We like Ford, GM and Paccar as auto industry revs up

I believe 2013 will be a better year than 2012. While I don’t expect huge growth, I do see positive changes ahead. In 2013, I believe we will see more cooperation across the aisle in Congress, a critical factor in moving the economy forward.

As I’m sure you remember, in 2011, the debt ceiling gridlock caused markets to plummet. We first heard about the 2011 debt ceiling crisis in early January of that year, but discussions didn’t heat up until June and July with a deal ultimately being passed on August 2. The biggest S&P 500 gain of 2011 was in the month of October (10.9%), just a few short weeks after the debt ceiling package was passed.  Despite the extraordinary performance of the market in October of 2011 though, the S&P 500 ended the year at 1,258, back where it was on January 1, 2011.

Now it seems that history is repeating itself, and thanks to the fiscal cliff debate in Congress that began this past April the markets have been behaving accordingly as evidenced by the market’s performance this spring. Just after the fiscal cliff debate moved to center stage in Congress in April and in May the S&P 500 was down 6%.

Albert Einstein once said that the definition of insanity is doing something over and over again in the same way and expecting a different result. That’s why I expect (and hope) that Congress will finally behave rationally and stop the games and power plays that in the long term will just hurt everyone.

I also anticipate that in 2013, US companies will do better internationally, especially in the technology sector. I believe some of the global technology manufacturing will come back to the US. Apple and GE have already started this trend, and I expect these kinds of initiatives to branch out to other industries in the coming years.

The reasons for this are simple – software companies need more control over hardware than ever before and production costs overseas are rising. This does not necessarily mean shareholders will benefit immediately, but in the long term I believe this trend will be quite beneficial for the technology industry. After all, software development power mixed with available resources and a huge market is a phenomenon that would be unique to the United States.

No company in the world could even come close to competing with this ecosystem once hardware and software are being produced under the same roof, in my opinion. With Google (GOOG) acquiring Motorola, we also see another giant getting on board with this trend.

In 2012, I had great faith in the finance and technology industries, though not all investments were successful. I believe if one industry will flourish in 2013 it will be the automotive industry, which is already on a strong path to recovery.  Year to date US auto sales (for both new and used vehicles) have increased 11% or 15.4 million units bringing overall sales numbers close to levels seen 5 years ago.

While new car sales are not even close to levels seen 10 years ago, when it was common for the industry overall to sell above 8 million cars per year, last year 6 million new cars were sold in the US. In my opinion, this year the industry is on the track to sell a little more than 7 million. In November 2012, 564,000 new cars were sold and YTD 6.7 million have been sold, which means we will likely break the 7 million mark by the end of the year.

There are several reasons I believe that this market will expand in 2013. The first being that automobiles across the US are aging and people are finding it more expensive to repair an old car than to purchase a new one. The second reason is because cars have become more fuel-efficient in recent years.

With gas prices going through the roof, for some vehicle owners it may actually be more cost efficient to get a new car. Finally, I anticipate more new and used car purchases in the coming year because car loans are easy to get now since very few mortgage loans are being made, but banks are still sitting on cash that needs to be circulated.

I currently have positions in Ford (F), General Motors (GM), Paccar (PCAR) and Standard Motor (SMP). I plan to hold all of these positions through 2013. I believe new auto sales in 2013 will reach 8 million by the end of the year.

I’m a firm believer in dividend stocks. Not just because the only consistent income people seem to be getting from the stock market right now is in the form of dividends, but because I believe companies that give back to investors are more responsible and mature than companies not paying dividend stocks.

My investment strategy in the stock market is based on a few core principles. One of them: If you invest in a company you believe in, you should also benefit from their success not just in terms of capital appreciation, but also dividends from profits. More than 90% of the stocks in my portfolio pay dividends.

Dividends make up an important part of the overall revenue in the stock market. As I pointed out in my article “You don’t have to be brilliant to do well in the stock market, just don’t be stupid!”, when looking at Pepsi (PEP) over the past 5 years, 15.5% of the return came from dividends, this is huge, especially since in the same period the stock price grew just 1.9%.

Dividend paying stocks will continue to comprise the core of my portfolio moving forward, regardless of market conditions – after all, I’m a great believer in the work of James P. O’Shaughnessy, who concluded that dividend paying stocks have always done well in good times and bad times in his book, What Works in Wall Street, which is based upon several decades of historical data on the stock market.

While I’m optimistic about the US stock market, I believe that its performance in the years ahead will be mixed – we will have some good years and some bad years. The continual growth that we saw in the stock market in the late eighties and nineties will come around again, just not anytime soon. We are at least 8 years away from that, in my opinion.

This recession was very hard on many people, but recessions should not be wasted, we should learn from them and adjust to the future. I believe that this practice is what many companies and people across US are in the process of putting in place, and as I reflect on 2012, I am grateful for that.  As the New Year approaches, here’s hoping that as Frank Sinatra once wisely sang, the best is yet to come.

Performance discussed is net of advisory fees, and includes reinvestment of dividends or other earnings. Past performance is no guarantee of future results.

The investments discussed are held in client accounts as of November 30, 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Any index comparisons provided in the blog are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors. The NASDAQ-100 is a stock market index of 100 of the largest non-financial companies listed on the NASDAQ. The Merrill Lynch 100 Technology Index (MLO) is an equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and ADRs.

Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.