Stock picking III: Speculative bounce back stocks for 2014

Final installment. The Maven's list of (possibly) ridiculous bargain investments. Photo: Copyright © 2011 Cliffs Natural Resources Inc.

WASHINGTON, December 19, 2013 – In action most pundits didn’t expect, stocks soared yesterday after a short afternoon burp, following the Fed’s statement that it would start to taper its QE3 bond-buying binge in January 2014.

That quick market gasp however, must have occurred prior to folks getting the word that the Fed also expected to keep interest rates ridiculously low indefinitely. When investors figured this one out, they sent the Dow spiraling upward to a colossal one-day gain of close to 300 points.

Today as we might expect, there’s a good bit of backing and filling as markets try to digest this upside surprise. At approximately 1:30 p.m. EST, averages are still relatively flat. But the bottom has dropped out of gold, apparently due to traders’ increasing conviction that inflation is no longer an issue. We’ve heard that one before, but at the moment, it looks like the optimists are right.

As for us, it’s time to explore our third, and decidedly speculative installment of year-end bounce back stock candidates. You can read about our rationale in Tuesday’s Part I article where we also list our first five picks, and can catch up with yesterday’s Part II installment where we list our next five.

Six Speculative Bounce Back Stock Candidates for 2014

Our initial list of ten stocks included companies that, by and large, were and are stable entities either suffering from undeserved selling or shorting or still smarting from a bad fiscal year that otherwise looks to be rectified in FY 2014.


SEE RELATED: Stock picking II: More 2014 year-end bounce back stocks, plus taper news


Our speculative list here is, frankly, an investing crapshoot. The stocks in this list have either been stymied or oversold due to a bad year and/or the annual, end-of-year tax-loss selling stampede; or, for various reasons, happen to be perched on the edge of potential upside surprises. Take these with a grain of salt. Or, as those signs say in various places along the Pennsylvania Turnpike, “Beware of Falling Rocks.”

These are stocks that may have tremendous upside if the tea leaves settle correctly in the cup. But if things don’t work out according to plan (they often don’t) you’d be making a mistake gambling junior’s 529 savings plan moolah here.

So here we go again for the final time in 2013 in no particular order, listings beginning with company name, stock symbol, current dividend yield, and target price:

Two Harbors (TWO). Target Price: $10. Dividend: 11% more or less. In our initial installment, linked above, we mentioned the REIT ETF, REM. To reiterate, REITs have been hammered for the last 9 months or so due to fears that a combination of mortgage payoffs and Fed interest rate increases would slowly begin to sink both book value and those extraordinarily high dividend payoffs common during FY 2012 and FY 2013. And indeed, book values have been eroding as many mortgages have been paid off, leading to dividend cuts rather than increases.


SEE RELATED: Stock Picking I: 2014 year-end bounce back stocks


But Two Harbors, one of REM’s components, has fared better than most REITs this year due to its more diversified portfolio of mortgages, both Federally-insured and not, plus the fact that it, like some other REITs, has been moving into the mortgage servicing arena in search of more stable fee income. The company did cut its dividend again yesterday, the fourth quarterly cut in a row. But the rate of yield decline, we think, is likely to flatten in another quarter or two as TWO’s portfolio restabilizes at current rates. Which fact will also flatten its moderate book value decline.

Even with this latest dividend cut, TWO is yielding a whopping 11+ percent, and the stock next week will go ex-dividend on the day before Christmas (the Maven’s birthday, BTW, send money…). So if you have interest, either purchase shares before then to catch the dividend. Or, perhaps better yet, pick some up on the 24th or after, as the price drops on ex-dividend date to compensate for the fact that purchasers won’t be entitled to the dividend.

Again, though, this is a spec. It’s a low priced stock and you can buy a lot for notta lotta money. But that also means that even tiny declines can cause heart-stopping drops in the value of the investment. In any event, REITs are primarily a dividend investment rather than a capital gain-style investment. But, that said, if you get the right price and if they stop cutting dividends, you could get a little appreciation on the stock which, combined with the swell dividend, can make for a happy 2014. If it works. Disclosure: If not, the Maven himself will suffer, as he’s already picked up a substantial position in this one.

Cliffs Natural Resources (CLF).

Iron ore carrier loaded and ready to go at a Cliffs Natural Resources dock in Michigan’s Upper Peninsula. (Copyright © 2011 Cliffs Natural Resources Inc.)

TP: 27. Div.: 2.5%. Formerly known as Cleveland-Cliffs, this iron ore and coal producer happens also to be a Market Maven nostalgia favorite. That’s because Cliffs, back in the day, used its own fleet of Great Lakes ore carriers (underwhelmingly called “boats” in lake parlance), and offered to the lucky few impoverished college kids who knew about this some pretty swell summer jobs aboard ship.

The Maven happened to be one of these kids, working aboard the carriers of Cliffs and those of other companies on the up bound trip to Lake Superior once a week to scoop up a cargo-hold of iron ore or taconite (pellets of slightly refined iron ore); and then haul that cargo back down to lower-lake cities like Detroit, Chicago, Cleveland and Buffalo where they unloaded ore at this country’s once numerous and massive steel mills.

Fewer but much larger trips still make that trip today, although a good bit of ore is now for export. Coal, also used in steelmaking, was another lucrative cargo. And bottom line, Cliffs was and is one of the world’s largest miners of iron ore and metallurgical (steelmaking) coal. In fact, this company today also has massive mines in Canada and Australia which is the real story here.

Obviously the Obama Administration is working overtime to crush the domestic coal industry and the jobs that go along with it. So Cliffs’ coal numbers are down year-over-year which put this stock in the trash compactor in 2013. Ditto numbers for iron ore, as domestic steelmakers continue to struggle due to the still ongoing Great Recession in American heavy industry.

But Cliffs has cut costs to the bone. Meanwhile, lest we forget, there’s always China. Even though the Chicoms are trying to increase capacity for their own domestic steelmaking activities, they still need to import resources, and more so if their economy decides to pick up again, which it just might do in 2014. And with its extensive domestic iron and international metallurgical coal reserves, Cliffs is well-prepared to assume a role as a a medium to low cost producer of these resources. And that’s the play. If it happens.

If things start working out in 2014, unbelievable amounts of money could be made by simply owning this stock. In a good-to-great year, this is a stock that can travel upwards of 20-40 points in a heartbeat. The Maven has made good money on this one in the past, although he’s occasionally taken a haircut as well.

Which is this stock’s weakness. With this kind of volatility, you can sink just as fast as you can soar.

We have used this stock in the past strictly as a trading vehicle, moving in and out as charts and news reports indicate. Currently, CLF boasts a low PE ratio (just 7.98 today) and a pretty decent and likely safe (for now) dividend of 2.5%. Volatile as ever, it’s up a buck twelve at mid-afternoon today, and we won’t chase it. But if we get a bad day or two, this badly beaten rust belt giant might very well make us some money in 2014 if we can pick some up soon at a decent price.

Again though, if you’re considering this beat-up stock for your own portfolio, make sure you don’t have any kind of heart condition. This stock’s upward and downward moves make even the scariest roller coasters in Cedar Point—just down the road from Cleveland Ohio-based Cliffs—seem like child’s play.

GT Advanced Technologies (GTAT). TP: $10.50. Div.: 0. Earlier this month, we devoted an entire article on this interesting tech spec, so you can read all the details right here via this link. Short story: this is still a fairly speculative tech stock whose primary business is the manufacture of synthetic sapphires, a widely useful industrial product with a particularly important use in glass coatings or in sapphire glass itself. Sapphires only take a backseat to diamonds in hardness, and that’s the reason why synthetic sapphire, produced in quantity, is important in the manufacture of super-hard glass or glass coatings.

Which is exactly what Apple is looking for in its still-being-finalized iPhone 6, likely to go on the market in late 2014. Apple is so keen on this technology that it’s struck a long-term supply agreement with GTAT and is even helping the little company build a new factory in Arizona to supply synthetic sapphire in quantity.

Although Apple’s alleged iPhone agreement with China Mobile keeps slipping. But sales are still brisk enough without that outlet to make it likely that next year’s iPhone iteration with its alleged sapphire coated and possibly larger screen, could pull GTAT’s boat along for the ride. Hence, the stock’s bounce back potential.

GTAT’s price recently dropped after a somewhat poorly-received secondary offering of stock. The Maven got on board for this one and plans to hold these moderately volatile shares until (fingers crossed) Apple saves his bacon by ordering a whole bunch of GTAT’s sapphire stuff.

Banco Santander SA (SAN). TP: $9.50-$10.00. Div.: 9.4%. For better or worse, we tend to stick with domestic stocks. But we’ve been in and out of this giant, internationally active Spanish bank. Right, Spain is and will likely remain one of Europe’s economic “sick men,” along with the other rather insultingly nicknamed “PIIGS” (Portugal, Ireland, Italy, Greece and Spain).

But Santander, whose reach is wide and broad and extends far beyond the borders of Spain, is a well-managed institution as far as we can see, and appears, even now, to be solvent and even quite profitable. Add to this a huge dividend—usually paid to American holders in additional shares of stock to minimize the tax issue—and only a point or two of improvement from its current ridiculously low price (PE=13.02)—and this oversold major bank could be well worth a stay until sometime in 2014. The Maven already owns shares of SAN.

Unilever (UL). TP: $44. Div.: 3.5%. Okay, this Europe-based consumer products giant has been the butt of snide jokes lately for its weird, often tasteless, but quite relentless promotion of its AXE line of products. But the products are successful, and the company itself is so ubiquitous that every reader of this column more than likely has one or two Unilever products somewhere in the house. The stock has been stuck in the market’s equivalent of the La Brea Tar Pits for quite some time. But its decent dividend is tempting, its stability is fairly good, and the possibility for a decent bounce back gain in 2014 is an appealing prospect, so why not.

UL has warmed a bit lately, so we’d only pick some up on a dip. Boring, but it could do the job.

iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (JO). TP:? Div.: 0.

What’s this you say? An entity whose name is tough to parse? No target price. No dividend. Indeed that’s the case with this sort-of ETF that rocks and rolls with the price of coffee futures. Hence the symbol for this virtual cuppa Joe, “JO.”

An ETN is somewhat like an ETF except that it’s not. Let’s borrow a definition from Michael Iachini of Charles Schwab, the Maven’s long-time brokerage house (an acknowledgment, not a recommendation, BTW):

“Exchange-traded notes (ETNs) are different [from ETFs]. Instead of being an independent pool of securities, an ETN is a bond issued by a financial institution. That company promises to pay ETN holders the return on some index over a certain period of time and return the principal of the investment at maturity. However, if something happens to that company (such as bankruptcy) and it’s unable to make good on its promise to pay, ETN holders could be left with a worthless investment (just like anyone else who had lent the company money).”

In other words, to a lay person, an ETN feels like an ETF and trades like an ETF, but it’s actually a kind of debt instrument, in this case a debt instrument or instruments that track(s) the price of coffee futures.

Short case: coffee futures, due to a substantial harvest of Arabica beans during the current season have dropped those beans close to the generally much-lower price of lower-quality Robusta beans which—in case you didn’t notice—were added in sneaky quantities to better and more popular coffee blends to stem last year’s massive coffee price increases.

With supplies of both types of beans now roughly in balance, Arabica sales at these lower prices are likely to increase sharply as roasters move to restore their blends back toward their original Arabica wonderfulness. Hence, JO, which tracks this action. The Maven is already in this one on the basis of one of his investment services’ recommendations, but the position is already down and could go lower to fill in a chart gap before the bounce we’re looking for. If you want to play, you may get a better price, but this one is iffy and this is our own first experience with it, so travel with care. Or just watch it this time around.

And that’s it, it’s a wrap for this year’s bounce back candidates. The best of luck to all, but particularly to the Maven, since he’s already partially in the bounce back soup.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above describe this author’s own investment ideas and decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk. Caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

 


This article is the copyrighted property of the writer and Communities @ WashingtonTimes.com. Written permission must be obtained before reprint in online or print media. REPRINTING TWTC CONTENT WITHOUT PERMISSION AND/OR PAYMENT IS THEFT AND PUNISHABLE BY LAW.

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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  

 

 

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