Top 12 Ideas For Your Portfolio In 2014 [Apple Inc Google Inc …

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Top 12 Ideas For Your Portfolio In 2014

(Editors’ Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

It’s that time of the year — there’s snow on the ground, the decorations are hung, and it’s time to start thinking about 2014. It’s been a good year, and though the markets in general might not have as good of a run next year, 2014 is setting up to be a year in which stock-pickers can be successful. I like to offer investors several ideas (I usually pick 12) in order to provide enough pick for investors looking to diversify, and ideas that meet a wide-range on investor preferences.

I see many opportunities still available in these markets for investors going into the New Year. As I put together my top ideas for 2014, a common theme developed — 2014 will be the year we see a revitalization in corporate spending, specifically in the U.S. We’ve gone through several years where the financial markets, and companies in general, have become debt averse. We now have many companies with stockpiles of cash sitting on their balance sheets, and as the markets have risen, the opportunity to make adequate returns from repurchasing stock has dwindled.

Over the past several years, companies have delayed capex spending due to political instability, but 2014 is shaping up to be a year in which we get greater stability in Washington, perhaps as much stability as we can realistically expect in the foreseeable future. Under these conditions, I believe that many corporations will find that their greatest returns on capital will be generated from increased spending on capital equipment and capital assets. In addition, given the continued low cost of debt financing, many companies might choose to issue debt at low rates before the Fed begins to tighten (which I expect to occur, at a modest pace that has already been expected, during the back half of 2014), and the delayed capex spending of the last few years finally kicks in.

Outside of the U.S. 2014 will be a year in which we see the rest of the world start to focus more of its resources on clean energy. China will increase both investment and regulations for new energy vehicles. Canada will ramp up its $350 billion infrastructure boom project and focus more of its resources on increasing energy efficiency for residential properties.

In Korea, government mandates will force private companies to expand capex on renewable energy. And in Europe, and especially Germany, we will continue to see an expansion of capex dollars aimed at clean energy. You will see from our list below that several of our ideas fit into this thesis.

My top 12 ideas for 2013: [Macy’s (M ), Google (GOOG ), Michael Kors (KORS ), Nationstar Mortgage (NSM ), Ocwen Financial (OCN ), Viacom (VIAB ), Deckers Outdoor (DECK ), Ruckus Wireless (RKUS ), Shuffle Master (SHFL ), Las Vegas Sands (LVS ), Dollar Tree (DLTR ), and BBT Bank (BBT )] had an average return of 45% during the year. This portfolio was set up to take advantage of the high-end and low-end (not the middle) of retail, the low premiums in mortgage servicing rights, and the continued growth of gaming in Macau. Though it will not be easy to repeat this performance next year, I believe that a portfolio focused on capex growth and U.S. expansion will outperform the overall markets.

I also wanted to thank the team at Manalapan Oracle Capital Management for their help in putting together this top ideas list. Manalapan Oracle, a long/short equity hedge fund managed by Joseph Vidich, significantly outperformed both the SP 500 and long/short index this year with big winners including Isis Pharmaceuticals (ISIS ), Acadia Pharmaceuticals (ACAD ), Aceto Corporation (ACET ), Cytec Industries (CYT ), Johnson Controls (JCI ), La-Z-Boy (LZB ), Methode Electronics (MEI ), and Rockwell Medical (RMTI ). Seeking Alpha Contributor and Manalapan Oracle Analyst Chris Bunge was instrumental in helping me put together the ideas for this article and I just wanted to thank him for his work.

Now, let’s get to our names for 2014.

Going into 2013, if you asked me to pick my top …-related names, I would have said Las Vegas Sands, Shuffle Master, and Bally Technologies. During 2013, after thinking about the move several times before, BYI finally acquired SHFL. Considering the growing opportunity in Asia, the secular shift to table gaming in the US, and the royalty revenue possibilities off the emergence of online gaming in the U.S.

I think BYI got a steal. By the end of FY 2017, I project that the SHFL acquisition will add $2 of EPS and another $.60 in synergies for Bally.

This acquisition also puts BYI in a position to be the biggest winner in the emergence of the systems business. To give some idea on the opportunity around this business, at a conference I attended a while ago, the CEO of MGM Resorts (MGM ) called the systems business the most important thing that has happened to the slots business since the implementation of paper tickets instead of coins. After impressive commentary around the business on their last earning call. I believe that 2014 will be the year that the casinos increase their capex spend, specifically focused on systems, and we will see an inflection point in this business.

BYI management gives really good information in their latest presentation on the opportunity in systems, and I believe that the business will add another $3 in EPS by the end of FY 2017. I am projecting that BYI has a combined run-rate EPS of $10 by the end of FY 2017.

BYI is in the best, and most diversified, position the company has ever experienced. Its leading position in the systems business will reach an inflection point next year. I believe the stock will end the year at a price north of $100.

Cabela’s, one of the best stories in retail today, provides investors with a unique growth + value opportunity. On the growth side, 2014 will be a year in which the company starts an aggressive store growth campaign that will double the total current square footage of the company’s retail business by 2017. That’s only the beginning; considering the company currently has only 50 stores, and sees the opportunity for up to 225 stores between the US and Canada, there is at least 10 years on runway left on this expansion.

These large stores (can be up to 100K square feet) provide the experience quality necessary to be successful in the changing landscape of brick and mortar retail.

On the value side, we can think of CAB as a retail business and a credit cards business. The sum-of-the parts of these two businesses is significantly higher than the company’s current value. Investors sometimes overlook the credit card business, but it is actually a very attractive asset.

The company’s card is one of the top 15 most used cards in the US, and has an average FICO score of about 800. These characteristics make the card very attractive to some of the major credit card companies for an acquisition. Though I do not believe the company will sell the card in the near future since the CFO comes from the credit card business, investors have brought up the idea of a credit card spin-off and this action could occur in the future.

To warn investors, there is some risk to the CAB story in the first-half of the year. The company will be coming up against some very tough comps off of last year’s boom in the firearms business. I don’t expect firearms to fair as well this year, and we could see a sell-off occur because of this, but I would be using any weakness as a buying opportunity.

In the back-half of the year, the story will become too good to ignore, and I expect the stock to reach the $75 price level by the end of 2014. Overall, I like the sporting goods segment of retail for 2014.

Google and (Possibly) Apple (AAPL )

Google has been, and continues to be, my largest holding. Most people think of GOOG as a technology company. I think of them as a real estate company, and that real estate is the internet ad space. As capex spending increases next year, so will advertising spending.

GOOG will be the single biggest beneficiary of this trend. More advertising spending will be allocated towards targeted online and mobile advertising, areas in which GOOG dominates. Android will also continue to take greater share of the growing smartphone/tablet market.

Though there could be some choppiness (there always has been over the company’s spending habits, but these tend to work over the long run), top technology, a best-in-class management team, and the top position in the online advertising market make GOOG a name to own in any portfolio.

When putting this article together, I had a tough time deciding on GOOG or Apple. I think both are names any investor should own, but I decided on GOOG because of the advertising opportunity. I wanted to point out in this article that I would also recommend AAPL as a buy.

Though Android is taking share, the market is growing fast enough for both of these companies to be winners. The China Mobile (CHL ) agreement is a bigger win for the company than most believe, the new line of products has performed well to date, and we might see greater amounts of capital returned to shareholders during 2014. Trading at only 12x forward earnings, I wouldn’t be surprised if AAPL got near the $700 level by the end of 2014.

I know I’m kind of cheating on this one. If you made me to choose, I’d be going with KB Homes (KBH ) on this one, but I think it would be more prudent for investors to create a basket a homebuilders for the coming year. Interest rates beginning to rise combined with a better overall economy creates the environment for a strong spring selling season in 2014. The homebuilders have done a great job of managing inventories and holding new units offline in the back half of 2013, putting these companies in a position to take further pricing on new homes in 2014.

Risks of higher rates scaring off buyers seem overblown as the 30-year rate is still under 5%, and I expect the Fed to tighten later than consensus thinking (towards the end of the year instead of the first half). Names like Standard Pacific (SPF ), D.R. Horton (DHI ), Lennar (LEN ), and Ryland Group (RYL ), will all be beneficiaries of the higher demand + higher pricing spring selling season.

Small-Cap Financial Services

As I noted in my recent article. JMP Group: Industry Tailwinds and Company-Specific Catalysts Should Boost Stock 50% . we have seen a rebound in the IPO Market:

Source: JMP Investor Presentation

Rebounds like the one we are currently seeing typically last 2-3 years. What’s different about this recent rebound is that small-cap investment banks are taking a bigger piece of the pie, most likely due to a greater amount of smaller-sized IPOs. In addition to this trend, these small-cap financial services firms also benefit from greater demand for small-cap research. If we look back at the equity business over the last couple of years, it has significantly underperformed.

This has created a larger pool of equity investors that have fewer assets under management and fewer in-house resources. This creates the opportunity for a research firm focused on small caps to take market share and a larger pool of managers, now that the equity business has returned and inflows are positive, that are more incentivized to obtain outside research.

Both of these trends, combined with asset management components of their businesses that are benefiting from greater management fees as a result of equity inflows and 2013 performance, really benefit the smaller cap names. Yet, when we take a look at valuation, JMP Group (JMP ), Cowen Group (COWN ), FBR Co. (FBRC ), and Oppenheimer Holdings (OPY ) trade at significant discounts to their peers. I expect these companies to outperform the industry, which will cause investors to re-value these names more in line with the industry average.

Again, if I had to pick one I’d go with JMP because of company-specific catalysts in the out years, but I think it would be prudent for investors to make up a basket of these names. I think small-cap financials will outperform large-caps as government regulation kicks in and the fact that larger banks have already positioned their portfolios for higher rates, which may take longer to materialize than expected. If I were to go into a large-cap financial name, I would choose BlackRock (BLK ) because of the growing trend towards ETFs.

I also still like the mortgage servicing names, Nationstar and Ocwen, for the coming year.

Interface, the world’s largest manufacturer of carpet tile, has already seen an inflection point in its business during 2013, but 2014 will be the year that the much anticipated commercial rebound in flooring helps boost TILE’s business to new levels. Every major flooring company has signaled a secular shift towards carpet tile as the preferred carpet product, and TILE is the biggest beneficiary of this shift. The company is poised to grow from not only the upcoming rebound in commercial spending, but also the move into the high-end retail space in the US.

The company had no retail presence before this move, creating the opportunity for market share gains as retail preferences shift to carpet tile. This new retail business is just now reaching break-even levels, so 2014 will also be the year that we start to see profitability out of this growing business.

TILE trades at a discount to its competition, yet it has a cleaner balance sheet and more upside from the shift to carpet tile. As the commercial business starts to kick in during 2014, the company will be valued more in line with its peers. I have a year-end price target of $26.

For more information on TILE, please see my recent article .

ON Semiconductor Corp (ONNN )

ON Semiconductor Corporation designs, manufactures, and markets semiconductor components for electronic systems and products worldwide. The company operates in three segments: Application Products Group, Standard Products Group, and SANYO Semiconductor Products Group. ON Semiconductor serves a number of markets which all play into the capital equipment cycle; including automotive, communications, computing, medical, industrial, smart grid, military/aerospace industries, industrial control systems, LED lighting, power supplies, networking and telecom gear, and automated test equipment.

The company offers a comprehensive portfolio of energy efficient power and signal management, logic, discrete and custom solutions.

But ON Semi has had its problems. In 2011, On Semi acquired Sanyo Electronics for $918 million, and has struggled with this division ever since. The division has been losing money for the company since its acquisition, dragging down the results of the overall company. For several years it seems as if management did not want to own up to their poor acquisition, and bite the bullet by cutting back on the size of the business.

Only recently has management taken the necessary and more dramatic steps to right size the Sanyo business to bring it back to profitability. ON Semi has announced a major restructuring of the Sanyo division and expects the division’s losses to end in early 2014, and for the business to be profitable by the 2nd half of 2014. As this restructuring takes hold, I believe On Semi’s earnings could accelerate from the expected 53 cents per share in 2013, to 67 cents in 2014, and $1 per share in 2015.

I believe ON Semi will see an earnings inflection point in 2014, as operating margins begin to expand, and move towards the company’s long-term target of 17%, which translates to roughly $1 per share in EPS by 2015. Applying a 14X multiple to these earnings would imply a $14 stock price by 2015.

ATMI is a company which I believe is on the cusp of a major upswing in earnings, as several long-term RD initiatives finally go from start up mode to growth and earnings mode. ATMI supplies high performance materials, materials packaging, and materials delivery systems for use in the microelectronic, Life Science E-Waste recovery industries. For microelectronics it offers front-end semiconductor performance materials; sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases.

For Life Science, ATMI provides containment, mixing, and bioreactor technologies to the biotechnology, laboratory, and cell therapy markets. For E-Waste recovery, ATMI provides technologies that extract most metals from electronic circuit boards at 99% extraction efficiency, with greater than 99% purity. The electronic components from the boards can be reused or sold.

ATMI is primarily known as a microelectronics company, however they have two exciting high growth divisions in E-Waste Life Science which are on the cusp of turning profitable, enabling the company to grow at a much higher growth rate, while potentially doubling their earnings per share over the next two to three year period. By year-end 2014, I believe ATMI could appreciate over 30%, while longer term I believe the stock has the potential to double in price. The Life Science division could possibly grow at a 20% to 30% growth rate, and generate 15% operating margins. Within three years Life Science could generate $100M in revenue for ATMI.

ATMI’s other exciting division is their E-Waste division, which is called eVOLV. The eVOLV has a technology which addresses the massive issue of electronic waste which the world faces. Their technology can, in an environmentally safe manner, extract most metals from electronic waste (think printed circuit boards, cell phones, computers) with a greater than 99% extraction efficiency and a greater than 99% purity. The company is in the midst of setting up licensing and royalty deals, which are just now being implemented.

As these deals get under way, and more are announced, ATMI should start to get recognition from the investment world. I believe that every new partnership could add an additional $0.06 to earnings. Finally, ATMI has stated they are seeking strategic alternatives for the company, which I believe could result in a spinoff of the Life Science division, or the implementation of a major stock buyback (They have a little over $4 a share in cash on the balance sheet and no debt, and as these other divisions reach profitability, they could do over $2 a share in free cash flow annually).

I see ATMI potentially earning $2.03 in 2014 and $2.70 in 2015, which could take the stock up to $40 next year, and into the mid 50s with a few years.

For more information on ATMI, please see Chris Bunge’s recent article .

Energy Recovery is the little company with the big technology. The company designs, manufactures, and sells energy recovery devices (ERDs) that harness the reusable energy from industrial fluid flows and pressure cycles in the United States and internationally. Its ERDs comprise energy recovery devices and turbochargers for water desalination; turbochargers designed for low-pressure brackish and high-pressure seawater reverse osmosis systems; and pumps ranging from high-pressure multi- and single-stage centrifugal pumps to circulation and high-speed pumps.

The company also offers complete energy recovery systems comprising turbines and industrial pumps for oil and gas operators; and energy generating systems that enable oil and gas operators to capture hydraulic energy and generate electricity from high-pressure fluid flows.

ERII traditionally has focused its own energy on building its business within the desalination markets, which has been a niche, choppy market to be in. In addition, the total addressable market size of the desalination industry is only $150 million. About three years ago, management realized they needed to take their proprietary technology and find the bigger opportunities. Management did just that — over the last several years they have been developing a proprietary solution for the oil and gas processing industries, which is just now on the verge of ramping up. I believe 2014 will be the inflection year for ERII, as their efforts of the last few years lead to substantial orders within the oil gas industry.

Management indicated that the total addressable market is about 1,200 plants, equating to over $1 billion in potential revenue. ERII has been in pilot testing with 3 large oil gas companies on 3 continents. Partners include, Sinopec (SHI ), Saudi Aramco, and others in which their IsoBoost technology reduced total energy consumption by 25% or $2.5M per year on average in pilot testing. The potential revenue is big, as the major oil gas companies have plants all over the world. I believe that starting in 2014 ERII will begin to licensing sign deals for their IsoBoost technology.

On average ERII will receive $2.5M for each deal, and the business should command gross profit margins exceeding 55%. Although I am assuming the company only earns .08 to .10 cents in 2014, I believe sometime over the next several years, ERII will hit an inflection point where their business ramps dramatically, and they have the possibility of earning .45 to .55 cents by 2015. Applying a 30X multiple to potential 2015 EPS of $0.50 gets me a 24-month price target of $16.

I expect the stock to begin this move in 2014 as these contracts are signed.

It’s been a rough year for LSB Industries — two plants went offline due to an explosion and a pipe rupture, which led to capacity constraints that had an impact on operating results and forced the company to buy ammonia on the open market for 3x the cost of what the company can produce it for by themselves. But, 2014 is shaping up to be the year that the company gets back on track and sees a positive runway in its business for the next several years.

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The plants that were damaged are now back online, which will boost revenue in 2014 as compared to 2013. Both of the company’s main businesses, climate control and chemicals, have seen recent growth. In chemicals (65% of revenue), management recently noted during their conference call that both UAM production and Cherokee Plant production for the balance of 2013 are sold out.

What’s more important, management thinks that they have already passed the through in this business (from a combination of capacity falling offline and pricing), and now with the plant capacity coming back online after the repairs, we should see growth in the business going forward. In the climate control business, the company will benefit from a commercial spending rebound, and do over $300MM in revenue and over $1.50 per share in operating income in 2014.

Furthermore, the climate control segment as a standalone business would trade at a much higher multiple than the cyclical chemical business that drives LXU’s company multiple. Management has noted several times in the past that there are not many synergies between the chemicals and climate control businesses, and that they could look to sell the climate control business at some point. When looking at comparable multiples for this business, it seems like a spin-off or sale of the unit could bring in north of $20 per share.

This, combined with almost $5 per share of cash coming in from insurance proceeds, means that the company could receive cash proceeds that equal more than 75% of the company’s market cap over the next 12 months.

I expect growth to kick in during the coming year for LXU, and for the company to beat current consensus estimates. Furthermore, once the expansion of the El Dorado plant is completed in 2015, and the company has 180,000 more tons of ammonia capacity than is currently online, the company will be able to save about $10MM in costs ($.50/share) associated to not having to purchase ammonia on the open market, and will be able to grow revenues by $90-$100MM (through selling excess capacity). Including conservative organic growth over the next two years, I get a full-year 2016 estimate of $5.50 per share (over 250% EPS growth from the depressed levels of 2013).

I have a year-end 2014 price target of $40, but believe there is much bigger upside to the story longer term.

For more information on LXU, please see my recent article .

UQM Technologies (UQM ) and Quantum Fuel Systems (QTWW )

I put these two companies in a basket as both play on the theme of increased capex in clean energy vehicles. I selected UQM and QTWW as they both have company-specific catalysts that will kick in during 2014, and these companies service much different markets.

2014 will be the year that UQM Technologies, the developer and manufacturer of power dense, high efficiency electric motors, announces a major contract with Audi or Saab. Audi has been testing UQM systems in the A1 e-tron for some time now. The Audi team is very excited about the success thus far and is discussing next steps internally, for which UQM provided additional data during 2013. Saab is back on sound financial footing, and has already announced that there will be a focus at the company on the electric vehicle during 2014.

Along with Audi and Saab, the company could receive contracts from Zenith Motors for its all-electric shuttle van, Proterra for its 37-foot bus, or announce a major contract in China.

Government regulation helps this push. The U.S. government has adopted new regulations extending fuel economy standards to medium- and heavy-duty trucks for the first time beginning with model year 2014. CAFE standards will increase the average fuel economy of each manufacturer’s passenger car and light truck model offerings to 35.5 miles per gallon by 2016 and 54.5 miles per gallon by 2025. In addition to this, the U.S. Government has a policy goal of one million electric vehicles on the road by 2015 and President Obama has announced a directive to government agencies to ensure that by 2015, all new vehicles they purchase are alternative-fuel vehicles, including hybrid and electric vehicles.

The Federal government operates a fleet of more than 600,000 vehicles. These initiatives, along with elevated gas prices, will help UQM get a major contract during the next 12 months.

For QTWW, CNG fueling will reach an inflection point during 2014 and the company is more than doubling is capacity due to end-market demand. Expect a big year in 2014 as the company reaches profitability.

For more information on QTWW, please see my recent article .

2014 will be the year that company’s step up and spend capex on fuel cell technology. With less alternatives ways to use cash, the value proposition of this technology becomes too hard to ignore. There are other names you could play in this space, but I’m going with HYGS because I also believe that 2014 will be the year the company announces a major energy storage contract with a utility, most likely Enbridge (ENB ) who owns 13% of HYGS.

HYGS management has already stated that they expect to reach break-even levels in 2014, which should alleviate liquidity concerns, but I expect the company to do much better. They are currently winning over 80% on the contracts awarded in Europe for energy storage. Right now, there is not much competition, but when competition grows, HYGS probably becomes a very attractive acquisition target for a bigger company trying to enter the business.

As alternative energy vehicles start to make more traction, HYGS will also benefit from increased hydrogen fueling stations. All of these catalysts above start to kick in 2014, and I expect HYGS to be one of the biggest beneficiaries.

For more information on HYGS, please see my recent article .

Honorable Mention

I wanted to quickly highlight some names/ideas that just missed the cut:

Whole Foods Markets (WFM ) — I think the sell-off is overdone, and even though I think some of the other healthy grocers could struggles, WFM will be the long-term winner in the space. Another name I continue to like in the high-growth food and beverage space is Starbucks (SBUX ).

For more information on WFM, please see my recent article .

American Eagle (AEO ) — I’m not a big fan of apparel retail going into the new year, but the teen space has had a very weak 2013. Though the space will continue to be promotional in the short term, I see American Eagle as the name that will come out of this period in the best position. The company also offers a 3.5% dividend yield at its current levels.

This is more a back-half of 2014 story.

Perficient, Inc (PRFT ) — As capex spending increases, a larger share of these dollars will find their way to IT solutions and software. I am bullish on the IT consulting space, and believe that PRFT is the best way to play it.

For more information on PRFT, please see my recent article .

Increased Mobile/Tablet Data Usage — Smart phones and tablets are now commonplace, but because of the rollout of 4G, we are in the early stages of a shift in the way we use these devices. Digital content (music/videos/work-related usage) will only increase now that we have better bandwidth available. 4G will continue to be rolled out through the United States during 2014.

The problem is, as our usage of data on these devices increases, it will put a heavier burden on the network. Furthermore, data plans are becoming costly now that unlimited data is not an option on most networks (something Europe is beginning to regulate). Companies that help users stay connected, like smart wi-fi solutions, and companies that help improve signal quality, like small cell providers, will be very important going forward.

I left this idea off my list because I have not yet targeted the right name to play this trend, but I do believe that this will be one of the major trends we hear about throughout 2014.

2014 will most likely be an up-and-down year for the markets, but picking good stocks will allow investors to make outsized returns. The year of the capex revitalization is almost upon us, and I am encouraging investors to position their portfolio accordingly.

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