What do you get when you mix an 8% pullback in the S&P 500 in May with a 21% pullback in August and a 10% pullback in November? The makings of a new bull market in 2012 that will see the S&P 500 rise 15% by year's end.
I got my crystal ball back from the shop recently. It's working beautifully, so without further ado, here are my prognostications for 2012.
For starters, let me say that I believe a bear market started in May 2011. The average duration of a bear market is nine to 12 months, so there could be a little selling left to go in this market. The October lows may or may not get taken out, but I'm expecting one more shakeout in the market before a new bull market gains traction. After Oracle's (ORCL) dismal report on Dec. 20 and the tech selloff that followed a day later (not to mention Intel's (INTC) warning on Dec. 12), I have concerns about fourth-quarter earnings season. Earnings season will have its bright spots, but I'm concerned about the tech sector overall. Judging by recent price and volume in the major averages -- specifically, the Nasdaq-100 -- the market has concerns as well.
The good news is that new institutional money will start to come in from the sidelines during the first quarter. A bona fide market uptrend could take shape as early as March. Not surprisingly, a new bull market will coincide with a strengthening euro and a weakening U.S. dollar.
As we head into the end of 2011, a strong dollar and weak euro has been a major headwind for the market. I expect both currencies to flip-flop in the first quarter as Europe continues to get its financial house in order. A strengthening euro and weakening dollar will be good news for U.S. stocks. There will not be a Lehman-like event in Europe in 2012.
We'll see heightened merger and acquisition activity in 2012 as large-cap names scoop up small-cap names to expand their product lines and fuel top-line growth. Biotechs and oil-and-gas producers could see the most action. Both groups are fragmented, filled with small-cap names that could eventually become takeover targets.
Among my favorite biotech targets is Questcor Pharmaceuticals (QCOR). Its flagship ship drug, Acthar Gel, is used to treat multiple sclerosis. It's a pricey stock, selling at 48x trailing earnings and 23x forward earnings, but its growth prospects are huge. In 2012, full-year profit is expected to soar 61% to $1.92 a share. Biogen Idec (BIIB), which has a strong presence in the MS market, could be a potential suitor.
Other potential targets in the biotech sector trading well and executing nicely as we close out the year include Cubist Pharmaceuticals (CBST), Salix Pharmaceuticals (SLXP) and Viropharma (VPHM). These three could also be potential targets due to strong growth and compelling pipelines.
The oil-and-gas sector will also see its share of M&A activity, specifically in the exploration-and-production group. It's another fragmented group, loaded with fast-growing, small-cap names that could easily draw interest from larger players in the space.
Some favorite small-cap targets showing big earnings and sales growth in recent quarters are Kodiak Oil & Gas (KOG), Approach Resources (AREX), Northern Oil & Gas (NOG) and GeoResources (GEOI). All four names are well positioned for growth in 2012.
In terms of new leadership in 2012, it will come from where it normally comes from: newer companies that are innovators in their industry group that have shown big earnings and sales growth in recent quarters. Don't expect the old bull market leaders that are rolling over now to lead anew in 2012. Instead, look for leadership from recent new issues like Visa (V), which went public in March 2008. Look at monthly chart and you'll see that it still could be in the early stages of a price move here.
Meanwhile, I'm expecting a strong 2012 for retailer GNC Holdings (GNC), which went public in April. The stock has some mutual fund sponsorship, but there's plenty of room for more, and I believe it will happen as the company continues to execute its growth strategy. The stock has been running into the end of the year, but a new entry point will come after the stock builds a second-stage base. The stock broke out from a first-stage IPO base in October.
In the large-cap tech space, Google (GOOG) has the best potential to outperform in 2012. There's been a lot of destruction in the S&P 500 but Google continues to perform as Wall Street continues to grow more confident that the company will be able to deliver solid earnings and sales growth going forward.
Similar to Visa, Google's monthly chart tells me this high-quality name could still be in the early stages of a price run.