What are some compelling stocks for 2014 and beyond?
Finding bargains in the market may not seem easy these days. The S&P 500 (.SPX) has surged more than 25% this year and valuations for some tech stocks, in particular, have reached stratospheric levels.
Still, some market veterans say there are plenty of industries and companies offering growth at reasonable prices.
"I don't think it's time to bail out of the markets," Howard Marks, chairman of Oaktree Capital Management, wrote in a recent memo to clients. A 40-year investing veteran who warned of market trouble in 2007, Marks said stock valuations now aren't abnormally high. His investing motto: "Move forward, but with caution."
To find compelling investment ideas, we asked a number of fund managers for their top picks — stocks they would buy at today's prices and hold for at least three years.
Some of their picks are small companies, others multinational giants. Each has its own set of risks, as well as potential rewards, and investors should consider them only as part of a broadly diversified portfolio.
As a starting point for further research, here are snapshots of 14 stocks the fund managers selected. As always, you should do your own homework or consult an adviser before investing.
Despite stiffer competition, Apple's (AAPL) iPhones and iPads are still hot products. China Mobile (CHL) recently announced plans to carry the iPhone, expanding Apple's reach into the Chinese market. And Apple could have a competitive edge with the new sapphire material it's starting to incorporate in phones, making them more durable and scratch-resistant.
"They're by no means done innovating with the iPhone," says Kevin Landis, manager of the Firsthand Technology Opportunities Fund (TEFQX), which owns the stock.
Key risks: Apple's growth rate may decline and profits could be weaker than expected.
Many airlines in developing countries that can't afford to buy new planes lease them instead from companies such as Air Lease (AL), which buys planes from Boeing (BA) and Airbus, getting bulk discounts. Demand for air travel is growing in emerging markets and carriers are upgrading their fleets to be more fuel-efficient, says Matt Berler, co-manager of the Osterweis Fund (OSTFX), which owns the stock.
The company's aircraft leases average seven to eight years, providing "highly visible and stable" revenues, he adds. And Air Lease is run by a seasoned management team that had success with a prior air-leasing business.
Key risks: A downturn in global air travel could hurt demand for aircraft and pressure Air Lease's profit growth.
Cheap natural gas — a raw material for the petro-chemical industry — should help boost profits for Dow (DOW), and higher inflation would lift chemical prices, says Barry James, president of James Investment Research in Xenia, Ohio. Dow looks reasonably priced, trading around 14 times estimated earnings, adds James, who recommends the stock for his clients.
Key risks: Softening chemical demand could pressure Dow's profits, as would higher raw-material costs.
HealthSouth (HLS) runs more than 100 rehabilitation hospitals and clinics, providing care for patients recovering from surgery and other hospital procedures. With the population aging and more Americans gaining health insurance, the company has strong growth drivers, says fund manager Berler. HealthSouth, based in Birmingham, Ala., should also benefit from efforts to reduce health care costs since its prices tend to be lower than those of full-service hospitals, he adds.
Key risks: Lower reimbursement rates for rehab services could hurt HealthSouth's profits.
Garmin's (GRMN) revenues have declined as its portable GPS devices lost sales to navigation-equipped smartphones. Yet the Swiss company also makes equipment for the marine and aviation industries — areas that are much more profitable and growing rapidly, according to Ragen Stienke, lead manager of the Westwood SMidCap Fund (WHGMX), which owns the stock. Analysts expect Garmin's revenue growth to pick up next year, and the company has lots of cash and no debt on its balance sheet.
Key risks: Garmin's portable GPS business could decline faster than expected.
Run by media mogul Barry Diller, IAC (IACI) owns major web sites including search giant Ask.com and dating site Match.com. Ask.com faces some tough challenges in the search arena, but Match.com and other sites are thriving and the New York-based company is growing steadily overall, says Stienke.
Key risks: Search revenues could be weaker than expected. Diller is known as a savvy dealmaker, but the company could make an acquisition that disappoints investors and pressures the stock.
J2 Global (JCOM) provides cloud-based services to small and midsize companies, helping to manage their voicemail, faxes and other digital data. It's a profitable business with stable and recurring revenues, says Stienke, and it should get a lift from business spending as the economy picks up and more companies sign up for J2's services.
Key risks: The Los Angeles-based company is small with a $2.1 billion market value. Shares could plunge if the company misses earnings estimates.
Rising interest rates tend to help banks such as JPMorgan (JPM), the nation's largest financial company. As rates rise and the "spread" between short and long-term rates increases, bank tend to see higher profits from lending. "The spread is so wide they're printing money almost as fast as the government," says the Ohio money manager James. An improving economy could also help boost lending volume and lead to higher profitability for the New York-based bank.
Key risks: JPMorgan could face stricter capital requirements and other regulatory pressures that may erode its bottom line.
Oil producer Marathon (MRO) trades at a 50% discount to other independent oil producers, according to fund manager Tom Forester, who holds the stock in his Forester Value fund (FVALX). The Houston-based company is shifting production to the U.S., improving its growth prospects, and it has operations in Iraq, which it may eventually sell, generating higher returns for shareholders.
Key risks: Weaker oil prices would likely pressure Marathon's profits and share price.
More investing ideas
Microsoft (MSFT) has mellowed in middle age, but the software giant still dominates business computing with its Windows and Office products. Windows tablets powered by a new generation of Intel (INTC) chips are hitting the market, along with a new generation of Windows phones, says Forester. "They've solved a lot of their problems," he says, "and have good momentum going forward."
Key risks: Slower PC sales would likely pressure earnings. The stock could be volatile around the announcement of a new CEO to replace Steve Ballmer.
More Americans are gaining access to health care, which should benefit generic drug maker Mylan (MYL), says Forester. The company also makes the EpiPen auto-injector, a branded epinephrine product used to treat severe allergic reactions; the market for the drug is expanding as more states require schools to it. Mylan is also working to develop generic versions of "large-molecule" biotech drugs, which could open a vast new market for the Canonsburg, Pa.,-based firm.
Key risks: Mylan's new generic products may not be approved as quickly as expected.
Rockwood (ROC) is the lowest-cost producer of lithium, chemical element increasingly used in batteries for electric vehicles, products for life sciences and other industries. The company has been selling non-core businesses and recently bought 49% of an Australian lithium producer that supplies most of China's market. Overall, the Princeton, N.J.-based business should continue to grow as lithium demand increases worldwide, says fund manager Stienke, who holds the stock.
Key risks: Earnings could take a hit if global demand for lithium slumps.
Six Flags Entertainment
Spending at amusement parks is growing and Six Flags (SIX) is benefiting, according to Michael Balkin, co-manager of the William Blair Small Cap Growth Fund (WBSNX), which owns the stock. Operating 18 theme parks, Six Flags recently introduced season pass memberships that could help boost sales, he adds. Based in Grand Prairie, Texas, the company has been buying shares and hiking its dividend, signs of financial health, says Balkin.
Key risks: Weaker consumer spending would likely pressure theme park revenues.
Qualcomm's (QCOM) chip technology sits in around half the world's smartphones — making it the king of a massive and growing market. "They have the best technology and cutting-edge design, and they're in very tight with Apple," says Firsthand's Landis, who owns the stock.
Industry analysts expect the San Diego-based company to lose some market share going forward, but the smartphone business is large and expanding, and the stock trades at 14.4 times estimated earnings, a discount to the broader market.
Key risks: Qualcomm's market share could decline more than expected.
Daren Fonda is Senior Writer and Investing Columnist with Fidelity Interactive Content Services, a provider of objective investing content on Fidelity.com. He does not own any of the securities mentioned in this article.