Jim Jubak: Trends and stock picks for 2011

Jubak's Picks12/20/2010 5:00 PM ET

The 10 best stocks for a volatile '11

With so much uncertainty and potential for crisis, the year ahead could be rough. I'm focusing on 3 clear trends -- and 10 stocks that will succeed because of them.

By Jim Jubak

2011 is shaping up to be a volatile year. The euro debt crisis threatens to expand to include Spain, before Greece and Ireland have even moved out of danger. The U.S. economy seems to be on a path of moderate growth, but the end of spending from the 2009 stimulus package in 2011 -- along with the uncertain effects of the Federal Reserve's $600 billion program to buy Treasurys and of the extension of the Bush administration tax cuts -- leaves the country poised between too much inflation and too little growth.

Plus, China's economy is in danger of overheating. But it's so hard to calculate the odds that the central bank will raise interest rates and cut growth down to 8% or so that I've actually suggested that investors watch next summer's vegetable harvest for clues. (Read "Focus on the Bank of China, not the Fed.")

But that doesn't mean you won't be able to make a profit, a pretty good profit, in 2011. As I noted in my post "Why 2010 was so volatile, and why 2011 will be just as wild a ride," this has been a wild year and yet, as of the beginning of December, investors were looking at a return of 10.64% for the first 11 months of the year -- once you adjust for inflation and dividends -- versus an annual average return of 8.71% for the Standard and Poor's 500 stock index ($INX) (after the same adjustments) since 1950.

Making money in 2011 won't be impossible -- just hard. It will be a year when you need to put all the trends you can identify at your back -- so that you have the best chance of beating market averages. And then you'll need to pay careful attention to individual stock picking.

Today I'm going to quickly lay out three trends that I think will be strong enough to pull your portfolio higher -- if you hitch your wagon to them. And then I'll give you 10 stock picks for taking advantage of those trends.

3 trends that hold true

Why start with the trends? Why not go straight to stock picks? In a volatile year, like 2010 or (as I project) 2011, the toughest challenge is staying invested. The second-toughest is knowing when to use the swings of the pendulum toward excessive fear to buy. (For more on this, see my column on investing when you fear the zombies are about to walk.)

You want to use market volatility to buy low -- and not let it send you running to the hills after you've sold low. The easiest way to do that is to indentify some longer-term trends that you want to own through a reasonable amount of volatility.

What are some of those longer-term trends for 2011? Here are three.

  • Food prices are headed higher, as are farm incomes. Speaking at the Bank of America/Merrill Lynch Global Industries Conference on Dec. 15, fertilizer company Potash of Saskatchewan (POT) said that by the middle of 2010 it had become apparent that, for the eighth time in the past 12 years, grain production would fall short of consumption and the world would have to draw down its stockpiles. In 2011, Potash estimates, it will take a 5% increase in grain production to keep pace with consumption. That will be a tough if not impossible task, because grain production has grown by only an average of 2% a year in the past few decades. Without a record increase in production, global grain stocks would fall to the historical lows of 2006 and 2007. That's certain to produce higher grain and food prices -- good for farmers and the companies that sell stuff to them but bad for consumers, especially poor consumers. According to the Food and Agriculture Organization of the United Nations, by November 2010 the year-to-year increase in the global food price index was 22%.

  • Commodity prices are rising, and there's a real possibility of supply falling short of demand for such commodities as copper. Encouraged by this, the global mining industry is raising capital-spending budgets for 2011 and beyond as fast as it can. A survey of global mining executives by the Financial Times puts mining capital spending at $115 billion to $120 billion in 2011. That would be a record, surpassing the peak of $110 billion set in 2010.

    Now, I can't tell you what the price of any commodity will be in 2011 -- too much depends on where the People's Bank of China comes down on inflation and growth in 2011. But I can tell you that mining companies are not going to cancel orders for capital goods on volatility in commodity prices, and they're going to be reluctant to cancel orders even on extraordinary volatility, because they're afraid of losing their place in the customer line. These companies remember from the last big commodities boom that supplies of capital goods are limited and suppliers can quickly ramp up to meet demand. Order early or forget about getting your order filled.

Continued: What about interest rates?

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