Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Director of Research Stephanie Link joined NBR to discuss transportation and aerospace stock picks for 2011. (Watch video and see transcript)
NEW YORK (TheStreet) -- This has been a year for theme investing.
The themes we are most bullish on are the auto industry, aerospace and within technology, the data center. There are also a few opportunities to be had in deep-value financials.
The auto and truck markets are recovering after years of underproduction and plant closures that has left the industry with fewer companies. The aerospace story is also one of better demand and less supply, as well as new product introductions from the leading manufacturers.
And within technology, corporate IT spending continues to improve, and as managers look to reduce costs, increase productivity and improve return on invested capital, they turn to storage and the data center for help.
We've chosen to play the auto industry through
. Johnson Controls is the leader in auto parts, batteries, and heating, ventilation and air conditioning equipment and has the dominant market share in all three divisions. It has a strong balance sheet and built a better company during the downturn through multiple acquisitions, expanding its overseas presence. The stock has had a nice run but still remains a core position in the fund.
GM is our other car name because it is a cheap way to play the economic cycle, and offers an interesting turnaround story. It has new products, more efficient manufacturing, an improved balance sheet, and terrific exposure in the international markets (boasting No. 1 share in key emerging markets).
In the truck market, we've chosen
, the world's leader in engines for trucks and large industrial equipment. Demand has been improving over the past year thanks to the age of the truck fleet (it's at 20 -year highs), changes to emission standards around the world and the recovering global economies. More than half of Cummins' revenues come from international and the company is dominant in the BRIC nations (Brazil, Russia, India and China), but 2011 will be the year of the North American truck recovery -- management expects this market to grow 60%.
The stock has been a monster this year, but the company's strong restructuring effort has yielded impressive operating leverage, which will lead to higher earnings than analysts expect - -- I believe the company can post $8 a share next year, making this still a cheap stock.
: In aerospace, the best play is
, the dominant U.S. company in the sector. Not only will BA gain from growing demand (and financially healthier customers), but the company will also benefit from the eventual launch of its 787 Dreamliner airplane --- the world's largest and most efficient wide- body aircraft. Although the plane has seen several delays, it will likely be delivered in 2011. In 2012, research-and-development costs will decline and margins will improve, providing significant earnings power to the company for years to come.
: The cheapest way to play the data center and storage market is through
, the largest name in the industry. EMC's full suite of data-center products -- hardware, software and services -- makes it the vendor of choice in the industry because it offers a total solution for its customers, - and its portfolio just expanded with the acquisition of Isilon. It also has an 80% stake in the hottest server virtualization company in the game,
. EMC is poised for double -digit earnings and revenues growth next year, and excluding the cash and the VMW stake, the stock trades at seven times earnings (below its long-term average of 9.6 times).
Another cheap technology play with positive catalysts is
-- it plans to launch two new products next year as it integrates the recent Sun Microsystems acquisition.
: Other ideas we like are the deep -value financials. Our favorite is
, which is trading at 12 times earnings for a company poised to deliver double -digit earnings growth. The company should benefit from an improving credit cost cycle (that has just begun) and the return of the consumer and business customer.
-- Written by Stephanie Link, director of research & vice president of strategy for TheStreet.
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Stephanie Link is the director of research & vice president of strategy for TheStreet.com. She is the co-portfolio manager for Jim Cramer's premium investing service, Action Alerts PLUS and works daily on the strategy and stock picks chosen for the portfolio. Stephanie is also responsible for recruiting talent for the paid sites including options, technicians and fundamental contributors. Prior to joining TheStreet.com, Link worked on Wall Street for 16 years. She spent nine years at the Prudential Equity Group as a managing director in U.S. institutional sales and as the New York sales manager covering top national accounts. She was the managing director of equity research in her final year at the firm. Prior to that position, she worked at Dean Witter as an institutional sales person for six years. Link's investment specialties include large-cap core stocks as well as value ideas.