Two Large-Caps for 2014

 | Dec 13, 2013 | 2:00 PM EST
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The market has posted three straight days of declines. For investors that were waiting for a better entry point while equities ground relentlessly higher over the past few months; this could be a good time to start to deploy some of their "dry powder" into the market.

In my own portfolio I am looking to pick up or add to a couple of large-cap plays. Both sport cheap valuations and their prospects should be buoyed by some trends I think will play out in 2014.

The first of these is LyondellBasell Industries (LYB). The company is one of the largest chemical manufacturers in the world and is based in The Netherlands. However, the firm gets most of its profit and revenue from North America. LyondellBasell is one of the top three producers of ethylene, polypropylene and polyethylene globally. The stock is up some 30% since I last profiled it in May

This chemical maker is benefitting greatly by low natural gas prices available in North America. This fuel is a core feedstock to the company's primary products. Natural gas prices are running three to five times higher in Europe and Asia than here. This gives LyondellBassell a tremendous cost advantage over some of its overseas competitors. The collapse in the price of natural gas liquids this year is also a positive for earnings and margins.

The disparity in worldwide natural gas prices is likely to be a long-term secular trend. The energy boom continues unabated in North America. It also will be many years or decades, if ever, before there is enough LNG capacity built to arbitrage these discrepancies and bring natural gas prices globally into better balance.

Despite its recent rise, the stock is still cheap at under 11x forward earnings. Earnings are tracking to better than 15% gains this year and FY2014 should see similar increases. This equity also pays a nice yield of 3% after recently announcing a 20% increase in its quarterly dividend. Payouts should increase in line with earnings growth in the coming years.

LyondellBassell is starting to garner some positive comments from analysts as we head into 2014. RBC just upgraded the shares to a "Top Pick" and slapped a $110 a share price on the equity. This is roughly 50% above the current stock price of the company.  I added to my holdings Thursday.

The next large cap that looks good to me is Aetna (AET), the nation's third largest health insurance company by enrollment. Interest rates look like they will continue to move higher in 2014. The spread between two and 10-year Treasury yields just hit a two-year high and I think this trend will continue as the Federal Reserve starts to "taper" while committing to keep short-term rates near zero.

This should boost the value of insurers' investment portfolios and I look for the sector to outperform the overall market in 2014. Aetna provides solid value at 10.5x forward earnings. In addition, company management just provided updated guidance for 2014 that was above the consensus of analysts.

Revenue growth should clock in at better than 30% this year, partly driven by the acquisition of Coventry in the first half of this year. Sales should increase by more than 15% in FY2014.

Aetna has also taken a conservative approach to the private exchanges for individuals created by the Affordable Care Act. Given the unknowns and atrocious rollout of this government health program; this looks entirely prudent.

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