The impressive trading action on Wednesday holds an important
lesson for investors. In the absence of any dire economic news,
investors are playing a bullish hand.
Earlier in the week, economic woes in Europe had pushed many to the
sidelines. With a sense that a fresh crisis in Europe can be
averted (at least as seen by the euro's rebound on Wednesday),
investors marked up stocks with big gains across the broad. By that
logic, a reasonably benign global economic picture in 2011 could
keep investors in a buying mood.
Where will they turn? Growth stocks. At this phase of the economic
cycle, investors tend to gravitate toward companies with the most
robust growth prospects. With that in mind, here's a look at
companies in the S&P 500 that are expected to at least double
their profits in 2011. If we are indeed on the cusp of an economic
upturn that lasts into 2012 and beyond, then profits for these
firms are likely to keep growing.
Even as these companies are expected to post solid profit rebounds
next year, their share prices have also been on the rise and most
don't appear to be bargains in the context of near-term profits.
Instead, if you think that 2011 is just the start of a profit
rebound, then it pays to look at these stocks in terms of their
peakearnings performance (I went back and looked at the strongest
year of profits of the last decade for each company).
When viewed in that light, some of these stocks are quite cheap:
The major steel and aluminum makers and a number of banks trade for
less than five times peakearnings . Then again, staffing stocks
Monster Worldwide (
Robert Half (
are no bargain, trading for more than 15 times their best year
Looking at peak profitability may be a bit misleading.
U.S. Steel (
benefited from runaway prices in 2007, and it's unlikely we'll see
such a bubble again anytime soon. I still think Alcoa can earn more
than $2 a share within a few years, which makes the stock pretty
appealing at a recent $13. [Read why I think it's
the best rebound play in the Dow
In a similar vein, I'm bullish on online brokers if individual
investors continue to show their enthusiasm for stocks once again.
E*Trade (Nasdaq: ETFC)
, which has rebounded from a very bad bet on mortgages, remains one
of the leading choices for retail investors, which
I noted recently
The long-term winners
Yet it's the regional banks and financial services firms that may
be the most appealing names in this group, as they have yet to
truly rebound from the 2008 economic crisis but are poised for
significant sales and profit growth in the next five years if the
U.S.economy can generate a sustained rebound.
For example, analysts think
can boostearnings per share (EPS) sharply next year to around
$1.70, yet they also think profits can rise more than +50% again in
2012 to around $2.80 a share. By next year, analysts may start to
look even further out, projectingEPS of north of $4 within a few
years. Meanwhile,shares trade not far above tangible
Comerica routinely offered adividend in the $2.00-$2.50 range until
thedividend was sharply cut in 2009. It may be a year or two before
thedividend payout moves back north of $2, but shares wouldyield
close to 6% if profits rise as expected and thedividend is
In a similar vein,
Huntington Bancshares (Nasdaq: HBAN)
may appear reasonably valued at around 13 times projected 2011
profits. But the fact thatshares trade for just three times peak
profits should get your attention. Huntington is heavily exposed to
the auto loan market, and if auto sales rebound in coming years as
many suspect, then this segment should be a solid driver for
profits. The company has long been bandied about as takeover
fodder, but it could also look to make acquisitions, as many
smaller regional banks could be digested in a profit-boosting
fashion. As a last bit of context, Huntington used to offer an
annualdividend of around $1 a share. Withshares now below $6, an
eventual return to that payout would be a major boost forshares .
Action to Take -->
It's important to play close attention to theeconomy . We may be on
track for further muddled growth in 2011 -- or we just might be at
the start of a
robust economic upturn
If we are indeed headed for faster economic growth, then many
investors will start to look ahead to find the great growth stories
of 2012 and beyond. The companies in the table above look like the
names to watch.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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