Analysts and stockbrokers everywhere are predicting a big return for the Australian stock market in 2014. Forecasts for the All Ordinaries at the end of 2014 range from around 5500 to above 6000, indicating a return of between 3% and 13%, or more.
Foolish investors have two main options; invest in an exchange traded fund that tracks the S&P ASX 200 Index (ASX: XJO), such as the State Street ETF for the S&P/ASX 200 (ASX: STW), or purchase shares in a company with great management, a strong balance sheet and a competitive advantage over its peers. In most cases the second option will perform better over the long run and is favoured by Foolish investors.
When it comes to picking stocks for the year ahead, investors have to be careful not to purchase stocks just because of macro factors or because they underperformed in the previous year. Before investing, individuals should first look at a company's long-term growth prospects, the track record of management, strength of its balance sheet, and then whether local and global trends can benefit its outlook.
The team at Morgans Stockbrokers did just that when they delivered their outlook for 2014 in a note to clients. The group identified primarily cyclical stocks with growing earnings as their favoured picks for 2014. Cyclical stocks have been somewhat out of favour recently and are characterised by peaks and troughs in their earnings through an economic cycle.
The note highlighted that companies leveraged to a recovery in the Australian economy, improved consumer confidence and the lower Australian dollar were likely to outperform. Like many other analysts, Morgans have tipped Amcor (ASX: AMC) as their top stock pick for 2014 after it spun off its Australasian packaging arm into a new entity called Orora (ASX: ORA). Amcor generates the majority of its earnings from outside Australia and reports in US Dollars, meaning that its profit when reported in Australian dollars will be higher than previous years. The company has been a star performer for a number of years and is now targeting growth in the US, Europe and Asia. Morgans believes this should result in its price rising strongly compared to the wider market.
Morgans likes Harvey Norman (ASX: HVN) as their preferred exposure to an improving domestic housing market and consumer confidence, while global pathology company Sonic Health Care (ASX: SHL) is another company poised to benefit from a lower Australian dollar and the new health system being rolled out in the US.
Finally, BHP (ASX: BHP) and Crown (ASX: CWN) were the stockbroker's picks for exposure to improving global growth and growing global demand for commodities. BHP's long-life and low-cost mines provide a comprehensive competitive advantage over its peers, while Crown's monopoly in numerous Australian markets and exposure to global markets should sustain growing earnings in the years to come.
Foolish takeaway
The team at Morgans selected a quality group of stocks poised to benefit in the year ahead. Interestingly it's a similar list to that provided by a number of other brokers which this Foolish investor believes could be interpreted a number of ways. Some may say that the stocks are poised for a huge year with so much interest in them, while others may contend that they are overhyped and buying now could result in a capital loss over the year.
I think I'm somewhere in the middle, the stocks chosen (largely) have excellent long-term records and are led by highly competent and successful CEOs and chairpeople. All except for BHP outperformed the ASX 200 last year, most by a sizeable margin, and delivering a similar return this year will depend entirely on how much earnings grow by. Most will be impacted by global growth and could be in for a volatile year even if they end up rising solidly. Investors should consider their appetite for risk as the stocks chosen are certainly companies expected to deliver more growth than income.
