The United States Federal Reserve Bank just announced another round of stimulus for the economy, and it looks like it will last until 2015, by the Fed’s estimates. The Federal Reserve issued a statement indicating it would keep rates near 0% until unemployment fell below 6.5%. More specifically, they plan on buying $45 billion in longer-term Treasuries each month, in addition to the already $40 billion in mortgage-backed securities (MBS) per month they purchase.
What does this mean exactly? Essentially, the Federal Reserve will be pumping Wall Street banks with cash to increase liquidity and lending, and historically, this will result in the inflation of all asset classes. Real estate, commodities and equities will increase in value, while your cash in the bank will likely decrease. These ripple affects, of course, are theoretical and are the results we should see, not necessarily with certainty. As of late, one of the major obstacles in the way of a prosperous 2013 is the fiscal cliff. Without rehashing all the economic repercussions if Washington doesn’t come up with a suitable agreement before the New Year, it suffices to say 2013 may not offer the positive returns investors are hoping for. Regardless, as a cautious value investor, we think 2 stocks may be poised to deliver 50% returns over the course of the next 2-3 years.
Apple (AAPL) – $540
Like you, we are tired of hearing the debate about this company, but when a stock has the potential to boost your portfolio’s returns, its hard not to hear the reasons to buy this company’s shares. Barron’s Andrew Bary offered a wonderful cover story this last weekend, highlighting the magazine’s top “10 Favorite Stocks For 2013”. He duly pointed out that “None of the recent investor concerns – lower margins, supply constraints, management changes, iPad competition, and the iPhone 5 map fiasco – are major”, and I completely agree. It’s understandable that some investors might be skittish given that revenue and earnings growth from new products is unforeseen at the moment. Chances are, as many point out, the Apple TV will not make a debut in 2013, and the lower-margin iPad Mini will cannibalize profits from the iPad 3.
Nonetheless, from a valuation standpoint, Apple is almost a steal. The stock currently trades about 11x fiscal year projected profits of $49/share, and back out the company’s enormous cash holdings of $128/share, and we’re talking about a P/E of 8. Combine recent reports of a cheaper priced iPhone 5S for emerging markets, a deal with T-Mobile to bring the iPhone to the 3rd largest carrier in the U.S. midway through 2013, and that China Mobile, the largest mobile phone network on the planet with more than 700 million total subscribers, is in talks to offer the iPhone in the future, we’re not sure how you could go wrong with owning Apple.
JPMorgan Chase (JPM) – $43
As every news outlet has highlighted in recent months, the housing market appears to have bottomed and is making a slow recovery, and what do most home purchases require? A lender offering you a mortgage. With the Federal Reserve keeping interest rates low and the economy and labor market improving, home loan lending will offer banks huge returns.
Moreover, JPMorgan is a best-in-class bank trading at one of the lowest multiples among major banks, slightly over tangible book value. With a great reputation and strong market share in asset management, investment banking, consumer banking, credit cards, and processing services, JPMorgan is poised to grow their earnings.
Since no industry or company is without its potential downside, it is important to note the overhanging negative catalyst on all bank stocks: regulation. With consumer advocate and Wall Street critic Elizabeth Warren, who helped create the Consumer Financial Protection Bureau, in the running to get a seat on the powerful banking committee, banks and Wall Street should fear her role in creating regulation that may hurt their profitability.
With a multitude of analysts, as well as Jamie Dimon, CEO of JPMorgan, already calling for 2013 to offer superior returns, I agree with Lloyd Blankfein, CEO of Goldman Sachs, who warned that “The next 12 months will be tricky”. So invest selectively and with caution.
This was a guest post by Gary, who blogs at Gajizmo.com, a personal finance blog focused on investing, real estate, insurance, debt, and money.