My list of favorite stocks for 2014 is heavy on autos and housing.
I believe we are in the midst of a 1950s-style recovery led by classic cyclical stocks such as automakers and home builders. With the average age of US cars at 11 years, I believe there is pent-up demand for new cars and active demand for replacement parts.
While I expect the economy to be strong, I figure the stock market will be choppy, with perhaps a 10 percent gain for the year, interrupted by at least one meaningful downturn.
Here are my top picks:
■ General Motors Co. still doesn’t get much respect, but it should. It has cast off the restrictions that came with being owned in substantial part by the government. Unlike Ford, it is selling a lot of cars in China. GM shares sell for a reasonable multiple: nine times expected 2014 earnings.
■ Lear Corp. makes auto parts, mainly car seats and electrical systems. It is wrapping up its fifth consecutive year of profit, and analysts look for earnings to jump about 25 percent in 2014.
■ Cooper Tire & Rubber Co. was slammed by investors when a takeover offer from Apollo Tyre of India fell through. But I find the stock attractive on its merits, and dirt-cheap at six times recent earnings.
I recommend three housing-related stocks. The housing industry is off its knees now but still has a long climb:
■ NVR Inc. Its balance sheet is in decent shape, with debt at 47 percent of stockholders’ equity.
As household formation picks up, people will buy more furniture. A little-known furniture maker I like is:
■ Flexsteel Industries Inc. Its name comes from days long ago when it made springs, but these days it offers a broad line of home and office furniture.
Houses need roofing materials, which is a specialty of:
■ Carlisle Cos., a small conglomerate. This stock is largely ignored by Wall Street, which means there is some potential for it to be “discovered.”
That leaves four other stocks:
■ HollyFrontier Corp., a refiner. The whole refining group seems attractively valued, Holly more than most. It has a competitive advantage in refining heavy oil, sells for nine times earnings, and yields 2.4 percent in dividends.
■ Olin Corp. produces chlor alkali chemicals and makes Winchester brand ammunition. Because of the ongoing gun control battle, it’s a controversial stock — but that’s why you can buy it for only 12 times earnings.
In a more speculative vein:
■ NetEase Inc. An Internet company, it provides computer games and e-mail in China. Its profit margins are high — nearly 47 percent. The steadily advancing sophistication of video game devices should help keep profits growing.
My final selection:
■ Spirit AeroSystems Holdings makes airplane components. It has been struggling with cost overruns, but civilian aviation is in a worldwide upswing, and I believe Spirit will benefit.
I own all 10 of these stocks for clients and personally. My list for 2013 returned 32.9 percent from publication on Dec. 25, 2012, through Dec. 27, 2013. That edged out the 31.7 percent return on the Standard & Poor’s 500.
John Dorfman is chairman of Thunderstorm Capital in Boston.