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The 10 best stocks for 2007 . . .
I'm only six words into this column and already I see trouble ahead. The problem, you see, is that with the big-picture outlook for 2007 so murky -- even if the new year is less than a month away -- it's hard to figure out which stocks will be best suited to profit from the big trends in 2007. If you can't pin down the trends, it's really hard to pick the shares that will make money because of those trends.
But never fear. Not everything is murky for 2007. If we don't know much about the big trends -- the health of the economy or the direction of interest rates -- there are medium-sized trends that can still deliver profits to the investor who's on the right side of the curve.
So I'm going to start this column by separating what we don't know about the big picture for 2007 from what we do know. Then I'm going to give you 10 stock picks that will profit, in my opinion, from the trends we do know in 2007.
Later this month, I'll follow up this top-down stock picking with two bottom-up sets of picks. In those two later lists, I'll ignore the big-picture trends for 2007 to pick first 10 stocks that you might want to buy simply because of the great stuff that's going on at the company (my Dec. 12 column) and then follow that with 10 stocks that you might want to buy simply because they're so cheap (my Dec. 19 "Dog Stars" column).
Missing puzzle pieces
What we don't know about the big picture for 2007:- The growth rate of the U.S. economy: Recent data point to the Fed's wished for soft landing (Q3 GDP growth came in at 2.2% in the latest revision); growth slow enough to raise fears of a recession (factory orders dropped by 4.7% in October, and durable goods orders dropped by a huge 8.2%); or, growth fast enough to raise the odds that the Fed will raise rates again. (The ISM Services Index climbed to 58.9 in November, up from 57.1 in October and way ahead of the 55.5 consensus expectation by economists. Any number above 50 shows that the service economy is expanding.)
- The direction of U.S. interest rates: The U.S. Federal Reserve has recently been at pains to convince the financial markets that the Fed's next move is most likely to be to raise interest rates again. The financial markets haven't been convinced. Yields on the 10-year Treasury note are still declining, and the market has priced in about an 80% chance of an interest-rate cut in March and almost 100% certainty of a cut by May from the current 5.25% to 5%.
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- The level of U.S. inflation: After signaling that inflation might be under control by keeping rates steady at its August, September and October meetings, the Federal Reserve has started to talk tough on the dangers of inflation again. This may have more to do with the slide in the U.S. dollar than with actual inflation worries (see my Dec. 5 column, "Fed has lost control of interest rates.") But the inflation numbers are ambiguous at best. The headline inflation rate dropped to 1.3% in October on lower energy prices, but the core rate, which removes volatile food and energy prices from the index, is now at 2.9%, the highest rate for the decade.
- The direction of oil prices: After hitting a closing high just shy of $80 a barrel in July, oil prices slid into the mid-$50s before rallying into the mid-$60s. Find a trend in that! There seems to be plenty of oil to meet demand at the moment, but the market continues to react with big moves to the upside on relatively minor shifts in weather forecasts and OPEC (Organization of Petroleum Exporting Countries) production quotas.
The trouble with growth, the dollar and oil
What we do know (with reasonable if not 100% certainty) about the big picture for 2007:- Economic growth will be higher outside than inside. Even the optimists in the White House are forecasting slower GDP growth in 2007 with a strong possibility that growth will drop to 2.5% for the year. Some private-sector economists are calling for growth of 2% or less. In contrast to sinking confidence in the United States, business confidence is climbing in Europe and real growth there is currently forecast to hit 2.4% in 2007. Business spending continues to rise in Japan as well -- climbing by 12% in the third quarter, the third straight quarter of double-digit growth. Forecasts now call for 2.2% growth in Japan in 2007. So both of the globe's notoriously slow-growing economies could, according to some projections, outgrow the United States in 2007. Although that's uncertain, nobody expects anything but another year of outperformance from China and India, with growth rates in those economies projected at 9.5% and 7.3%, respectively, in 2007. The International Monetary Fund projects economic growth of 8.2% for 2007 in Asia, excluding Japan. (For more on this, see my Nov. 11 column, "Take your portfolio overseas for 2007.")
Video on MSN Money: Jubak's Journal
Data drives investors crazy: As more and more third quarter data comes out, more and more investors are looking for an edge in 2007. MSN Money's Jim Jubak warns that using 2006's data may not be the best way to approach your 2007 investing. Click here to play the video.
- The U.S. dollar will remain weak and is likely to slide lower. Certainly any weakness in the U.S. economy and the huge U.S. trade deficit won't help, but the dollar's slide in 2007 is almost guaranteed by the international interest-rate cycle. The U.S. Federal Reserve has stopped raising interest rates, but the central banks of Japan, the European Union, India and China are still in rate-increase mode. As these rate increases close the yield gap that currently favors the U.S. dollar, the dollar becomes relatively less attractive to global investors.
- Oil prices will remain high by historical standards. I don't have any idea whether and when oil prices will spike back toward $80 a barrel or test $55 (again) or $50. But I do know with reasonable certainly that oil prices will stay high enough in 2007 to keep oil-company exploration and drilling at high throttle and to attract capital to high-cost projects ranging from Alberta's oil sands to Qatar's liquefied natural gas plant to windmills in Spain and ethanol plants in Iowa.
- Money will remain cheap in the global markets. Let's be clear -- the huge wave of liquidity that the Federal Reserve and other central banks released on the world to fight everything from the scourge of Y2K to the dot-com collapse is still largely sloshing around the world's financial markets. Yes, interest rates are going up in Europe and Japan, and they have gone up in the United States. But in historical terms, money is still cheap. Hence the global boom in mergers, acquisitions and buyouts to take public companies private. In the United States, 2006 is within striking distance of the 2000 record of $1.5 trillion in mergers and acquisitions. This boom won't stop in 2007. In fact, the weak dollar may just accelerate the trend by making U.S. companies look cheap to overseas investors armed with yen and euros.
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