These two Barron's stock picks for 2015 are risky bets

The calendar has turned to 2015, but the bad headlines have continued for two iconic U.S. stocks, General Motors and Bank of America.

General Motors Co.'s 2014 was, as a recent Bloomberg headline says, a year of "recalls and record sales," although investors and the general public are likely more familiar with the former. The company acknowledged its final recalls of 2014 on Jan. 2, starting 2015 with the same sort of news that filled the previous year's calendar. While the company issued earnings guidance Wednesday that pleased its advocates, the market still found reasons to send the shares in the other direction.

Bank of America spent much of last year estimating and re-estimating how many billions of dollars it would spend to continue cleaning up messes and misdeeds from the financial crisis, now five years in the rear-view mirror. On Thursday, the company missed earnings expectations, suggesting investors can now shift their worries in 2015 to its ongoing business.

So, run for the hills? You might be surprised that both companies are backed by numerous bulls who say this is the year things turn around. One prominent example: U.S. investing newspaper Barron's named both to its "10 Favourite Stocks for 2015" list, suggesting we're in for a year of big, market-beating gains.

Maybe so. But if Barron's and the bulls are correct, I fear shareholders may spend a good chunk of this year waiting for that promise to be fulfilled.

Let's start with GM. Analysts have been saying for some time that the company's postbankruptcy autos are far better products than the cars that soured many consumers on the auto maker. The company is strong in a number of growing international markets. GM's December sales were the strongest since 2004, says analyst David Whiston of Morningstar, who puts a $53 (U.S.) fair estimate on the company's shares, more than 50 per cent above Thursday's close of $33.43.

The Barron's argument: GM could reach $5 a share in earnings as soon as 2016, and "as that number comes into view," investors will bid up the stock from current prices that are a "deep discount" to the S&P 500. In the meantime, the shares pay a dividend yielding 3.6 per cent.

The first event starting this investor awakening could have been the earnings guidance GM issued at the Detroit Auto Show this week. And, indeed, GM offered strong targets across all its regions, calling for expanding profits and margins.

"At first glance, we thought that General Motors provided enough in its guidance to keep investors happy," according to Brian Johnson of Barclays. But the GM bears, he says, "are fixated on weak free cash flow and capital expenditure [guidance] and no sign of a dividend raise … it is still cast by many as a value trap."

And there is still the possibility that recall costs and penalties – although already accounted for by GM and factored into the bulls' models – may continue to dominate GM earnings announcements for some time, even as the underlying business improves. It may take a cessation of the recall news for investors to truly buy in to the GM story.

Bank of America seems finally to be past the worst of those issues – "litigation expense," a recurring cost in its earnings, was "just" $393-million in the fourth quarter of 2014, down from $2.3-billion in the year-ago quarter.

The bigger problem is that the bank closed 2014 by reporting a revenue decline and earnings miss. The Barron's buy thesis is that earnings per share should triple in 2015, to $1.48, and rise again to $2 in 2016. Notably, each percentage-point increase in U.S. interest rates would add $3-billion to the company's pretax profits, or 12 per cent of the 2015 estimates. "Look for B of A to return 20 per cent over the next year, as investors see cleaner earnings reports and healthy growth, and the financial-crisis hangover fades."

Ah, but one of the longest-running investment theses of the postcrisis era is "once interest rates rise … ." I use it myself, quite a bit. And yet, once again, they're actually heading in the wrong direction for financial stocks that would profit from an increase. In the meantime, the big U.S. banks' trading businesses are posting disappointing results, failing to make up for the interest-rate problems.

Both GM and Bank of America may well prove Barron's and the bulls correct this year. But they may better be placed on the 2016 top stocks list, instead.