Calling the Right Plays in 2014

 | Feb 01, 2014 | 10:00 AM EST
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All men can see these tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved.

--Sun Tzu

Super Bowl weekend should be one to remember this year. The game will match the number-one offense, the Denver Broncos, led by arguably the best quarterback in NFL history, Peyton Manning, against the number-one defense, the Seattle Seahawks. We will find out if the old cliché "Defense wins championships" holds true in what may be the first Super Bowl in history to feature snow.

I have often thought that great investors and great quarterbacks have a lot in common. Topping the list of commonalities, they both adjust their game plans according to game conditions.

Obviously, the Broncos have a different offensive strategy for playing a bottom-dweller in perfect weather conditions than playing the league's best defense in a game that might turn out to feature snow flurries.

In the first scenario, you can take a lot of shots down the field and you can afford to make a mistake or two and still have a high probability of walking away from the field a victor. In the latter scenario, with the loquacious Seattle cornerback Richard Sherman draped all day over your number-one receiver and facing a ferocious pass rush, your game plan changes. Your strategy gets much more conservative. You keep running back Knowshon Moreno in the backfield to pick up the blitz and provide an extra pass protector. You dump the ball underneath to Wes Welker and Julius Thomas. You run a lot of draws and screens. You do what is necessary to keep the chains moving. Only after you establish some success using these methods do you open it up and throw longer routes.

In 2013, the market was very much like playing the second-division Jacksonville Jaguars in late September. An investor could take multiple shots downfield with highfliers like Netflix (NFLX) and Tesla Motors (TSLA) and be successful even if a BlackBerry (BBRY) or two was in the portfolio.

With increasing turmoil from the emerging markets and concerns about the Federal Reserve's initiation of the taper setting a backdrop to the market to begin the year, 2014 is looking more like playing the NFC champion Seahawks in uncertain weather conditions.

My market strategy in the first quarter of 2014 is similar to what I think you will see from Peyton Manning to start the Super Bowl. A lot of safe, short passes. A heavy mix of check downs underneath, screens and draws will set the tenor in the first part of the game. Moving the chains is paramount. After establishing that we can move the ball, we can open up the offense a bit.

From an investment perspective, here are my all-star players.

American International Group (AIG) is the perfect "check down" stock. The shares sell at around 75% of book value and 11x forward earnings. The insurance giant has done a great job disposing of non-core assets and it should return to growth in 2014. I also look for AIG to significantly hike its dividend payments in coming years as it begins to remove the shackles of government oversight. The stock is also offering a nice entry point after declining some 8% from recent highs.

Abbott Labs (ABT) is a solid "three yards and a cloud of dust" equity. The health care conglomerate consistently churns out 5% annual revenue growth and 10% earnings gains. The stock sells for slightly less than the overall market multiple and provides a 2.4% yield.

Finally, it is hard to run a safer play than buying Microsoft (MSFT). The software giant has a triple-A-rated balance sheet and more than $60 billion worth of net cash and marketable securities on its balance sheet. It is showing strength in the enterprise market and making great progress with its two cloud initiatives (Azure and Office 365). Revenues are growing in the 6% to 8% annual range, and the stock sells at a 20% discount to the overall market multiple.

Investors should embrace what great quarterbacks already know: Whether it is an easy 42-10 blowout at home in September or a 24-23 nail biter in hostile conditions during the playoffs, a win is a win. Take it happily and get ready for the next game.

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