Value Is the Watchword for 2012

 | Dec 22, 2011 | 12:30 PM EST
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At this time of year I try to find some macro ideas that will help direct my trading for the coming year. With European nonsense overhanging every trade this past year, it has been what many have called a "Goldilocks" market -- not too hot, not too cold -- meaning that promises of Armageddon as well as promises of grand, sweeping solutions have both remained unfulfilled.

Inside of this you were left with a range bound, no progress market where both courage and patience were the keys to being rewarded and where the dividend-payers were the safest places to be.

And what of 2012? Will the song remain the same, or will another theme creep into the trading model and tell us where we can go to make some money?

I am now almost convinced that Europe will be, at least as regards to our stock market, relatively ironed out. Now, I'm not about to claim that all 17 nations are about to agree on giving up sovereign fiscal control to Brussels or Bonn or adhere to strong austerity programs either. Nor am I convinced that the European Central Bank (ECB) will do a "helicopter" and massively "print money", in a stimulus-like backstopping of the banks and sovereign debt. But we're seeing some progress. The recent 550 billion euro three-year LTRO financing was snapped up and followed by a 300-plus-point Dow rally here in the U.S. More activity like this is assured, I believe, no matter how you may come down on the morality of the added debt float.

Creative can-kicking, as I have come to call it, will be the theme for 2012 and should lead to some terrific gains in the stock market next year because stock valuations, by any metrics, are incredibly cheap.

The biggest gains, I believe, will be made in the value stocks that have been ignored in the last two years and particularly in 2011 in favor of the mega-cap dividend payers. While these darlings of this market - companies such as McDonald's (MCD), Chevron (CVX), Procter & Gamble (PG), 3M (MMM) and others –- have sported cheap double-digit multiples, other fantastically run companies with strong balance sheets and growth but without dividends are trading at tiny single digit P/E's. Companies including Ford (F), Agrium (AGU), Vale (VALE), Apache (APA), Mosaic (MOS)and Diamond Offshore (DO) are on my mind as we head toward 2012.

All of these value shares have had awful trading years in 2011, compressing their margins to 8x, 6x, even 5x forward 2012 earnings. In a stock market that I believe will slowly regain confidence in 2012, these companies represent the best opportunities for a 10% to even 25% gain for the coming year.

Timing is everything, of course. These value stocks will have to prove themselves before they will earn any significant percentage of my portfolio, but here's the way to play them.

At the start of the year, I'm going to start small positions in a few of these names that I really believe in and I will add to the positions as they recover. In this trading strategy, you want to buy stocks as they go up and prove a little momentum. If these issues find traction, there is no need to buy them on their lows; they have enormous potential to go a very long way. If they don't perform, you won't be left hanging in underperforming stocks for the year, as they were in 2011.

That's my theme for 2012 – a return to valuation analysis for stocks -- a shift from investing in stocks that act like bonds and back to stocks that trade like stocks.



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