A New Theme for a Stretched Market

 | Dec 05, 2013 | 11:00 AM EST  | Comments
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Stock quotes in this article:

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I believe the "growth at a reasonable price" investment mantra will be very much in vogue next year. The market has delivered stellar returns for equity investors in 2013, but most of those have been a direct result of multiple expansion -- not from revenue or earnings growth.

The S&P 500 is now valued at around 16x forward earnings, roughly 25% above the level where it started the year. So I think any additional multiple expansion is unlikely in 2014, especially as the Federal Reserve starts to slowly withdraw liquidity out of the market.

This means it will be critical to find companies that can grow revenue and earnings at a faster clip than what the overall market is doing, with valuations that are in line with or lower than the broad-market multiple. Not to sound cliché, but 2014 is shaping up to be a true stock-pickers' market.

This means avoiding momentum plays that are growing sales rapidly but selling at sky-high valuations, such as Tesla Motors (TSLA) or Amazon (AMZN). It also means avoiding value traps with compelling valuations but no growth, like IBM (IBM).

Investors will do well if they can find stocks in the market's sweet spot in 2014. In other words, they should target growth at a reasonable price. Here are a couple of equities that meet such criteria.

Halliburton (HAL) should have a good year in 2014. Revenue gains are expected come in around 10% next year, and earnings are projected to increase by more than one-third vs. 2013 levels. The company is well-positioned to continue benefiting from all the energy production being brought online by new and improving technologies. It also should be a big player as Mexico and other frontier markets open up new investment and exploration opportunities. The stock currently sells at less than 12x forward earnings.

Meanwhile, I find it hard to talk about growth at a reasonable price without a perfunctory call-out to Apple (AAPL). Yes, the stock is up more than 40% from its June lows, but valuation is still less than 9x forward earnings if we subtract the company's massive cash hoard. The new versions of Apple's iconic iPhone and iPad franchises are selling very well, and margins are holding up. Also, media reports say it has signed a deal with China Mobile (CHL) -- and, if accurate, this development should substantially boost sales in the Middle Kingdom. Look for revenue growth in the high single digits in 2014 while earnings increase in the 10% to 15% range.

Small-cap Bakken player Triangle Petroleum (TPLM) has been one of the best performers in my portfolio this year, but I still like its growth prospects. The company went from losing money in fiscal 2012 (ended January 2013) to posting a profit of around $0.80 a share for 2013.

Revenue growth should come in north of 50% in fiscal 2014 as earnings per share moves up to around $1.10 a share. The shares trade at 10x forward earnings. That's cheap, given these growth projections. With an enterprise value of just over $1 billion and rapidly growing production, I would not be surprised to find Triangle become an acquisition target for a larger player at some point in the future, either.

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