Frank Holmes looks ahead to 2014 and offers some surprising stock tips

As they weigh up the prospects for another record-breaking year, market analysts could be forgiven for thinking there isn't much upside left for U.S. stocks.

But Frank Holmes isn’t among them.

“I think a lot of people will be surprised that the market continues to rise,’’ said the Texas-based blogger and CEO of U.S. Global Investors Inc.(NASDAQ: GROW, Stock Forum), during a recent interview with Stockhouse.

“You will get a big correction, everyone will says it’s over. But the odds favour that the government and politicians will respond and they will do everything to keep the economy going,’’ he said.

Holmes has a vested interest in seeing stock prices and commodities go up. He runs a mutual and hedge funds company with $1.2 billion in assets under management and interests in gold, natural resources, infrastructure and emerging markets.

U.S. Global’s Holmes Macro Trends Fund, for example, uses a 10-20-20 model for stock selection, one that focuses on companies that grow revenue at 10 per cent, generating a 20% earnings growth rate and a 20 per cent return on equity.

But the veteran market watcher says there are plenty of reasons to be optimistic.

Aside from signs of strength in the U.S. economy, he says the weight of history favours a surge in the S&P 500.

“History shows that, in the first two years of a U.S President’s term, the market is sideways, or down. It is in the 3rd and 4th year that you usually get the biggest surges in the stock market,’’ he said.

Holmes is betting that after posting 51 record closes (at the time of writing) in 2013, the Dow will continue its ascent in 2014, probably after a correction.

“I think it will go higher unless government comes in and raises taxes, which is always a detriment to the economy.’’

Here are some of Holmes’s other predictions for 2014.

Gold

Since gold was under so much pressure in 2013, Holmes thinks the odds favour a resurgence. While preferring not to offer specific targets, he says gold’s normal volatility is plus or minus 15%. “So it would be nothing for gold to rally 15%.”

On the other hand, he says gold could just as easily fall below US$1,000 per ounce.

“We have always advocated that in a diversified portfolio, it is prudent to have a 10% weighting in gold and gold stocks. You rebalance each year. For the past 10 years you still have a higher return and lower risk with that model,’’ Holmes said.

Copper

A fixture on the mining conference circuit, Holmes thinks the most liquid of all the base metals could rise by roughly 20% from current levels.

He said the price of copper is highly correlated to the ongoing expansion of the (global) manufacturing sector as measured by several countries’ purchasing manager’s index (PMI). This is because the PMI is widely seen as a leading indicator for job creation and economic activity.

When you see strong PMI globally, then you see a strong pickup in demand for steel, copper, zinc and palladium.

Palladium

“I would think that palladium is the tightest of all the commodities,’’ Holmes said.

He says palladium could easily have a major spike up because of expected strong demand from the auto sector and supply issues in South Africa and dwindling Russian stockpiles.

Dividend-paying stocks

“I think that dividend paying stocks are going to continue to attract capital as more and more management companies are focused on that.”

Even in the tech sector management at many companies have been embracing a balanced approach to returning cash to shareholders, combining dividend growth with, in many cases, share repurchases.

Stock tips:

In the U.S. we love Mastercard Inc. (NYSE: MA, Stock Forum),’’ Holmes said. It is just a great company, boasting high profit margins and rising dividend payments.

Among speculative Canadian stocks, Holmes likes IOU Financial Inc. (C: IOU, Stock Forum).

The Montreal-based company provides loans of up to $50,000 to small businesses. CEO Philippe Marleau is a former.Merrill Lynch analyst.

Trading at 65 cents this week, up from 40 cents in November, IOU Financial has a market cap of $28 million, based on 46.5 million shares outstanding. The 52-week range is 64 cents and 30 cents.

In the gold mining sector, Holmes likes Alamos Gold Inc. (TSX: T.AGI, Stock Forum), Franco Nevada Corp. (TSX: T.FNV, Stock Forum), companies that operate high margin businesses and pay dividends. “Most of the gold mines don’t have a high margin business,’’ he said.

BHP Billiton Ltd. (NYSE: BHP, Stock Forum) is among the top holdings in the U.S. Global Investors group of funds. It is also a big dividend payer.

In January 18, 2013, U.S. Global Investors bought a 50% stake in Galileo Global Equity Advisors Inc., a Toronto mutual fund manager. The move gives U.S. Global exposure to a portfolio that includes a basket of small cap and mid cap energy service providers.