By Keith Richards
If you’ve noticed that certain sectors of the stock market are now yielding ground to others, you’re not imagining things.
There is, as I’ve noted before, a rotation going on .
Once hot sectors such as REITs, utilities and retailers have broken their long-term uptrends, as have such erstwhile darlings as Apple Inc. (AAPL-NASDAQ, $536.96) and IBM Corp. (IBM-NYSE, $179.70).
Taking their place are many names that were also-rans in the recent five-year bull market.
Here at Value Trend/Wealth Management, we’ve made a concentrated effort to find those stocks that were formerly treading water.
In other words, we’ve been looking for companies that have only just begun to break out of their long-term holding patterns.
Such breakouts indicate the emergence of a new, bullish rotation of capital into these formerly overlooked names.
With this in mind, I’d like to suggest you spend some time identifying the new market leaders for your portfolio.
It’s important you do so since it’s a good bet that on Bay Street, as well as Wall Street, all the “easy money” has now been made.
Simply put, it’s now a stock pickers market. Not only must investors learn to sell stocks that are slipping back into second or even third place, they must also be prepared to put their money into the new emerging growth candidates.
But before identifying who these candidates are, I’d note that those names now emerging as the next growth stories are nothing more than market stalwarts.
Yes, they’re old dogs. But they’re learning new tricks, reinventing the very business models that originally brought them fame.
Here are four such stocks, all of them blue chips, that we now hold in our equity portfolios.
Each of these companies has developed a successful business model, but have used its original products and services to do so.
More important, these outfits are now nurturing new growth through innovation, acquisition, as well as through the creation of disruptive technologies.
The first of the four is Texas Instruments Inc. (TXN-NASDAQ, $43.13), the Dallas-based high-tech giant.
We bought the stock 12 months ago when it broke out of its 13-year consolidation that had kept it below $40 a share.
And although the company no longer makes only calculators, this remains a core business.
Company broadens product line
But Texas Instruments has since added semiconductors, high efficiency batteries and power converters to its product line.
Not only has the company benefited from global growth in semiconductor sales, it will likely continue to do so.
Indeed, its revenue is being fuelled by its sale of analog and embedded processing products.
Overall, we believe TI’s strong product mix will drive higher margins in the months ahead.
For us, the company is a good holding for the next three to five years, potentially doubling its share price over that period.
Our second blue chip is The Walt Disney Co. (DIS-NYSE, $77.79). It’s hardly Mickey Mouse.
Having consolidated below $45 a share since 1997, the multi-media entertainment giant finally broke out in 2012, riding a strong uptrend that has yet to plateau.
Meanwhile, Disney’s growth engine has been fuelled by its purchase of Marvel Entertainment in 2009 and of LucasFilms in 2012.
No longer just a Disney-flick operation, the company is now a media content enterprise with a big theme park footprint.
Admittedly, Disney, in terms of some metrics, may seem expensive to value investors.
But we believe the premium is justified by the company’s best-in-class operations, as well as by its expected growth in cash flow.
In the interim, Disney’s theme parks and cruise ships continue to attract a growing number of guests.
And these folks don’t mind paying premium prices for the experience that only Disney can deliver.
Over the long term, we see the company growing even further, as it monetizes the stellar movies it got through LucasFilms such as Star Wars and Indiana Jones.
That’s because Disney has consistently shown that it knows how to profit from emerging trends in the entertainment industry.
No. 3 on our blue chip list is Microsoft Corp. (MSFT-NASDAQ, $37.17). True, Bill Gates’ baby may hardly be a little-known micro cap waiting for discovery.
But if you choose to ignore Microsoft, you overlook a solid investment opportunity.
For one thing, its shares are now technically bullish, having broken out of their 14-year ceiling of $34 in mid-2013. Moreover, for the last two quarters, Microsoft’s earnings have topped the consensus call.
In addition, new developments at the company could potentially lift its shares much higher.
True, Windows, Microsoft’s signature software, may now be a weaker growth engine, given lower sales of personal computers.
But the company has made inroads in cloud computing which is fast becoming a hot technology. It’s also scored with its gaming devices and associated software.
Moreover, Microsoft’s new CEO, Satya Nadella, has stressed the importance of innovation.
Indeed, Mr. Nadella, who’s been at the company for more than two decades, has necessarily been part of its technological evolution.
Because of that, he’ll likely ensure Microsoft remains focused on areas that will be both relevant and profitable into the future.
At the same time, it’s a good bet he’ll occasionally receive guidance from Mr. Gates himself.
The last of our four blue chip stars is American International Group Inc. (AIG-NYSE, $49), the U.S.-based financial services giant.
Since crashing to the ground six years ago because of its exposure to sub-prime mortgages, AIG has not only cleaned out its top management, but has paid off its government bailout loans.
Nonetheless, its stock has remained trapped below $48 a share for the past five years. A breakout above this would be technically bullish. It would also target substantial upside.
What might inspire a breakout? For starters, AIG’s new focus, as shown by its recent rebranding of its American General agent force as the AIG Financial Network.
Moreover, the company continues to restructure. In 2010, for example, it sold one business unit, American Life Insurance, to Singapore-based Pacific Century Regional Developments (P15-SGX, $0.22) for US$15.5 billion.
And its long-awaited sell-off of another unit, International Lease Finance Corp., to Holland’s AerCap Holdings N.V. (AER-NYSE, $38.98) for US$4.5 billion is expected to close in the middle of this year. That sale will pave the way for AIG’s results to be driven by its core insurance and financial business.
Moreover, continued success in AIG’s restructuring could easily see its shares double, or go even higher, in the next three to five years.
Keith Richards is portfolio manager of Value Trend/Wealth Management in Barrie, Ont.