My Best Picks for 2014, Part 1

 | Jan 02, 2014 | 1:00 PM EST  | Comments
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Last year momentum names were all the rage. Netflix (NFLX) and Micron Technology (MU) rose fourfold and more than tripled, respectively. The S&P 500 posted its biggest annual advance since 1997, ending the year up by 30%. Of course, a steady dose of Fed stimulus didn't hurt, either. Since the S&P 500 hit a 12-year low in March of 2009, the index has nearly tripled -- not too shabby. Last year, most investors only had to hang on to make money.

While I believe 2014 will be another positive year, I also believe the market will be more volatile. I bet the S&P 500 will only eke out a mid-single digit gain. With the Fed reducing its stimulus and interest rates on the move, fundamentals will be more important. Chasing momentum is so last year. Following that playbook, these are some my best ideas for 2014, with more to follow next week.

Tech is always a hot sector and next year I'm looking for innovative companies with a chance to break out. One long idea is Nimble Storage (NMBL). While the company has been public for less than a month, the shares are up 27% and I recommended the stock in December. Datacenters and IT administrators are quickly adopting Nimble's groundbreaking technology. The company's products allow administrators to keep "hot data" in fast but expensive flash memory while keeping ordinary data on inexpensive disk drives. Other solution providers like NetApp (NTAP) and EMC (EMC) traditionally have stored everything in inexpensive arrays of disk drives. Customers in industries like cloud services, financial institutions and healthcare providers are natural customers for Nimble's products.

Nimble's hybrid solutions provide the right mix between capacity, performance and cost. That's why Nimble's products are disruptive to the existing storage vendors. The storage vendor most threatened by Nimble's success is NetApp. If you were interested in a pair trade, I would go long Nimble and short NetApp.

Another name in technology that I think will do well this year is Xilinx (XLNX). In October I wrote that XLNX is poised to ride the wireless wave. Capital spending on 4G LTE is expected to grow to an estimated $17 billion by 2016 from $6.5 billion in 2012. Spending on optical network build-outs are expected to grow to $14.8 billion by 2016 from $8.2 billion in 2012. Its FPGA semiconductors are ideal for low-volume, high-margin optical networking gear. Xilinx is a big player in FPGA, which allows engineers to deploy new products rapidly.

If XLNX can grow revenue between 8% and 11%, the company has tremendous earnings leverage because of its high gross margins. Because of its strong end-markets, XLNX is expected to expand gross margins 300 basis points during the year. If the company were to get to $2.4 billion in revenue, XLNX could theoretically grow earnings per share by as much as 24%. Strong fundamentals would drive the stock higher.

I've been bullish on Facebook (FB) for a while and people laughed when I slapped a $60 price target on the stock. Strong fundamentals and the shift to mobile will keep Facebook's stock moving higher. Facebook can reach $65, which works out to another 20% by the end of 2014. The Street consensus estimates revenue growth of 35% to $10 billion. It's hard to find a company growing revenue by 35% with a 74% gross margin and operation margin of 49%. Facebook has its act together and it should be a strong performer in 2014.

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