As a new year approaches, we decided to ask some of our top analysts for their favorite stock idea for 2014. Here are nine companies that look compelling right now.
Jim Gillies: It's hard to find a positive word about IBM (NYSE: IBM) nowadays. Year-over-year revenues have shrunk for six consecutive quarters, it's losing valuable government "cloud" contracts to upstarts like Amazon Web Services, and it seems a lock to win the raspberry for "worst-performing Dow stock of the year award" for 2013.
And yet, the valuation has been punished severely for these sins and arguably more. IBM is still on track to generate in the neighborhood of $16 billion or $17 billion in free cash flow in 2013. That cash will be deployed into its ever-growing dividend (raised 19% annually over the past decade), and into its aggressive share repurchase plan that has reduced share count by 37% over that same decade. And the company still carries the tacit imprimatur of Warren Buffett, who has branded IBM as one of Berkshire Hathaway's "Big Four" investments.
Something of a contrarian "Dog of the Dow" pick, IBM currently sells for barely 10 times next year's expected earnings, well below the multiple on the average stock in the S&P 500. I expect this year's loser to be next year's winner as the company's cash deployment ratchets up the share price. A multiple expansion to, say, 12 times earnings would be gravy -- holiday gravy, if you will.
Patrick Morris: With the calendar turning to 2014, one stock worth considering is e-commerce giant eBay (EBAY -4.22%). I've never been one to watch the market movements and attempt to make judgments on a company from those. But the reality is that eBay has been essentially flat over the last year, while the NASDAQ is up almost 40%, and I think that is largely unjustified.
eBay has continued to deliver strong results, and the most recent quarter was no exception. Through the first nine months of the year, its operating income had risen 16.5% relative to the first nine months of last year. Not to mention its payments business (PayPal) continues to watch its revenues grow by more than 18% year over year, and eBay's total quarterly revenue growth has consistently stood at 14%.
So the company is continuing to deliver impressive growth and results, but its price doesn't reflect that. Consider that its trailing price to earnings ratio currently stands at 25.5, which is almost identical to Costco and below the 29 held by Google. I understand that's not exactly a fair comparison, but eBay seemingly still has quite a potential growth runway ahead of it.
The last thing I will note is that many people think eBay is simply a place where people bid on products, but excluding autos, 75% of its transactions were made at a fixed price. Amazon is the clear leader in the rapidly expanding e-commerce space, but eBay has a commanding position in the No. 2 spot.
Matt DiLallo: The Fed might slowly be taking away the punch bowl, but that shouldn't taper the prospect that 2014 will be the year that the housing market finally hits its stride. In fact, The Fed's tapering move just might be what jump-starts the still sluggish housing market. That's why I think homebuilders should do well in 2014, with PulteGroup (PHM -6.30%) being the stock I'd buy for 2014 and beyond.
The housing market is currently pretty low on inventory, which is one reason home prices have trended higher. That trend will only continue as we see the end to historically low mortgage rates. Buyers need to move fast in order to lock in these low rates.
Where PulteGroup fits into the equation is that its multi-brand strategy has it well-positioned to really deliver as housing recovers. For example, its Centex brand focuses on first-time buyers. These buyers have been cautious to get into the market, but seeing an end to historically low mortgage rates will likely convince many that the time to buy is in 2014. At the same time rising home prices nationwide are freeing up many current homeowners to sell in order to move up into a nicer home. The Pulte Home brand caters to move-up buyers, while the Del Webb brand focuses on those in the active adult marketplace that are now in a better position to retire and enjoy life.
Bottom line, PulteGroup's multi-brand strategy, when combined with its renewed focus on creating shareholder value, has it well-positioned to deliver exceptional returns in 2014.
Chuck Saletta: If there's one stock I'd consider buying for 2014, that stock would be Kinder Morgan (KMI -2.23%). As the largest natural gas transporter and storage operator in North America, Kinder Morgan is well-positioned to profit from increasing demand for natural gas. Between coal power plant shutdowns, an aging fleet of nuclear power plants, and the inherent inefficiency and unreliability of many renewable energy sources, natural gas is the most logical candidate for new power generators.
In addition to the electric generating capabilities, natural gas is generally the cheapest and most common means to heat homes. It's also gaining significant traction as a transportation fuel, especially among fuel-hungry trucks. Regardless of how and where it's used, natural gas needs to get from the shale fields and other sources to where it's needed, when it's needed. That's where Kinder Morgan shines.
The business case is clear, and the investment case is strong enough that I own shares of Kinder Morgan in the real-money Inflation-Protected Income Growth portfolio. Take a business model at the center of the energy economy, and add a reasonable valuation, a covered and growing dividend, and a balance sheet without too much leverage, and the result is a company whose stock is worth buying for 2014.
Brendan Mathews: Liberty Global (LBTYA -3.29%) is the largest cable company in Europe. It is heavily laden with debt, generates GAAP losses, pays no dividend, and is exposed to Europe's economic woes. For those reasons, you might not be interested at first glance. But, if you dig a bit deeper, the company actually looks very attractive. It's got great leadership following a proven strategy, and it's adding new subscribers and revenue per subscriber.
John Malone, the famous "cable cowboy," is Liberty Global's chairman, and the company is following the same playbook that Malone used to build Tele-Communications into the largest cable provider in the United States, before it was sold to AT&T in 1999. Liberty Global is using cheap debt to acquire smaller cable systems. While it doesn't generate GAAP earnings, the company does generate healthy amounts of free cash flow -- over $3 billion in the past year. Malone is using that cash to upgrade its cable system and aggressively repurchase Liberty Global shares, both of which should generate long-term value for shareholders. Using this same basic strategy, Malone generated more than 30% compound annual returns for Tele-Communications shareholders.
And, despite the economic gloominess in Europe, Liberty Global's business is doing well. Liberty Global is on pace to add 1 million new subscribers this year. Its current customers are buying more services -- 40% of subscribers now pay for a "triple-play" package, up from 30% a year ago. This has driven a 29% increase in revenue per customer.
Maxx Chatsko: Despite nearly doubling the gains of the S&P 500 this year, there are several upcoming catalysts for Momenta Pharmaceuticals (MNTA) that could lead to even bigger gains for investors in 2014. The company's competitive advantage rests in its ability to analyze, characterize, and design complex molecules -- which speeds development time and reduces costs. The MIT rollout proved its novel approach to drug development in 2010 with the approval of its first product, a generic version of Enoxaparin Sodium Injection, which pushed operating margins to 63% on revenue of $283 million in 2011! Unfortunately, competing generics have since eroded the edge for the company's only product.
Momenta will swing back into profits next year if it can market its second product, a generic version of Teva's Copaxone. Investors were originally waiting for the last Copaxone patent to expire in September 2015, but a summer decision by the Court of Appeals may have expedited the Food and Drug Administration's review date to May 2014. While Teva intends to go to the Supreme Court with an appeal and Momenta isn't the only company with a generic drug ready, simply becoming profitable or even breakeven would smooth out the ride on the road to disruption for investors. I think it's likely generic versions will get the green light next year, which makes Momenta -- with $250 million in cash and an impressive and relatively undervalued pipeline -- a long-term buy-and-hold company at today's prices.
Simon Erickson: My one stock for 2014 is Universal Display (OLED -5.73%). The company makes organic light-emitting diodes (OLEDs), used to light the displays of consumer electronic devices. Much of the company's history has been devoted to R&D, providing the behind-the-scenes technology for Samsung's Galaxy smartphones in exchange for semi-annual royalty payments.
But UDC is finally seeing the light at the end of the tunnel. Commercial material sales have begun to meaningfully contribute to the top line – increasing 176% year-over-year and 11% sequentially during the 3rd quarter. The company reported a solid profit, even without the royalty (which gets paid in 2Q and 4Q). Universal Display is breaking into the market in multiple ways – partnering with the lighting division of Philips, providing materials for a new Samsung OLED television, and is even rumored to be in an upcoming "iWatch" from Apple! OLED is definitely one to keep an eye on in 2014.
Jim Mueller: I'm offering up the latest addition to the real-money portfolio I manage for The Motley Fool, Lindsay (LNN -2.68%). It sells mechanized irrigation systems to farmers. You've probably seen these while driving through or past croplands -- big, wheeled piping systems spraying water onto crops.
Irrigating this way is more efficient than gravity irrigation (flowing water across fields), resulting in higher crop yields while using less water (1/3 – 1/2 less). Over the past decade, mechanized irrigation in the U.S. has grown from 35% to 46% penetration, while gravity irrigation has fallen from 50% to 39%.
The opportunity comes from continued penetration gains domestically and international growth. Worldwide, 90% of cropland under irrigation uses gravity irrigation. Thanks to a growing population, farmers will need to produce more food; and thanks to limited water supplies, they'll need to do it while using less water. Replacing gravity irrigation with mechanized irrigation is a big step in that direction.
In addition, Lindsay is developing and selling "smart" systems that use feedback from sensors to distribute irrigation to where it's needed. This makes irrigation even more efficient.
An investment in Lindsay plays into three big, global trends: the two mentioned above (growing population and limited water) and more droughts. With four severe droughts in the last eight years here in the U.S., farmers "don't want Mother Nature to control our destiny anymore."
Tamara Walsh: 2013 proved a record year for Tesla Motors (TSLA -6.80%), with the stock soaring more than 300% year-to-date. However, 2014 holds even more promise for the electric-car maker. Tesla continues to see strong demand for its Model S cars and is ramping up production to meet that demand. In fact, Tesla CEO Elon Musk says the company is on track to hit an annualized rate of deliveries that exceeds 40,000 cars per year by late 2014. Global demand for Tesla's cars is also accelerating at a rapid clip.
While European sales are already strong, Tesla is just getting started in China and other parts of Asia. The EV maker began taking Model S reservations in China last quarter, and plans to begin deliveries there during the first quarter of 2014. As the world's largest market by sales of premium sedans, China is an exciting piece of the puzzle for Tesla going forward.
Another important catalyst for Tesla is the ongoing expansion of its supercharger network. There are now 34 supercharger stations in the United States, and six so far in Europe. Tesla is now on track to have stations covering 80% of the U.S. population and parts of Canada as soon as next year. Moreover, Tesla plans to cover 100% of the population of Germany, the Netherlands, Switzerland, Belgium, Austria, Denmark, and Luxembourg with superchargers by the end of 2014. This is a significant part of the company's value proposition and it should help drive Model S sales in the year ahead. With these catalysts and more on the horizon, Tesla is a stock I want to own in 2014 and many years to follow.