You won't find them on any year-end lists. They're not the best, they're not the worst. Instead, they're the fair-to-middling stocks that more or less broke even in a year of superlatives.
They stand out simply because of this year's record-setting bull market. With the S&P 500 up by 26 per cent year to date, fewer than 20 companies in the index have posted a double-digit loss. More than three times as many have realized gains greater than 60 per cent.
For investors that poses a problem. Where do you look for next year's winners in a market that has already shot up so much?
It's unlikely that the big gainers of 2013 can repeat their spectacular feats, especially in an economy that's growing at only a modest pace. But this year's biggest losers are often seriously unattractive companies with grave problems.
Hence, investors may want to turn their attention to stocks that have been left behind by the bull market, but haven't actually lost much ground. It's there, in the middle ground, that buying opportunities may lurk.
"We're entering a period of time when the market is questioning whether this rally can continue," said John Stephenson, fund manager with First Asset Investment Management in Toronto. "I do believe it will be a stock picker's market going forward."
Among this year's mediocrities are some candidates that remain relatively unscathed by crisis.
Consider, for instance, the old guard of technology. While social media stocks have boomed, traditional IT and hardware stocks have languished. "Generally people are looking at this as a place where money goes to die in the tech world," Mr. Stephenson said.
Oracle
Oracle Corp. is a fine example of an established company that may have more potential for growth than the market is giving it credit for. “It’s transitioning to a new tech type of company, but it’s also a stalwart of older tech,” Mr. Stephenson said.
The company has become an important player in the shift toward cloud computing, yet trades at a 10-per-cent discount to its peers, according to Joel Fishbein, an analyst at BMO Nesbitt Burns Inc. “We believe the current investor sentiment might be overly negative and see a great opportunity to buy the shares,” he said, setting a $42 (U.S.) target on the share price.
Catamaran
Catamaran Corp. is another company that has been largely ignored by this year’s bulls. The pharmacy benefits manager was struck by concerns that Obamacare would compel U.S. employers to abandon company health plans. “There is a lot of anxiety over whether the company will get sideswiped,” said Alex Ruus, portfolio manager at BluMont Capital Corp. As a result, Catamaran’s share price fell by 6 per cent year-to-date.
Despite the concerns, the company should realize “strong underlying EPS growth over the next several years,” Lisa Gill, a J.P. Morgan analyst said in a recent report, which confirmed a $66 price target.
The U.S. housing market may also be harbouring some potential winners. While residential real estate stumbled in recent months, the recovery looks set to continue, with home prices still on the rise. But home builder stocks have largely gone sideways because of concern over whether the U.S. Federal Reserve will start to taper its stimulus program.
The prospect of slowing monetary stimulus, which would push borrowing rates up and pinch housing demand, kept investors on the sidelines of the housing recovery this year as the economic outlook improved.
“The interest rate risk is really concerning for a lot of the investors I talk to, so they moved out of it,” said David Williams, an equity analyst at Williams Financial Group in Dallas, Tex. “We’re just in a strange time where better economic data will mean higher interest rates.”
Horton
D.R. Horton Inc., which fell by 1 per cent this year, is Mr. Williams’s top pick in the sector. “They can build homes less expensively, they’re in every major market and they’re in more of the suburban areas,” he said, explaining his $26 price target. “We think they’ve got a long runway ahead of them.”
Another sector firmly in recovery mode is U.S. automobile manufacturing. With both Ford Motor Co. and General Motors Co. having posted solid gains this year, one dark horse candidate for playing the U.S. auto boom could be Carfinco Financial Group Inc., an Edmonton-based subprime auto lender.
The company, which caters to high-risk borrowers, entered the fast growing U.S. car loan market earlier this year. “The geographic diversification comes at a seemingly opportune time, as overall levels of non-prime auto loans are on the rebound, fully recovering from mid-2011 lows,” said a report by Dylan Steuart, an analyst at Jennings Capital, which applied a $14.50 price target to Carfinco’s stock.