Top 4 Equity Rebounds of 2013
Zack is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As 2013 begins, savvy investors look to bolster their New Year returns. One of the best ways to accomplish this goal is to look for an industry rebound. In 2013, I believe that these four beaten-down companies will ride the resurgence in their industries.
Chesapeake Energy: Much of Chesapeake's decline in 2012 can be blamed on lackluster natural gas prices. Natural gas has hovered around multi-year lows, hurting Chesapeake's capital-intensive business. But in 2013, natural gas prices have a strong opportunity of improving because of an increased demand from exports. In a recent report published for the U.S. Department of Energy, it was determined that exporting liquefied natural gas would have an overall positive effect on the U.S. economy. Since Chesapeake increased its production of liquefied natural gas and demand for natural gas should increase from exports, natural gas prices and Chesapeake should enjoy a beneficial 2013. But even if natural gas prices remain lackluster, legendary investor Carl Icahn, who is known for unlocking the hidden potential in companies, has acquired an 8.98% stake in Chesapeake. Icahn has been shaking up management as well by appointing four new directors, as well as relieving Aubrey McClendon of his position as chairman. Given Chesapeake's large natural gas reserves, I am confident that Icahn can unlock the great potential.
Cliffs Natural Resources: Advancing to another commodity-based business; Cliffs Natural Resources has struggled in 2012 based on weak iron ore prices. To demonstrate how important iron ore is to Cliffs Natural, 90% of all 2011 revenue was from iron ore. With iron ore prices rebounding 20% since their October lows, and the positive industrial news coming from China, iron ore looks to continue its surge into 2013. The market, however, is treating Cliffs Natural with too much pessimism as they are only trading at 6.03 times earnings. A sustained iron ore rally could cause the share price to surpass its former 52-week high. But even if that doesn’t happen, patient investors will be rewarded with the 6.5% dividend. The bottom line is if an investor is bullish on the industrial rebound of the world economy, Cliffs Natural Resources will be a great way to play it.
Apple: Can the greatest innovator of our lifetime really be on a list of the best rebounds of 2013? Well Apple is on the list, simply because of Mr. Market’s overreaction. We have all heard it before -- Apple’s margins will be compressed, and the Android will be an iPhone killer while the Kindle will hurt the iPad. And lastly, Apple won’t be able to create another innovative product. But the fact remains that Apple is one of the most financially stable companies trading on the market today. Apple generates $150 billion in revenue annually, and it's only trading at less than 10 times forward earnings. The market is pricing Apple like the Apple brand won’t be relevant in the coming years. I still see no indication that Apple won’t maintain its status as a tech titan. If it takes the market time to realize this, investors can be happy with Apple’s 2% dividend.
Tronox: Tronox is probably the least known company on this list, but this could provide an opportunity for investors. Tronox is a major producer of titanium dioxide pigment, which is an important component of paint. And since paint is essential for new homes, Tronox is an alternative way to play the housing recovery. Year over year, new home sales have increased 15% when comparing November 2011 to November 2012. While the housing market proves to be a significant catalyst, Tronox is also deeply valued. Trading at just 8.25 times forward earnings, Mr. Market again only sees doom in the future for this equity. But with the eventual housing recovery, and a 5.5% dividend, it would appear that Mr. Market is wrong again.
Conclusion: Although it is always risky to go against the grain, these four equities seem like great opportunities. They are all trading at small forward earnings, and they all are significantly off their 52-week highs. As we look back on these investments next year, hopefully Mr. Market realizes the steep discount these four companies are trading at.
zman4money is long shares of Chesapeake Energy. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!