My Best Ideas for (the Start of) 2014

 | Jan 05, 2014 | 6:00 PM EST
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Allow me to cheat, just slightly.

All the Real Money contributors are offering their best ideas for 2014, and I will do the same here. All of these ideas are buyable right now, I own most of them in my growth-at-a-reasonable-price (GARP) strategy, and I am actively research any names I do not own. You should research these stocks for your own portfolio.

However, like many portfolio managers, I worship in the "church of what's working now" -- with a twist. When I look for what is "working," I look at the fundamentals, not the charts. My portfolio is always fully loaded with names whose earnings momentum is the best you can find. Within that group, I always prefer lower valuations, and I try to buy names with a price-to-earnings ratio in the bottom half of the range. If the chart looks great, all the better.

So the names I offer today are the best I can find at the moment. They all sport great earnings momentum and reasonable valuations and, for most of them, a great chart.

My caveat is that the fundamentals can change rapidly, so I cannot offer a time frame for ownership. I could be in these names for a month -- or for five years. The holding period depends on how the companies perform and how market expectations react. Predetermining a time period for action is foolish, whether you are the Federal Reserve or a portfolio manager or an individual investor.

I further subdivided this exercise by offering "best ideas" for each S&P 500 sector. (As longtime readers know, I prefer to group by FactSet sector, but there are 16 of them, which is too many for this project.) For each sector, I offer one top large-cap idea and one top mid-cap idea. This will enable you to better diversify both across industries and market-capitalization size.

The table below lists my best ideas for the start of 2014.

In energy, for oilfield services I like "the other HP," Helmrich & Payne (HP). For refining, I like Marathon Petroleum (MPC). H&P is a leading land-contract driller that commands excellent technology to run its rigs, and the company is building on its top market share in land-drilling. As a refiner, Marathon should benefit from the coming glut of oil in the U.S., driven by fracking and horizontal-drilling productivity.

In materials, I like Packaging Corp. of America (PKG) and DuPont (DD). Packaging Corp. stands to benefit from cost savings realized after its acquisition of Boise. DuPont, for its part, is transforming itself from an old-school chemicals giant into a cutting-edge, science-driven company with a focus on enzymes and agricultural innovation that can be utilized in foods, biofuels and biochemicals.

In industrials, I think Boeing (BA) and Xylem (XYL) can soar. Boeing is in the sweet spot of the cycle, enjoying accelerating order rates and improving profitability. Xylem is a leading water-infrastructure name that investors are just starting to discover.

In consumer discretionary, I am bidding on Priceline (PCLN) and Nu Skin (NUS). Priceline is demonstrating the massive leverage that becomes available when the Internet disintermediates an industry, in this case travel agents. Nu Skin is selling beauty products to an aging population in the U.S. and to newly middle-class populations in emerging markets, especially in China.

In consumer staples, I like Mead Johnson Nutrition (MJN) and Energizer (ENR). Mead is selling baby formula into China and other emerging markets -- enough said, if you've been following the baby-formula issues in China. Energizer, meanwhile, is more than a battery company. It also sells sun protection and shaving products.

In healthcare, I am diagnosing success for Forest Labs (FRX) and Gilead Sciences (GILD). Forest is extending a strong franchise in its Namenda Alzheimer's franchise in order to avoid a patent cliff this year, and at the same time the company is acquiring its way into anti-psychosis treatments. Gilead is building momentum on its Sovaldi protease inhibitor, which blew away estimates in the early phase of release at the end of 2013.

In financials, I am investing in Och-Ziff (OZM) and insuring my position with Prudential (PRU). Och-Ziff is seeing very strong inflows resulting from strong performance, which will boost assets under management, revenue and earnings. Prudential will benefit from rising interest rates on U.S. Treasury bonds as it yields more on its investment portfolio.

Finally, in information technology I give a tip of the hat to RedHat (RHT) and Facebook (FB). RedHat is the open-source server software leader, achieving rapid revenue and earnings growth and using a very visible subscription model. We all know Facebook, and while I am neutral on its multiyear outlook due to the saturation factor, I think the company is in the early stages of fully exploiting the current user base.

While I have owned several of these names for some time, many positions are fresh. I just initiated positions in H&P, Marthon, Xylem, NuSkin, Gilead, Och-Ziff and Red Hat.

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