Growth was a dominant theme in 2013's 30% rally. Companies that showed impressive revenue and earnings growth like Facebook (FB) were coveted by investors. This makes logical sense, given overall earnings for the S&P 500 only advanced some 5% year-over-year in 2013.
The 2014 markets have started much shakier than the end of 2013. Although growth stories will still be a focus area for investors, other themes should come to the fore. I think M&A could easily increase. Recent acquisitions like that of Zale (ZLC) and Forest Labs (FRX) show that these purchases can raise the market value of both the target and the acquiring company. Companies also have a record amount of cash on their balance sheets.
Another theme that I believe will be in play is turnarounds. These companies and sectors have underperformed the market significantly but are in the midst of transformations and improvements in business fundamentals that will be greatly rewarded by the market.
You can see this development early in the year in the gold and silver mining stocks, which have been some of the worst performing equities in the market for two years. Thanks to rationalizing of operations, closing unprofitable mines, selling off non-core assets and a nice rise in precious metal prices, these stocks have soared in the New Year.
I want to return to a couple of stories that are two of my biggest turnaround plays in 2014. Both companies made good progress in their turnaround plans this week and deserve to be highlighted again.
I have to give a big 'shout out' to Jim Cramer for turning me on to Alcoa (AA). Jim has had the Alcoa CEO Klaus Kleinfeld on Mad Money several times. Jim consistently reminded viewers that although fundamentals in the aluminum industry were lousy, that Alcoa was by far the best-managed company in the sector.
He was right and even though Alcoa has gained some 50% since bottoming at just under $8 a share late last year. I still think the equity has further upside for longer term. Alcoa's game plan is fairly simple: close unprofitable smelter capacity and grow its high margin businesses supplying the aerospace & automotive industries.
The company continues to execute against its plan. This week it announced it was selling off some Australian smelters. It also is getting big wins in the truck business. Ford (F) is using Alcoa's products in its all-aluminum body for its new F-150. General Motors (GM) also announced this week that it will produce a similar truck by 2018. Stay tuned, I think this story will continue to unfold.
My favorite mid-major energy concern, Devon Energy (DVN), is finally starting to move as well. The company's turnaround strategy is to focus on selling off its lower returning Canadian assets and operations and to grow its much higher returning U.S. assets.
The company took a big step towards that goal Wednesday when it announced it was selling a portion of its Canadian business to Canadian Natural Resources (CNQ) for just under $3 billion. Devon also announced that earnings beat expectations by three cents a share this quarter.
It is easy to see why Devon is pursuing this strategy. It grew production from its Permian properties this quarter by almost 30% year-over-year to 86,000 BOE/D (Barrels of oil equivalent/Day). Its Woodford play delivered just below 50% growth to 16,000 BOE.
Devon produced over 30% earnings growth in the just completed fiscal year and should deliver similar results in 2014. Given this, the stock is too cheap at around 11x forward earnings. I would also expect given the Canadian asset sale, earnings beat and the nice rise in oil and natural gas prices recently, this stock will see several upward earnings revisions by analysts in the coming weeks.
Both of the companies are delivering against their transformation plans and I expect further upside to both stocks in 2014.