Before the Internet, and Apple (AAPL) iPads and iPhones, at the start of a fresh year for the market there were pens, papers and a good old-fashioned calculator -- along with a degree of imagination from the folks on Wall Street. Naturally, all investors wanted was to arrive at a fair-value estimate for one's index of choice, or for a specific stock, by adherence to basic principles of investing, instead of positioning one's portfolio to win with the next headline.
With that in mind, I return to yesteryear with this prediction piece. I'll outline two themes I plan to use as my foundation for stock selection in 2013 -- or, at least, until that headlines force me to change.
Theme No. 1: Corporate Restructuring Actions Are Finally Rewarded in Stock Valuations
Beginning in the second quarter, because of general disappointment in the trajectory of sales and earnings in 2012, many companies announced previously unplanned restructuring actions. That resulted in charges to assets on the books, and likely a lower level of aggressiveness on shareholder-friendly initiatives (think stock-buybacks and dividend increases).
In 2013, I expect significantly restructured companies to finally enjoy margin upside on mediocre volume. These include names, such as Boeing (BA) and Caterpillar (CAT), that have cut more low-hanging fruit and developed new processes, among other things. Should the global economy dig itself out of mediocrity, possibly in the second half of next year, profit margins from restructured companies will only look that much better. Firms with profit-margin upside, in turn, will likely return cash to shareholders paying higher tax rates.
Mental note: Companies that have undergone major restructuring plans are usually the names on which the Street has become too cautious, with a beat-and-raise pattern established with respect to earnings estimates.
Theme No. 2: Seek the Needle-Moving New Product or Service
Forearm to throat, Apple shares stand to be higher on Jan. 1, 2014 than they are today, even though its product pipeline is being skewed toward evolutionary, rather than revolutionary. In turn, Apple will win from its reputation among consumers -- which should create strong global volume, plus a lower cost base.
However, I want to rock out in 2013 by seeking a company that has guided to a new product or service that could be surprisingly influential on profits, with the Street caring little in the present. One such name is Take-Two Interactive (TTWO), which trades at 5x forward earnings in front of a major launch of a new iteration of its "Grand Theft Auto" title. Additionally, I have been quite pleased by the strength of the company's catalog business. The company could also see further benefit from a smaller rival, THQI (THQ), being forced to close up shop due to financial troubles.
The Silly S&P 500 Prediction
I am personally no fan of chucking an S&P 500 target out into the universe. It's my opinion that, through rigorous research of individual stocks, one could do far better than buying an index fund and calling it a day. In this market, nimbleness is rewarded. It's silly to pay homage to a target on the S&P 500, as this would mean a failure to bob and weave throughout the year. Nevertheless, since I know you are wondering, my fair-value estimate on the S&P -- derived using modest growth and multiple assumptions -- is 1560. I estimate gains will be weighted toward the back-half of the year.