24/7 Wall St. has continued to see the endless themes and predictions made by Wall Street firms for 2014. Over the past month, we have highlighted many of the top picks and pans for this year. One of the interesting aspects of compiling and reporting on the stocks to buy and ideas for this year is that they tend to run reasonably parallel across the board. For instance, while most firms feel that we could experience a sizable correction at some point, none are predicting a crash on Wall Street.
Another similarity we have found is that most firms are favoring cyclicals this year. Since cyclicals tend to outperform defensive names in a rising rate environment, the analysts at many have screened for stocks that should outperform under that scenario. Technology and financials are sectors that seem to make the lists at most Wall Street firms for this year. We have combined some Wall Street research and ideas, with ideas that we have here at 24/7 Wall Street. It adds up to what may be the top five trades for 2014.
1. Short the Treasury Market
We advised more than a year ago that shorting the Treasury market would be a smart idea for investors, and it proved to be a top trade for 2013. After starting 2013 just above the 3% level, the 30-year Treasury yield bottomed at 2.84% on May 1. After Fed Chairman Ben Bernanke warned that a tapering of the ongoing quantitative easing (QE) program might be in the future, rates took off and really have not looked back. On December 31, the 30-year Treasury yield closed at a 3.96% level, a 40% increase from the May lows.
This year should provide more of the same. Despite a pathetic December jobs report on Friday that knocked yields back to the 3.8% level, the future looks like more of the same. The Fed will continue to taper its QE purchases, and most Wall Street firms agree that the federal funds rate should rise next year. The bond market will look for economic growth, and when it sees it, it will drive rates higher. The way to put on the trade is buy the ProShares Ultra Short 20+ Year Treasury (NYSEMKT: TBT) exchange traded fund (ETF). While not the most efficient vehicle, it provides investors a way to short the Treasury market without paying the coupon carry.
2. Buy Technology Stocks
The stock market had a tremendous year in 2013, the best since 1997. One notable underperforming sector was technology. As we mentioned, almost every firm that we cover stressed that technology should outperform this year. Many firms pointed to new innovation and capital expenditure budgets that are growing as major reasons for technology to improve. For investors, technology just makes good sense. Many of the firms have little or no debt, and they dominate the areas that they are in.
One solid way to have a strong technology position is to buy the PowerShares QQQ Trust (NASDAQ: QQQ). While only 56% of the ETF is technology, it also gives investors a wide holding in other quality Nasdaq stocks. For investors with less capital to invest, this may be an ideal way. For those looking to own only technology stocks, the iShares U.S. Technology (NYSEMKT: IYW) is a pure technology play.
3. Buy Small and Mid- Cap Biotechnology
The start of 2014 for the small and mid-cap biopharma group has been torrid. Positive exciting catalysts delivering greater-than expected (or even in-line) results have rapidly pushed selected names higher — a lot higher. The magnitude of these one-day moves has been astonishing, and more than the biotech teams at many firms are accustomed to seeing.
With big pharmaceutical companies having many of their top drugs come off patent, the search for additional pipeline strength has become relentless. We caution that these stocks can be extremely volatile and are not suitable for conservative accounts. Only the most aggressive and risk tolerant accounts should be purchasing these stocks. We recently ran a list of top names to buy priced under $10.
4. Buy Emerging Market Debt
Most firms on Wall Street are decidedly negative on emerging market (EM) stocks and have said so. This trade seems as though it would be counterintuitive, since most firms are so negative on the asset class. The unusual fact is that in rising interest rate environments, EM debt has often done extremely well.
Since 1994, there have been three periods of increasing federal funds rates. However, each of these periods has had unique factors that affected the way fixed-income investments responded. In each of these periods, EM debt has at the minimum held its own and sometimes outperformed on a total return basis. The reason for that is investment grade EM debt has much lower sensitivity to U.S. interest rates and unhedged currency adds return. It is important to note that is also adds volatility potential.
The analysts at Nuveen point out in a report from last year that foreign bonds respond to the interest rate cycles of their respective countries, which may diversify a bond portfolio and help protect against rising U.S. interest rates. One good way for investors to participate is the PowerShares Emerging Markets Sovereign Debt (NYSEMKT: PCY) ETF. This provides diversity and a 4.68% yield.
5. Buy Cyber Security Stocks
It seems like almost every day we are informed by the media that there has been a security breach somewhere. Banks, credit cards, Facebook accounts, email accounts, phone records and more. Target had more than 40 million accounts hacked right at the height of the holiday shopping season. Neiman Marcus announced over the weekend that its customers’ data may have been compromised. It may take some time before consumers again trust these retailers.
Cyber thieves are constantly finding new ways to get around even the most complex firewalls and security systems. This constant barrage of threats has turned what was initially a business designed for government security into one of the top areas in technology. Business and governments are now desperate to protect data and will pay almost any price to make sure they are safe. We recently covered the top cyber security stocks to buy for 2014.
Yes, 2013 was spectacular and investors were treated to an almost 30% gain in the S&P 500. While 2014 has started off slow, the overall outlook for the year is positive. Many firms are expecting low double-digit gains, which would still make for a very solid year. The five top trades for 2014 offer investors some conventional and unconventional ideas. As always, match your risk tolerance to the various ideas, and pick the trades that fit best in to your specific portfolio and investing plans.
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