2013 has been an excellent year for investors in high-yielding stocks. Record low interest rates have pushed conservative investors from term deposits and bonds into the higher-risk Australian share market in the search for a reasonable return on their money.
With term deposits yielding only 4% in most cases, a $10,000 investment in NAB (ASX: NAB) at the beginning of the year would now be worth $14,000 and have delivered $760 in fully franked dividends.
The big four banks now trade at historically high price-to-earnings ratios and many market commentators have questioned whether they can deliver similar returns in 2014, when they are forecast to grow earnings by only 5 to 8%.
While the hunt for yield was a key theme for 2013, the team at the Australian Financial Review has highlighted the following key themes for investing in 2014:
- Outperformance by companies exposed to the US recovery and overseas income,
- Avoid the lackluster performance of the Australian business investment environment, and
- Renewed focus on earnings-per-share growth.
The following three companies satisfy the conditions of Foolish investing and suit the key themes for 2014.
Crown Resorts (ASX: CWN)
Crown owns and operates a range of casinos and entertainment complexes in Australia, London, and the United States, and controls a 34% stake in the Melco Crown (NASDAQ: MPEL) joint venture that develops and owns casinos and entertainment resorts in Macau. The company is exposed to the US recovery and lower Australian dollar, which is expected to boost tourism and consumer spending.
Interestingly, Crown's stake in Melco Crown is currently worth around $7 billion, or nearly 60% of Crown Resorts' market capitalisation, however Morningstar analysts attribute 70% of the group's valuation to its two Australian casinos. This indicates that the market may underestimate the Melco Crown holding or the performance of the Australian casinos moving forward.
Crown's management team includes vast gaming experience and the company controls the Perth and Melbourne gaming markets. Additionally, Crown is 51% owned by billionaire chairman James Packer's family company Consolidated Press Holdings. Management's stake in the company is large and, importantly, growing.
Crown has all the hallmarks of a Foolish investment, and has a healthy future with significant investment being undertaken to renew facilities and build new complexes to grow earnings over the long term.
BHP Billiton (ASX: BHP)
Investors in Australia's big miners have had a forgettable year as constant speculation about a Chinese hard landing and the end of the mining boom conspired to draw investors away from the materials sector.
Things are looking up however, as the Chinese hard landing did not eventuate and global resource prices have remained at long-term averages over 2013.
BHP's experienced management team has focused on removing non-core assets, maintaining diversified income streams, and scaling back capital investment over the past 18 months, after years of expanding capacity at all costs. Cost-cutting and efficiency savings through the business should leave BHP with huge cash reserves for increased dividend payouts, or potentially, sensible capital expenditure on a large project such as the Olympic Dam expansion in South Australia. Both could be catalysts for a share price revival in 2014.
BHP is forecast to deliver 10% earnings per share growth in 2013/14, and as a net exporter will benefit from a lower Australian dollar.
Aurora Oil and Gas (ASX: AUT)
Aurora Oil and Gas produces oil and gas from Eagle Ford shale in South Texas. The Eagle Ford is the second-largest oil field in the United States and the fifth-largest in terms of shale gas production. Aurora controls 22,000 acres in the Ford and at the end of 2012 had equity proven, probable and possible (3P) reserves of over 165 mmboe. This represents a reserve life of around 25 years at 2012 production levels.
In order to extract the oil and gas from its fields, Aurora has a joint venture with Marathon Oil LLC (NYSE: MRO) to operate the wells. In an analyst briefing in early December, Marathon noted a potential increase in production capacity of between 40% and 50% in 2014 compared with 2013, and a doubling of production between 2013 and 2017. Additionally capital expenditure is due to decrease with operational efficiencies giving cost savings over time.
Aurora represents a higher-risk but higher-return investment. The company controls quality land and has a good track record so far of delivering on guidance. As an aside, management ownership of the company is healthy and Aurora is a beneficiary of a lower Australian dollar and stronger US economy.
Foolish takeaway
Investing for short-term gains is foolish and can often lead to heartache for investors of all experience levels. Short-term investing themes can instead be used to identify undervalued or over-sold companies in sectors likely to outperform over the long term. Of course, any investment must satisfy the Foolish investment philosophy, and the three companies above all have strong management, long futures, and a history of delivering good returns for investors.
