2013 Stock Market Preview
At the end of each year, there's a natural inclination for investors to wonder what the following year will
bring in the stock markets, and how they can best position their portfolios to maximize returns.
However, the stock market doesn't stop on New Year's Eve and re-set for a brand new market start at
the first open in January. Trends that were in place at the end of the year aren't suddenly replaced with
new trends in the new year.
The fluid nature of the markets makes it difficult to forecast in terms
of how the indices, sectors, and individual stocks will perform
between the following January 1st through December 31st period.
None the less, our readers always want to know what we think the
markets will do in the coming year, which sectors we like, and which
individual stocks we think will be top performers.
While we don't care for the idea of predicting markets on a calendar
basis, we're going to give our readers what they've asked for, and
share our predictions on what the stock market will do in 2013...and
how to position yourself to take advantage of it.
This would be a good time to point out that there are disclaimers at
the end of this report that you need to read and fully understand. In
a nutshell, the information contained in this report is our opinion about what will happen in 2013.
Obviously, we don't actually know what will happen in 2013. So we highly recommend that you do
your own due diligence and/or speak to a licensed advisor prior to making any investments. Don't ever
trade blindly on somebody else's recommendations.
Having said that, we hope that you find our opinions informative and interesting. Only a year's time will
tell how right, or how wrong, we were.
2012 In Review
Before we discuss where we think the market is heading, let's take a look at where it's been. Here's a
look back at the stock market performance for 2012:
Overall, the stock market had a strong year in 2012. There were short stretches of bearishness in the
Spring and Fall, highlighted by May's 6.27% drop in the S&P 500. There was also some late-year
weakness surrounding the Presidential election, and then Fiscal Cliff worries in December. When it was
all said and done, the S&P 500 had a price return of 13.41% and a total return of 16.00% for the year,
outpacing historical annual averages for the index.
Major Index Returns for 2012:
Index S&P 500 DJIA NASDAQ
Price Return 13.41% 7.26% 15.91%
Total Return 16.00% 10.24% 17.45%
Sector Performance for 2012:
The top performing sectors in the S&P 500 for 2012 were Financials, which gained 26.26%, and
Consumer Discretionary, which gained 21.87%.
The worst performing sectors were Utilities, which lost 2.91%, and Energy, which posted a small gain of
2.33% for the year.
Top Stocks for 2012:
Many of the top performing stocks in 2012 took advantage of the housing market rebound.
Homebuilder, PulteGroup, Inc. (PHM) was at the top of the performance charts gaining more than 160%
for the year. Lennar Corporation (LEN), another homebuilder, wasn't far behind.
Also benefitting from the rebound in housing were the mortgage lenders. Bank of America (BAC) gained
more than 90% on the year, taking it from the worst performing bank in 2011 to the best in 2012.
Moving beyond builders and lenders, there were other companies that were buoyed by housing, such as
home appliance maker, Whirlpool Corporation (WHR). WHR gained nearly 120% to make it the 3rd best
performer in the S&P 500. Home Depot (HD) while not on the top of the performance list, did turn in a
strong gain of nearly 50% in 2012. It was also aided by housing.
2013's Great Unknown
As if predicting stock returns on a calendar basis is difficult enough, ending the year with the future of
our economy in question, and the possibility of going off a "Fiscal Cliff" certainly doesn't make it any
easier. We held off on writing this report until the last possible minute to see if we could get some
clarity on the subject out of Washington.
It appears that the markets will open on the 1st day of trading for 2013, with a deal in place. It's not a
deal that will make everybody happy (heck, it might not make anybody happy). It's also not a deal that
will solve our National Debt problem. However, it is a deal that can give a little comfort and clarity to
traders moving forward.
Since this is about what we expected to see out of Washington all along, we feel comfortable with our
predictions for 2013.
Where We See the Market Heading
We believe that 2013 will be another up year. We anticipate the S&P 500 to reach 1,600, and possibly go
above it. However, we don't believe it will hold above the 1,600 level. Our target close for the S&P 500
in 2013 is 1,580...for a price return of 10.78% over the 2012 close of 1,426.19.
While a price return of 10.78% isn't as strong as 2012's 13.41% , we believe that will be as good as can
be expected since our economy will continue to face head winds in 2013. The deal to avoid the "Fiscal
Cliff" won't solve any of our Nation's financial problems. At best, it will only kick the can further down
We anticipate unemployment to remain relatively unchanged and retail sales to stagnate. We feel the
bright spot in the economy will be the continued rebound of the housing market. While we think the
housing rebound trend is still intact, we do believe it will weaken.
Our Top Sectors for 2013
Even though Financial Services was the top sector in the S&P 500 last year, we believe there is still
plenty of upside, and expect it to be a top performer in 2013, as well. While it's rare for a top performing
sector to do so two years in a row, we do believe there is more room to grow here.
Below is the 2012 chart of Financial Select Sector SPDR (XLF) to show you how the sector performed.
However, we are not recommending that you buy the XLF. Rather, we recommend you choose top
individual stocks within the sector and make sure your downside is protected with either a hedge or an
itchy finger on the "sell" button.
The two other sectors that we expect be strong in 2013 are Information Technology and Basic
There are several reasons to be bullish on tech right now. First of all, real tech investment has been
below trend for several years but growth in business investment in technology is now outpacing growth
in total business investment. This coupled with the fact that banks are showing signs of easing lending
requirements, could bode well for the future of the sector as spending returns to more normal levels.
Additionally, tech has always grown with innovation. 2013 is setting itself up to be a remarkable year
due to innovation in technology products, the cloud, social media, etc.
We're looking at the Materials Sector as a play on what we believe will be a strengthening Chinese
economy in 2012. China appears to be mounting a monetary easing campaign, which should help to
support their economy, as well as the sector. We also believe that demand for materials will increase in
India, and other emerging markets, as they ramp up infrastructure building again.
Our Top Stock Picks for the Year
Our top 5 stock picks for 2013 are a mixed bag. There are 2 Large Cap stocks, 2 Mid Caps, and 1 Small
Cap. 3 of the stocks had a rough year in 2012, posting losses in a good market. The other two were both
higher on the year. All 5 showed good strength at the end of the year that we believe will carry over
into 2013, making them strong performers. Here are the first 4. Our #1 pick for 2013 will come later.
The Royal Bank of Scotland Group plc (RBS)
As you can see by the chart below, RBS had a very strong 2012, along with many other large banks.
Royal Bank of Scotland's strength was a result of several factors that we believe still make the stock
attractive to buy.
First of all, RBS made significant strides in removing risk and adding strength to its balance sheet in
2012. The company described progress on its restructuring program as "excellent" in a Q3 statement
released in November
Secondly, A lawsuit filed by South Korea-based Woori Bank against RBS was dismissed by a U.S. District
judge in Manhattan. The lawsuit was related to Royal Bank’s sale of collateralized debt obligations
(CDOs) supported by risky residential mortgage-backed securities to the latter prior to the 2008 financial
crisis. While the lawsuit was for a small amount of money by big bank standards, the ruling has large,
positive implications for further suits that may be brought in the futures.
There's no doubt that the stock finished 2012 with strong momentum, but the big question is can that
momentum carry through 2013. We believe the answer is yes, but it's unlikely to last the entire year.
We anticipate healthy gains in Q1 of 2013 followed by some retracement, and then a more normalized
trading pattern. Because of this, if you are going to initiate a new position in the stock, we recommend
that you do so early in the year, and try to find pull-backs for entry points.
Freeport-McMoRan Copper & Gold Inc. (FCX)
Freeport-McMoRan's stock lost roughly 20% of its value in early December after announcing that it was
buying Mcmoran Exploration (MMR), a company which had split from the larger Freeport-McMoRan
organization some time ago, and Plains Exploration & Production (PXP). Both companies were bought
at large premiums to their respective values at the time. We believe that the market over reacted to
FCX's purchase of the oil companies, which will represent a minority of the combined company’s
Freeport-McMoRan tends to be tied to the global economy. While gold prices can increase in times of
economic stress, copper is one of the most macro driven commodities, and so the stock has a beta of
2.3. Revenue and earnings have been down, but with the recent stock price drop (shares fell 13% in
2012) Freeport-McMoRan trades at only 8 times forward earnings estimates. We view FCX as a good
value play that is positioned to take advantage of what we see as a strengthening economy in China and
global emerging markets.
Atmel Corporation (ATML)
ATML dropped 20% in 2012, finishing the year at $6.55. However, Atmel has bounced back since
reaching a 52-week low of $4.37 in November.
We that Atmel's touch technology is far superior to any rival product, which has earned it a place in
Amazon's Kindle Fire, smartphones and tablets from Samsung, and the new Microsoft Surface tablet.
This is a market that is likely to rebound as new models are introduced, and Atmel should be well
positioned for an upturn in demand that would support capacity utilization and pricing.
We view ATML as a strong turn around stock for 2013. We anticipate the share price returning to double
digits in 2013, providing investors with healthy 50%+ returns.
PMFG, Inc. (PMFG)
PFMG is the smallest of the companies on our buy list for 2013. PMFG, Inc. provides custom-engineered
systems and products primarily to natural gas infrastructure, power generation, and refining and
petrochemical processing markets worldwide.
PFMG's stock was punished in February of 2012 following a secondary stock offering to raise capital.
Additionally, it continues to face regulatory headwinds in the industry. However, we believe that the
stock was over-sold by the market and is well positioned to benefit from growing market for filtration
and separator products for the use in natural gas and nuclear fuel markets.
For those with a risk profile suitable for small, speculative stocks, we feel that PFMG is worth
Our Top Shorting Opportunities
Before discussing our top stocks to short, we would like to point out that these stocks could be on the
hard to borrow list, or not available to borrow, which means your short trade might not get executed.
We only recommend shorting stocks to more sophisticated investors who have the risk profile for
shorting, and the knowledge of how to protect against large losses.
All of the following stocks had a rough 2012, and we don't believe any of them have solid prospects to
turn things around. That being said, stocks that have been beaten down that do make a rebound,
typically make large rebounds, which will create large losses if you're short. Proceed with caution!
Vertex Pharmaceuticals Incorporated (VRTX)
VRTX, like most in biotech space, is quite volatile. The fact that Vertex is a one trick pony living and dying
by their hepatitis C drug, "Incivek". Also like other biotechs, VRTX will have plenty of rumors running
around about future prospects for partnerships and buyouts from major Pharmaceutical companies.
These rumors create spikes in the stock price that burn short sellers, but they typically fade after the
rumor fails to come to fruition.
If you short this stock, look for one of those rumor spikes for your entry point, ride the impending fade,
and then cover position to lock in your profits. We also recommend using out of the money calls to
protect you from any spikes that may occur while you're short.
Under Armour, Inc. (UA)
UA hit a 52-week high of $60.96 in September of 2012, and has remained in a down-trend ever since.
While Under Armour has a strong brand name and image, it continues to be overpriced based on the
company's financial performance relative to its peers'. This coupled with their narrowing profit margins
is why we continue to recommend UA as a short.
Elan Corporation, plc (ELN)
Elan recently de-merged from Prothena Corporation plc. The company has be plagued by legal issues
surround the SAC hedge fund insider trading scandal. In the last 6 months, the stock price has slid from
the high 14's to the low 10's. We don't see anything on the horizon that will substantially reverse this
J. C. Penney Company, Inc. (JCP)
JCP is an interesting situation. The company has had lackluster performance for quite some time, is
currently in a legal battle with Kmart over selling Martha Stewart products, and is a favorite of short
sellers. It currently has over 1/3 of its outstanding shares being shorted. Yet, there are several billionaire
hedge fund managers who are taking large positions in the stock. Essentially, you have smart money on
both sides of this trade.
We believe the billionaires are looking at longer-term prospects for the business and the short sellers
are looking at their near-term issues. Ultimately, they both may turn out to be right. For now, we agree
with the short sellers and (if you can get shares to borrow) think the stock is worth shorting in 2013.
Incyte Corporation (INCY)
Incyte, like Vertex, is a one trick pony. INCY is hanging its hat on a JAK inhibitors targeting myelofibrosis,
called, "Jakafi". Jakafi received FDA approval back in November of 2011. YM Biosciences (YMI) has a
drug in the same space called, "CYT387", that hasn't advanced to phase 3 trials, but showed promising
results from a phase 1/2 study. Additionally, Gilead Sciences (GILD) recently announced a buyout of
YMI. INCY shares fell on this news for fear that CYT387 could ultimately gain the upper hand over Jakafi,
thanks to the GILD relationship. We think that's true.
Also like Vertex, please remember that shorting biotech stocks can be enormously profitable, but you
can get burned by rumors. Choose your entry points wisely and hedge your position.
Our #1 Stock Pick for 2013
Our top pick for 2013 is a high risk trade that is certainly not for everybody, but for those who are
suitable for such an investment, we believe there's an opportunity for unusually large gains. Our #1
stock to own in 2013 is Guangshen Railway Co. Ltd. (GSH)
What They Do:
Guangshen Railway Company Limited provides passenger and freight transportation services on the
Shenzhen-Guangzhou-Pingshi railway in China. The company's freight services include the
transportation of full load and single load cargo, containers, bulky and overweight cargo, dangerous
cargo, fresh and live cargo, and oversized cargo.
Things We Don't Like About the Stock:
GSH is a widely followed stock. It has almost no analyst coverage and trades only 26,467 shares on an
average day. There's not a lot of action here.
Things We Do Like:
We feel that GSH is a company that is well positioned to take advantage of our belief that we will see
rebounds in both the Chinese and Basic Material markets.
One way to look at GSH is how it fits into the Chinese government's push for urbanization and
development. China is focused on integrating the rural interior with the more developed coastal areas,
and railway links are a key part of this integration. Guangshen Railway handles both passenger and
freight transportation, and should benefit from growth in these areas, as well as Chinese government
policies for infrastructure development.
As of 12/31/12, GSH had EPS (ttm) of $1.50, giving it a P/E (ttm) of 13.15. It boasts a solid cash position
and pays a $.69 annual dividend, which equates to a current yield of 3.50%.
This isn't a flashy stock that's going to make huge runs up on news or analyst coverage, but we do think
it's a stock that can break out of its 52-week high of $20.12, and move considerably higher from there.
At $19.74, we feel GSH is a strong buy.
In summary, while we feel that 2013 will be another strong year in the stock market, we do believe it
will be a stock picker's market. In other words, we don't think taking a broad-based approach of buying
and holding a large, diversified portfolio is the way to go. We believe traders who hold a concentrated
portfolio of only their top names, and are willing to sell at a moment's notice, will reap the most profits
As always, trade in a fashion that you are comfortable with and do you own due diligence. Don't blindly
follow our recommendations, or anybody else's.
Top Trader Resources for 2013
Best Investment Newsletters:
The Prudent Speculator - The investment newsletter ranked #1 ranked by The Hulbert Financial Digest
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Forbes Special Situation Survey - Started by Malcolm Forbes in 1954, the Forbes Special Situation
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TradeStation - Our choice for best trading platform. To learn more, click the following link:
optionsXpress - Tops for client support and trading tools. To learn more, click the following link:
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