The market gained 29% in 2014, which will be hard to repeat next year. Rates on the 10 year are expected to rise to the 3.5% range, but aside from REITs that should not impact the economy too much. REITs could be a buy in 2H14. The old bogey men of inflation, rising energy costs, a stagnate economy, and wars/political instability are off the current radar screen for 2014. Couple that with liquidity from falling bond prices and greater retail investment and we should be in the black in 2014.
Most forecasts call for the SP500 to posts earnings in a range of $130 to $135 next year. Applying, the historic P/E of 15 gets the SP500 to 1,950 to 2,025. Some are citing the market as currently being undervalued based on the backward P/E ratio, but I never put much credence on backward multiples in an improving economy.
As far as the drive stocks go, STX (56.94) & WDC (83.67) are up almost 100% in 2013 versus a 29% market gain and a 26% gain in IT stocks. So that raises a yellow flag! We could go higher based on the following: modest drive TAM growth, growth of cloud storage, penetration into Android tablets, significant growth of solid state storage revenues, cost cuts from easing of MOFCOM restrictions, and raising market multiples. I would watch these factors closely and I would NOT hesitate to take SOME profits if they don't pan out or we see a flat year.
I would look for turnaround stories in 2014 and the drive space has two: HTCH (3.22) & IVAC (7.51). A couple others are : ASYS (6.29), BP (48.10), SDRL (40.92) & UTEK (28.65). A couple high dividend stocks that still look attractive: BBEP (20.42), CODI (19.45), & NMM which is on sale today at $18.
HTCH remains a highly speculative play, so don't put your retirement money into it.
The last two quarters, HTCH stumbled because of some internal manufacturing glitches. This produced negative gross margins. I expect these issues will be behind HTCH this qtr and margins will be positive this quarter. Early last year when HTCH reported a smaller than expected loss, shares ran from $2 to $6.30.
HTCH also significantly increased sales to STX last qtr. THIS IS VERY IMPORTANT!
The ramp of DSA suspensions, growth of cloud storage, and increasing component count/drive should help increase shipments in 2014, thereby narrowing losses. Ramping suspension assembly in Thailand should also help reduce costs.
If WDC can get China to reduce MOFCOM restrictions, HTCH could see greater shipments to HGST which only buys enterprise suspensions from HTCH.
The option elves recently pushed SDRL down under $40 on concerns about rising rates, so I added to my position. SDRL has $10 B in LIBOR based debt. So, a 150 bpt rise in rates, will hit SDRL for an extra $150 M in annual interest expense.
However, SDRL has a growing $21 B order backlog, 4X 2013 sales, and estimates call for EBITDA to rise from $2.65/shr in 2013 to $4.50/shr in 2016 so rates rising is IMHO no big deal.
Also, Mexico is opening up its off-shore for drilling, which bodes well for SDRL. The Mexican off-shore is the biggest unexplored region in the world for oil outside of Antarctica.
SDRL has been raising its dividend, now at 9.5%!