Second Half Playbook: Which Market Laggard Can Become a Leader?

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

The first half of the trading year is over. For all of my readers, I hope it was a successful venture in the markets and your outside lives.

Given the numerous concerns heading into 2013, few investors expected to have a breakout performance in equities. We entered the year with concerns such as the looming fiscal cliff, payroll tax hike, and lukewarm corporate earnings forecast. President Obama won his re-election bid and investors reacted by hitting the “sell” button, with the market reaching a November 2012 low.

The dust began to settle when it became clear there would be no capital gains or dividend tax increases, and the Federal Reserve announced plans to increase its quantitative easing (QE) program. Ultimately, the Dow Jones Industrial Average posted its best “first half” performance since 1999, opening at 13,104.30 on Jan. 2, and closing at 14,909.60 on June 28.

To begin the second half of 2013, I thought it'd be worthwhile to discuss the top underperformers in the market year-to-date. Let’s consider the following readers choices, which have received a lot of news and media attention.

Innovation or not?

Despite its falling share price, Apple (NASDAQ: AAPL) is still widely perceived to be the world’s most valuable brand. Shares of the technology giant fell 25.5% in the first half of 2013.

Let’s consider the bear case on Apple before predicting if the stock can rebound. Investors are concerned that slowing demand for smartphones and tablets will affect Apple’s top-line revenue and a falling gross margin could affect bottom-line earnings. The company also faces increased competition from new devices such as the Samsung Galaxy S4, HTC One, and Google Nexus.

There’s a lot of moving parts, but I think Apple can make a comeback in the latter half of 2013.

First, Apple is the main beneficiary of a PC market in secular decline. We are in the early innings of a long-term trend as old PC inventory is replaced with newer tablet devices. While competitors have made inroads against iPhone, Apple maintains a stronghold of the tablet market with the iPad. In my piece The Contrarian View: Four Reasons to Sell Google and Buy Apple, I outline why the tablet market is expected to triple in the next four years.

Apple shares have consistently outperformed based on new product introductions and related announcements. Chief Executive Tim Cook has promised to introduce a new iPhone and other “game-changers” in the second half of 2013 and throughout 2014. On June 27, we learned that Apple filed a trademark application for the term “iWatch” in Japan and reports now indicate the trademark extends to a half-dozen other countries.

Despite the painful decline in Apple’s share price from $700 to the current $400 level, I believe the stock can rebound at least 25% in the second half of 2013. Readers might consider Apple with a 12-month price target of $600.

Precious metal under pressure

The SPDR Gold Shares (NYSEMKT: GLD) fell a massive 23% in the second quarter, including two days (April 12 and 15) when the precious metal suffered a 9.3% loss, the largest drop in 30 years of history. Overall, gold has fallen 35% since the September 2011 all-time high.

Despite the significant declines in the gold market, I do not believe a fundamental bull case can be made at the present time. Investors fail to realize that gold has been in a 10-year uptrend, and gold fundamentals have deteriorated as concerns over hyperinflation and fiat currency begin to lose credibility.

The U.S. dollar is reaching multi-year highs, an ill fitted occurrence as gold bugs anticipated the Federal Reserve’s monetary policies would result in a weaker dollar, not a stronger one. Furthermore, the level of inflation since the 2008-09 recession has been modest at best, and concerns remain equally weighted between inflation and deflation, a second negative for the gold market.

If readers need further evidence that gold prices are falling, consider the recent actions of mining industry executives. Gold producer Barrick Gold (NYSE: ABX) announced on June 28 that its Pascua-Lama project in Chile and Argentina will be delayed until the middle of 2016, compared to a previous expectation of mid-2014. Barrick is the world’s lowest cost senior gold producer, and it appears management is voting with their feet that gold prices could persist downward.

Shares of Barrick Gold have fallen from $50 in January 2012 and currently exchange hands beneath $15. As of this writing on July 2, analysts at New-York based Jefferies have lowered their gold forecast to $1,250 from a previous $1,500 and lowered their price on Barrick Gold to $14. The investment firm believes the precious metal and gold stocks may have further downside.

Finally, a pure fundamental analysis of the supply/demand dynamic indicates that physical demand for gold may not stabilize until the second half of 2014. Mining companies are beginning to remove supply from the market.

Readers might consider selling the SPDR Gold Shares and gold miners such as Barrick Gold based on my analysis.

Foolish takeaway

With the second half of 2013 upon us, it’s good timing to consider the best and worst-performing sectors so far this year.

Apple and SPDR Gold Shares are among the most popular investments in 2013, despite significant losses in both through the end of June. Based on my analysis, Apple could stage a rebound in the second half of the year, although I’m less optimistic on the gold market and mining stocks such as Barrick Gold.

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John Macris has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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