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3 stocks riding the big trends of 2006
It's way too early to tell how 2006 will treat investors, but three big trends have already emerged. That's why I'm looking at gold, energy and financial stocks.
By Jim Jubak
We're only two weeks into 2006, and it's still way too early to say how this year is going to turn out. Global investment managers, according to a recent survey by Mercer Investment Consulting, expect a 7.6% return this year from the world's stocks, which is either good (compared to the performance of the Dow Jones Industrial Average ($INDU, news, msgs), down 0.61% last year), bad (compared to the 19.3% that global equities have returned on average over the last three years) or just so-so (compared to the 9.5% global equities returned in 2005).
But even if the ol' stock market crystal ball remains a bit cloudy on the prospects for the entire year ahead, I think investors have already got three themes to guide their stock-picking for the first half of the year.
Theme 1
There's nothing more certain about 2006 than uncertainty.
Here's what's clear two weeks into 2006:
- The U.S. Federal Reserve will stop raising short-term interest rates after either one or two more rate hikes, unless energy price inflation bleeds into the economy, or the housing market refuses to cool down, or the U.S. dollar goes into a nose dive,
Ben Bernanke
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or the new Fed chairman Ben Bernanke decides he needs to prove how tough he is. And the Fed will then leave interest rates alone for the rest of 2006, unless the economic growth looks like it's falling too fast. In that case, the Fed will end 2006 by cutting short-term interest rates.
- The U.S. dollar will fall against the currencies of its trading partners; because our trading partners hold too many dollars; because with Europe and Japan likely to raise interest rates, the U.S. will lose its yield edge; and because an annual trade deficit headed toward $800 billion is unsustainable. Or the dollar will stay strong; because foreign central banks will buy dollars to keep their own currencies from climbing and to keep their exports to the U.S. growing; and because overseas pension funds and insurers will continue to snap up 10-year U.S. Treasurys, because they need stable long-term paper to pay future benefits to their aging populations.
How's that for uncertainty?
Related news and commentary on MSN Money
My pick: Anglo American (AAUK, news, msgs). When times get uncertain, the uncertain buy gold. Yes, gold hit a 25-year high at $547 an ounce on the spot market on Jan. 9. That's the highest price since March 1981, and the price is closing in on the all-time high of $850 an ounce in January 1980. But that's in nominal terms, that is, before you take inflation into account. Adjust for inflation, and the 1980 high is actually about $2,100 an ounce in today's dollars. So instead of being 65% of the way to the historical high, we're only about 25% of the way there.Jubaks Gold Pick
Anglo American
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To be quite frank, I don't have any idea how high gold will go in the long term -- so much depends on trends in the dollar, in inflation and in global politics that just can't be projected right now.
I already own two gold stocks in Jubak's Picks: Goldcorp (GG, news, msgs), up 76% since I bought it in April 2005, and Glamis Gold (GLG, news, msgs), up 34% since November 2005. But at this point in the gold rally, I prefer Anglo American for new money.
The company is undergoing a restructuring that will eventually involve selling its steel, paper and packaging and gold-mining businesses. Why invest in a gold-mining company that's selling its gold mines? Because Anglo American will get twice the bang for its gold buck by selling its 51% ownership in AngloGold Ashanti (AU, news, msgs).
First, the company will sell an underperforming asset at a premium price. AngloGold Ashanti accounted for 8.6% of Anglo American's revenue but only 4.8% of earnings in 2004.
The businesses marked for sale generate an average return on invested capital of just 5%, according to Morgan Stanley. Without them, the company's return on invested capital would climb from today's 10.6% to 15.6%.
The businesses that will be left for Anglo American to reinvest in are exactly the kinds of hard-asset businesses that I'd like to own right now: platinum, diamond, coal, base metals and iron ore.
Theme 2
The worry for 2006 isn't high energy prices but a lack of energy supply at any price. You don't need any further proof than the Jan. 1 slowdown in Russian natural-gas shipments to Europe to see this trend at work. (See my Jan. 4 column, "Russian roulette? Not with these 5 stocks.") Even though it lasted for less than two days, the Russian supply reduction badly rattled European governments and financial markets. Russia's oil and gas are critical to European consumers, who get about 25% of their natural gas from that source. But the supply cutoff demonstrated that Russia can't be counted on to keep the energy flowing. If Russia is willing to cut off gas supplies to pressure the Ukrainians into a pipeline joint venture, why wouldn't they be willing to cut off supplies again in the future?
If the Russians are unreliable suppliers, what should we call the Venezuelans, the Nigerians and the Iranians? It's best not to count on any one supplier for too much, and it's best to supply as much of your own energy needs as you can. For Europeans, that means spending more on alternative energy, such as wind, solar, biomass and nuclear. For the Chinese, it means buying up more overseas oil and gas fields. On Jan. 9, for example, China's CNOOC (CEO, news, msgs) signed a deal to pay $2.3 billion for a 45% stake in Nigeria's Akpo deepwater offshore oil field. Even the United States is getting into the act: In the first week in January, General Motors (GM, news, msgs) and Ford Motor (F, news, msgs) both began promoting flex-fuel vehicles that will run on gasoline or E85, a popular mix of 15% gasoline and 85% ethanol.
My pick: Conergy (CEYHF, news, msgs). Alternative energy is big in Europe -- because the Europeans really don't have any other way to avoid a crippling energy dependency. The International Energy Agency estimates that by 2010, Europe's aging oil and gas fields will be able to supply only a third of Europe's needs. Conergy is the largest photovoltaic system integrator and wholesaler in Europe. Sales, which include the company's wind, biomass and solar thermal units, climbed an average of 97% a year from 2002 to 2004, and Commerzbank forecasts that the company will grow sales by 48% a year from 2004 to 2008.
You'll find other European alternative-energy stocks, such as Spanish utility Iberdrola (IBDRF, news, msgs) in my Jan. 6 column, "Invest in Europe's alternative energy leaders."
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