2013: A Quick Review
Two years ago, I started off my end-of-year Cabot Wealth Advisory with the following observation: “the stock market produced plenty of action in 2011. I really like adventure rides, but the recent action in stocks had a few too many sharp drops and loop-de-loops for most of us.”
The action in stocks in 2013, though, couldn’t have been more different. The Standard & Poor’s 500 Index is up a whopping 27.5% year to date in 2013 and, even better, the ride has been as smooth as a Cadillac (or the car of your choice). The largest drop in 2013 was the 5.75% decline (a mere bump in the road) in the Standard & Poor’s 500 Index seven months ago.
This year’s impressive U.S. stock market advance also provided one other feature. It was the only game in town. If you diversified into emerging market stocks, you likely lost money. The stock markets in China, India and Russia all produced negative results. Gold was down, bonds prices were down, and well, you get the picture. The only place to put your money in 2013 was stocks in the good ole U.S.A.
Will 2014 be a repeat of 2013—so that investors who missed out in 2013 can make up for lost ground? I think not.
At the beginning of 2013, investors were worried about the "Fiscal Cliff" and the accompanying "sequester cuts." There was Europe and the slowdown in China. The U.S. economy seemed weak, unemployment remained stubbornly high, and there was talk of the Fed starting to taper their bond buying programs. And how did the U.S. stocks react? They just kept on climbing to record highs—week after week, month after month.
During the past 12 months, investors’ negative outlook has turned positive based on several economic and political dynamics. The U.S. economy grew at a 4.1% clip in the third quarter. Corporate profits are at all-time highs. Inflation is low. Interest rates are low. And the lawmakers in D.C. decided not to act childish this holiday season.
Not only are the Dow and S&P 500 setting new highs, bullish sentiment is near all-time highs, too. Does all of this bode well for 2014? Maybe yes, maybe no. The news was bleak a year ago and the stock market proceeded to climb relentlessly higher. Now the news is rosy, and maybe that means the stock market will head lower.
I’ll give you my thoughts on 2014 in my next Cabot Wealth Advisory, entitled “2014 Outlook: Part II” on January 2, 2014. Stay tuned.
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My Top 5 Choices for 2014
Among my top picks for 2014 are Cognizant Technology and Qualcomm.
Cognizant Technology (CTSH 98.64) offers complete start-to-finish solutions for designing, testing and integrating complex software systems for corporations. More companies are outsourcing partial and full responsibility of their technology functions to Cognizant. Clients want to cut costs and transition quickly to new technologies that include Cloud computing and electronic business activities, which can be completed electronically.
Management raised its sales and earnings forecast for 2014 based on solid growth from all product segments and from all locations. Sales and EPS (earnings per share) likely surged 20% in 2013. Sales and EPS will rise another 18% in 2014. Additional expansion overseas and advancement into the telecomm, media and entertainment sectors offer outstanding opportunities for growth.
CTSH shares are reasonably valued at 23.9 times current earnings per share. CTSH has no debt and lots of cash to fund initiatives for continued growth. The stock does not pay a dividend. I expect CTSH to increase to my Minimum Sell Price of 136.16 within one year.
Qualcomm (QCOM 72.84) designs, manufactures and markets digital wireless telecom products and services based on Code Division Multiple Access (CDMA) technology. Products include global positioning systems (GPS) and integrated circuits and system software for wireless voice and data communications. The company also licenses many of its 5,700+ patents and intellectual property to manufacturers of wireless equipment.
Qualcomm’s integrated circuit chipset, called Snapdragon, helps power Apple’s iPhone 5; Google’s Android-based smartphones, including the popular Samsung Galaxy S III and S4; and Microsoft’s new Windows smartphones. Qualcomm’s technology is also used extensively in notebook and tablet computers.
Qualcomm continues to benefit from the rapid growth of 3G (third generation or Tri-Brand 3G) wireless technologies and smartphones in the emerging markets, including China. The next-generation super-fast 4G Long Term Evolution (LTE) technology will be quickly adopted in many parts of the world. Qualcomm is now the leading provider of LTE technology.
Sales will probably climb at least 11% in 2014 while EPS will advance 13% compared to increases of 26% and 14% in 2013. The potential for Qualcomm in 2014 and beyond is noteworthy. There are seven billion cellular connections in the world, and two-thirds are 2G. This provides Qualcomm with substantial potential to upgrade systems to 3G or 4G technology.
At 15.9 times my 2013 EPS estimate, QCOM shares are a bargain. The balance sheet is very solid with no debt and lots of cash targeted to fund research and expansion. Qualcomm pays a generous dividend yielding 1.9% per year. I expect QCOM to reach my Minimum Sell Price of 88.55 within one year.
On January 2, 2014, I will reveal three additional top stocks for 2014 in my next Cabot Wealth Advisory entitled “2014 Outlook: Part II.” I hope you won’t miss it!
I wish you and your loved ones a happy holiday season and a healthy, prosperous new year!
Chief 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.