The Game Plan for 2014

 | Feb 06, 2014 | 2:50 PM EST  | Comments
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Stock quotes in this article:

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sdrl

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xom

If you've missed the point of the last two weeks of market action, let me get you up to date: 2014 is going to be rough -- really rough. We'll need to go back to the defensive playbook we haven't used in four years, one that saw us through great profits at relatively low risk. We must to go back to 2009.

I'm a commodity guy, and I've written recently about the continued weakness of base metals, particularly copper, zinc and coal -- commodities I consider crucial indicators of a continuing robust recovery. Look at the worst-performing stocks of the last two years and they are almost all commodity names, particularly coal and copper names -- Peabody Energy (BTU), Alpha Natural Resources (ANR), Vale (VALE), Freeport-McMoRan (FCX), I could go on.

So what is the difference today and why am I turning so defensive on the market? Commodity strength becomes that much more of a factor precisely because the Fed is beginning its taper and strong stock-index results last year seemed to "borrow" gains from the current year.

But with falling share prices and concurrently falling bond yields, we're looking at another 2009 scenario where dividend producers represent a sharp arbitrage opportunity. And it's with bond-like stocks that were will find our best ideas.

Now's the time to give up (and I mean entirely) on high-beta names for the near term. The earnings and stock performances of Twitter (TWTR) and Pandora (P) should tell you something, even if you're a singularly energy-centric analyst like I am. No, it's time to get into rock-solid, large-cap dividend payers, just like the scary moments after the financial crisis of 2008.

The names that worked so well then aren't available now, however. We can't find solid 5% to 6% dividend returns in shares of McDonald's (MCD), Kimberly-Clark (KMB), or 3M (MMM). But in the energy space, because of a brutal January, there are a few equally good opportunities emerging. Let me suggest two.

BP (BP) is by far the most undervalued major oil name. Even with a David Einhorn-inspired rally today, BP delivers a rock solid 5% dividend. While focus remains on the Deepwater Horizon disaster and the continuing liabilities associated with those settlements, BP has written down all but the worst-case scenario of federal and civil liabilities. Please sell BP down some more; I'd love to get more shares with an implied 5.5% or 6% dividend, though I can't see that happening. (A similar idea is Exxon Mobil (XOM).)

Transocean (RIG) deserves two columns all its own, but suffice to say, the entire deep-water drilling sector is in the midst of a disaster cycle with on-shore drilling costing less and returning more at a time many offshore servicers have new (and massively expensive) rigs coming on line and looking for work. Day rates are plummeting and some providers are not going to make it to the next up cycle (which might be two years away). Yes, I'm talking to you, SeaDrill (SDRL).

But that's not Transocean. Its contract book looks solid and its 4.1% dividend is completely sustainable. Cash flow remains positive even in this declining day-rate environment. Oil at $100 per barrel is a fantastic impetus to return to big offshore deep-water projects, and with global stockpiles of oil at lows not seen since 2003, we're likely to see a return to those projects a lot sooner than most analysts expect.

Like BP, this isn't a blanket recommendation of offshore players -- please stay away from SeaDrill, Noble Corp. (NE), Diamond Offshore (DO) and so many others. But like BP, there are a few select opportunities in the sector. (Another good idea is Ensco (ESV).)

So It's back to the 2009 game plan: playing the dividend payers.

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