Building a Barbell for 2014, Part II

 | Dec 20, 2013 | 8:00 AM EST
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In our last piece, we recommended employing a barbell-like investment strategy of higher-dividend, lower-volatility stocks on the one hand, paired with higher-growth, appreciation-oriented value stocks on the other. In that piece, we had focused on the higher dividend stocks, so today we will turn our attention to the higher-growth part of the barbell.

In view of the market's 2013 successes, one should not count on a uniform tide of rising appreciation that will lift all boats into next year. Indeed, we expect much greater selectivity, more volatility for stocks in 2014, along with returns that should recede to average levels.

Clearly, though, this does not preclude opportunity. We envision continued relative success for financial stocks in particular, given the very low threshold from which they began their recovery, and in light of the very real business progress that many financial companies have made over the past few years.

We also believe 2014 could see a relative resurgence among certain areas of the market that, thus far, have not enjoyed the same level of success as the overall market has done. Among these sectors are the industrials and energy stocks. Both of these groups are significantly underpriced at the moment, not only compared with the broad market, but also when stacked up against their respective normative valuation levels. As economies continue to firm worldwide into next year, it is reasonable to envision these areas of the market gaining greater business traction -- and thus warranting higher valuations.

With all that in mind, here are four value stocks with strong growth profiles that we like for 2014.

First, Wells Fargo (WFC) is finishing 2013 poised for growth. Loans and fees are beginning to pick up, and businesses and consumers are finally willing to borrow again as jobs and confidence levels rise. During the 2008 downturn, Wells picked up dramatic market share with its highly accretive acquisition of Wachovia.

As interest rates begin to rise, Wells' net interest margins and net income should dramatically climb from depressed levels. Its shares are inexpensively valued at 10.8x the average 2014 earnings estimate of $4.05 per share, and the company pays a dividend with 2.8% yield. Upcoming quarters carry a strong possibility of upward earnings revisions and an expanding price-to-earnings multiple.

Qualcomm (QCOM) should also provide investors with meaningful appreciation potential for 2014. The company, after all, continues to see strong market-share and organic growth rates in 3G and 4G licensing agreements and chipsets. In particular, the firm's continued 4G LTE rollouts should provide meaningful growth.

In addition, Qualcomm management is boosting company performance with disciplined cost-reduction actions and aggressive share-repurchase programs from the firm's $30 billion net cash stockpile. Qualcomm's shares are very reasonably priced at 14.6x the 2014 EPS consensus of $5, and the dividend yields at a reasonable and growing 1.9%.

Qualcomm is one of the few large-cap technology names in a legitimate growth mode.

Schlumberger (SLB) should likewise report strong momentum into 2014 with a pickup in international oil drilling. Record crude-oil prices continue to push global exploration-and-production budgets up to record levels. As the leading international energy-services contractor, Schlumberger should be the major beneficiary of these growing spending programs into the coming year. Its shares are reasonably priced at 15x 2014 estimates of $5.70 per share. The company pays a modest 1.3% dividend.

Lastly, we continue to recommend Devon Energy (DVN), an out-of-favor energy company. Devon has been in the penalty box for the past five years due to declining natural gas prices. Earnings and share values have fallen 50% since 2008 as natural gas prices declined from more than $13 per cubic foot to a recent low of $3 to $4.

Fortunately, in recent years Devon's management has been transitioning the enterprise to more oil production. In the most recent quarter, the company announced plans to acquire GeoSouthern Energy for $6 billion in order to further expand this oil-production mix. Given this, we expect Devon to begin reporting meaningful improvements in revenue and earnings in the upcoming year and, potentially, beyond that point. Devon's shares are reasonably priced at 11.1x the 2014 EPS average forecast of $5.40, and the dividend yields at 1.5%.

Devon is a well-run and opportunistic company. It remains a large producer of natural gas, so any pickup in natural gas prices could be a huge plus for the firm.

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