Invest Like Warren Buffett
5 Outstanding Stocks for 2014
A Classic Year in the Stock Market
As I pointed out in my Cabot Wealth Advisory communiqué on December 26, the stock market in 2013 produced results that were nothing short of amazing. As of December 30, the Dow (Dow Jones Industrial Average) is up 25.7% to 16,504. Best of all, there were no major corrections in 2013! The chart below tells the story of the Dow:
2014 Outlook I hinted last week that maybe 2014 will be different. My prediction: January will produce a nice rise to 17,000 or more for the Dow, but we could then see a nasty correction during the following six months.
After the big stock market climb in 2013, investors are nervous. It won’t take much to cause investors, big and small, to start taking profits and dash to the nearest exit! It’s tough to predict how far down the U.S. stock market could sink, but a correction in the order of 10% to 20% is possible. A correction of that magnitude would bring the Dow down to the 14,000 to 15,000 range.
How did I arrive at my forecast? If you look at the chart above and draw some lines and make some calculations, your conclusions will likely be quite different than mine. I am using a value approach, and my value analysis of the Dow shows that the blue-chip average will be extremely overvalued at 17,036. I have calculated “fair value” for the Dow at 14,534 and extreme undervalue at 12,033. I doubt 2014 will bring any punishing news which will cause the Dow to go from one extreme to the other, so projecting the Dow to slide only half-way down the value slope to the 14,000 to 15,000 range is a realistic forecast.
The remainder of 2014 will be relatively tame. An extended period of time will be necessary for investors to recover from the shock, but we should see a good rebound in stock prices in the second half of 2014. Growth stocks have led the market during the past four years, but value stocks are poised to lead in 2014 and in future years.
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My Top 5 Stocks for 2014
In my Cabot Wealth Advisory on December 26, I revealed two of my top choices that will perform very well in 2014. Click here to review my first two picks.
My other three choices for 2014 are Ensco, Lear and Questcor.
Ensco plc (ESV 56.61) is a leading offshore oil and natural gas drilling company. Ensco owns and operates shallow water and ultra-deepwater rigs located in many parts of the world. Two new drilling rigs are ready to begin multi-year contracts with major international oil companies. Six more rigs are under construction. In addition, Ensco is spending heavily on standardizing and modernizing its drilling fleet which will help the company maintain its advantage over competitors.
Demand for Ensco's drilling rigs is solid and will likely strengthen further during the next several years. Sales will rise 15% in 2014, and EPS will climb 17% to 7.20.
Ensco has been named #1 in total customer satisfaction for the third consecutive year. Its stock’s low current P/E (price to 2013 earnings) ratio of 9.2 and high dividend yield of 5.3% are very attractive. ESV shares are currently selling right at book value.
I expect ESV to reach my Minimum Sell Price of 88.49 within one year.
Lear Corp. (LEA 80.95), founded in 1917 and headquartered in Southfield, Michigan, is a leading global supplier of automotive seating systems, electrical distribution systems and electronics. The seating division manufactures, assembles and supplies vehicle seating systems for automobiles and light trucks, which are fully assembled and ready for installation. The electrical and electronic division manufactures, assembles and supplies electrical and electronic systems and components for vehicles.
Lear’s purchase of Guilford Mills in May 2012 is producing better than expected sales and earnings results. Guilford makes vehicle seat fabrics and is providing Lear with unique and popular seating systems.
I expect sales to rise 7% and EPS to climb 21% to 7.00 in 2014. Earnings could climb faster if management’s operating efficiency program increases profit margins.
At 14.0 times current EPS and with a dividend yield of 0.8%, LEA’s shares are undervalued. I expect LEA to reach my Min Sell Price of 110.73 within one year.
Questcor Pharmaceuticals (QCOR 54.21) is a specialty pharmaceutical company providing H.P. Acthar Gel (Acthar), a prescription drug for treating autoimmune disorders and other ailments including MS (multiple sclerosis). Questcor is in Phase II trials to gain FDA approval to sell Acthar as a treatment for ALS (Lou Gehrig’s disease).
In 2014, sales will increase 30%, and EPS (earnings per share) will jump 38% to 6.32.
QCOR shares have dropped recently after the report of an investigation by the states of Pennsylvania and New York and, in addition, by the Securities and Exchange Commission. Details are few, but the investigation seems to include examining Questcor’s labeling and marketing practices.
Realistically, Questcor will lose part of its fight and will be fined and admonished. The outcome will probably have no material effect on the company’s sales and earnings.
Questcor shares are now a bargain at 11.8 times current EPS with a dividend yield of 2.2%. The balance sheet includes minimal debt, but QCOR shares are high risk because of the speculative nature of the company’s biotechnology business and the pending investigation. I expect QCOR to achieve my Min Sell Price of 114.85 within two years.
I wish you and your loved ones a happy, healthy and prosperous new year!
Chief Editor and Analyst, Cabot Benjamin Graham Value Investor
Editor's Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Investor. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.