCD today.

2 & 3. Two Harbors Investment Corp. (NYSE: TWO) and Silver Bay Realty (NYSE: SBY) 

Two Harbors is a surprisingly little-known real estate investment trust (REIT) that invests primarily in residential mortgage-backed securities (RMBS). Their stated objective is "to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation." Somewhat unlike peers Annaly Capital (NYSE: NLY) and Hatteras Financial (NYSE: HTS), TWO branches out and owns both Agency and non-Agency RMBS. This can result in relatively increased risk (as not all of their securities are government-backed), against which they prospectively hedge.

So far, it's working.  Astoundingly, on December 17, 2012, TWO announced a quarterly dividend increase from $0.36 to $0.55, a 53% jump.  At its current stock price of $11.08, that results in an annual dividend of 20.1%! While a dividend this large is normally a sign of bad things to come for any stock, I think that TWO may be a well-managed exception.  For one example, consider that TWO's operating cash flows have increased from -$11.3 million in 2009 to $33.1 million in 2010 to $151.6 million in 2011.

One final advantage to owning TWO currently is that they have recently spun off Silver Bay Realty (NYSE: SBY), an initial public offering (IPO) that you may have heard about in the financial press. In short, SBY is a cash-rich, debt-free company backed by Two Harbors with an enlarging portfolio of single-family houses in some of the hardest hit markets, including Arizona, California, Florida, Georgia, Nevada, North Carolina and Texas.  They specialize in the "acquisition, renovation, leasing and management of single-family residential properties for rental income and long-term appreciation."  

Sound interesting?  I think so.  If you've missed out on purchasing a new home during the recent housing crash, you may want to consider SBY as an alternative way to "own" these homes as the market continues to recover.  SBY is also applying for REIT status, which means they will return about 90% of profits to you and me, the shareholders.  

Looking through Two Harbors' website, it looks as though current TWO shareholders may receive shares of SBY as a "special dividend" following a mandatory 90-day lock-up period from the IPO date (12/14/2012), rumored by Steve Sjuggerud of Stansberry & Associates to be worth about 9% of your Two Harbors holdings.

I expect only good things from both TWO and SBY as the housing market recovers in the coming years, so invest accordingly.

Okay, three down and ten to go in our 13 for '13: Thirteen Market-Beating Investments for the New Year.  The table below summarizes our first three recommendations:

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Current Price</strong></p> </td> <td> <p><strong>Current Yield</strong></p> </td> <td> <p><strong>Comments</strong></p> </td> </tr> <tr> <td> <p><strong>MCD</strong></p> </td> <td> <p>$88.21</p> </td> <td> <p>3.5%</p> </td> <td> <p>Jump on board one of 2012’s Dow laggards</p> </td> </tr> <tr> <td> <p><strong>TWO</strong></p> </td> <td> <p>$11.08</p> </td> <td> <p>20.1%</p> </td> <td> <p>World’s best REIT?</p> </td> </tr> <tr> <td> <p><strong>SBY</strong></p> </td> <td> <p>$18.83</p> </td> <td> <p>N/A</p> </td> <td> <p>Vicarious ownership of rental properties</p> </td> </tr> </tbody> </table>


JeffRossMD owns shares of McDonald's and Two Harbors. The Motley Fool owns shares of McDonald's and Annaly Capital Management. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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