UBS Sees High-Yield Dividend Laggards Ready to Lead the Market Higher

History shows that years following sub-2% GDP growth tend to be good for stocks, but near-term exuberance, with investors focusing again on momentum stocks, could signal a pause after the big rally from October 9. The approach of the end of the fiscal year for many mutual funds brings window dressing, and this could be the catalyst for a rotational move into higher yielding stocks that have lagged the S&P 500. These companies are forecast to grow earnings strongly and could come at the expense of momentum stocks that have outperformed the S&P 500 but offer lower dividend yields.

The equity strategy team at UBS has been looking for the stocks that are set to outperform after what looks to be the best year for the stock market in almost a decade. They point out that numerous issues still overhang the market and could turn 2014 either way, depending on how they are resolved. UBS’s list is made up of laggard stocks that portfolio managers may embrace as they rotate out of big momentum winners. Another boost is its list of stocks to avoid that may be included in fiscal year end sell programs.

Here are the top laggard stocks to buy. The UBS analysts have screened for top-yielding names that they expect to have at least 20% year-over-year earnings growth.

Dow Chemical Co. (NYSE: DOW) announced Wednesday that it is launching cash tender offers for up to $500 million aggregate principal amount of notes issued by Dow and its subsidiary Rohm and Haas. Lowering debt levels and growth from emerging markets may be a solid combination for investors. Investors also receive a 3.3% dividend. The UBS price target for the stock is $44. The Thomson/First Call estimate is $42. Dow closed Wednesday at $39.26.

Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) has been battered as investors have fled mining companies. The company is planning to enter the U.S. oil and gas space, which could truly make it a natural resources powerhouse. Investors are paid a very solid 3.3% dividend. The UBS price target of the stock and the consensus target are both at $40. Freeport closed Wednesday at $37.28.

International Paper Co. (NYSE: IP) makes the laggard list of stocks to buy at UBS. Jim Cramer from CNBC pounded the table on the stock last Friday and for good reason. The company is the largest and most globally oriented North American paper company and does a huge amount of business in Brazil, Russia and China. Shareholders are paid a 3.1% dividend. The UBS price target is placed at $55, the same as the consensus target. The stock closed Wednesday at $44.46.

J.P. Morgan Chase & Co. (NYSE: JPM) has faced a year of legal battles and may not be out of the woods yet. The company’s gigantic $13 billion settlement has hit a few snags and may take some time to play out. The core business is solid, and UBS likes the prospects for earnings growth. Investors are paid a 2.9% dividend. The UBS price target for the stock of $63 is the same as the consensus target. J.P. Morgan closed Wednesday at $52.60.

Nucor Corp. (NYSE: NUE) is a leader in the steel industry in vertical integration. That means owning steel mills, iron ore operations and coal mines. The goal is to be able to remove the middle men, and added costs, from the process of making steel. It is a road that several of the industry’s biggest players have gone down. UBS likes the strategy and has a $56 price target. The consensus is at $54, and Nucor close Wednesday at $53.18. Investors are paid a 2.9% dividend.

Williams Companies Inc. (NYSE: WMB) reported earnings Wednesday and offered a solid beat. The company also recently raised its cash dividend, which is very positive for shareholders. Investors receive a 3.9% dividend. The UBS price target for this top energy infrastructure company is $41. The consensus target is placed at $41 as well. Williams closed Wednesday at $36.95.

While positive on the high-yielding laggards, the UBS team was negative on momentum leaders. They have either Sell or Neutral ratings on American International Group Inc. (NYSE: AIG), Commerce Bancshares Inc. (NASDAQ: CBSH), Starwood Hotels & Resorts Worldwide Inc. (NYSE: HOT), Humana Inc. (NYSE: HUM), International Game Technology (NYSE: IGT) and StanCorp Financial Group Inc. (NYSE: SFG). UBS expects all these stocks to have stagnant earnings in 2014.

Rotating out of market leaders to laggards is not a new investing idea. However, it has proven a solid one, especially following blockbuster years in the market. It just makes good sense for investors to take gains from their winners and rotate to solid names that may have underperformed.

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