The year started wonderfully well for the average investor in the US equity markets. The S&P 500 is up by over 5% since the start of 2013 and now it stands at around the 1,500 level. Lately, I have been talking with many money managers and a number of them are afraid the market may suffer a strong correction at some point in between the first and the second quarter of the current year. I hate trying to make predictions but I can only say that, even though the market has gone up strongly and despite those correction warnings, I have recently made three equity bets.
BP plc (ADR) (NYSE:BP)
I have talked a lot about the company and I finally decided to make an investment in it. I bought it at around $43 and I sold Feb calls with a $45 strike. I think the stock has tremendous upside potential and this upside shall materialize whenever the Macondo spill trial sees an end. My long term target for the stock is at $60. BP plc (ADR) (NYSE:BP) trades at a 20% discount to US peers and its 2013 8.2x P/E and 5.1x EV/EBITDA are extremely compelling. This, plus its growing (at a +12% year over year rate) 4.8% cash dividend yield were reasons enough take a long position in the company. I like recovery stories whenever they happen to be a in a cash rich sustainable industry. By now, the market is giving me some credit: BP is up by 6% since the beginning of the year.
Telefonica S.A. (ADR) (NYSE:TEF)
The dividend for this company has been cut to 0% and earnings per share are expected to fall again in 2013 from just over 1 euro in 2012 to 90 cents. That said, Latin American fundamentals are strong and the management is taking the right approach to TEF´s high leverage and competitive problems in Europe. I have been watching the stock for over two years and I have just decided to go long. I bought TEF at $14.50 and I plan to hold it for the long term. The company currently trades at 2013 12x P/E and 5x EV/EBITDA with its net debt standing at 2.7x EBITDA. I expect debt to be reduced to 2x by the end of 2015 and the company to resume its dividend by the end of 2014.
AK Steel Holding Corporation (NYSE:AKS)
Goldman Sachs recently recommended selling AKS. I disagree and I just made a bet buying the stock at $4.08 (8% down for the day). The company is an ultra leveraged play on the US steel industry and I think this will be a turning year for this specific industry. AKS should benefit above most producers. Thanks to its recent equity and debt issuances AKS should not have any financing problems at least until 2018 and its Capex efforts are being correctly directed to ameliorate its cost efficiencies and competitiveness. The upside for AKS equity investors may come from better operating results starting in 1Q 2013 and from an increase in M&A activity within the steel industry starting at some point next year. AKS trades at 2013 16x P/E and 5.2 EV/EBITDA, but results are expected to boom from this year and on. I think the US economy is into a continued rebound mode and AKS is a great bet into this trend.