Stocks: Where to make money in 2014

NEW YORK (Money Magazine) In Money magazine's Make More in 2014, you'll find next year's economic outlook, where to find opportunities in stocks and bonds, the best moves for homebuyers, sellers and owners, and strategies for boosting your career. This installment: Tips on investing in stocks next year.

While housing and jobs improve as the economy gets going, equities move in anticipation of better times to come. For proof, see the double-digit gains the S&P 500 posted this year.

The "strengthening economy" theme, though, is already played out. Standard & Poor's says that U.S. shares are likely to keep climbing, but only by a modest 7% or so by late 2014.

Why? Valuations "are definitely not compelling," says Sam Stovall, chief equity strategist for S&P Capital IQ. The price/earnings ratio for equities jumped from a not-exactly-cheap 19 in January to 22, based on five years of average profits.

A rising P/E reflects higher expectations. Investors are paying more for stocks because they think earnings will grow even faster. To make money in this market, your stocks have to deliver profits. Or you must go with cheaper shares that have a greater margin for error.

THE STRATEGY: Add a foreign accent

In an increasingly expensive market, look for bargains. U.S. and international equities used to trade at similar levels, but today overseas stocks are about 20% cheaper based on five-year average profits. Says Paul Zemsky, chief investment officer for multi-asset strategies at ING Investment Management: "Europe is just beginning its recovery and is a lot less expensive than the U.S."

YOUR BEST MOVE

Boost your bet on Europe. Zemsky recommends increasing your foreign-equity stake by five to 10 percentage points. So if you normally keep 25% of your stock portfolio abroad, sell some of! your domestic holdings, which have had a remarkable five-year run, and raise your foreign weighting up to 35%.

You can use MONEY 70 pick Dodge & Cox International (DODFX) (Avg. P/E: 14.3), with more than 75% of its assets in Europe. For an even more targeted approach, go with Vanguard FTSE Europe ETF (VGK) (Avg. P/E: 14.2).

THE STRATEGY: Focus on revenue

As the economy accelerates, trim your exposure to defensive areas such as consumer stocks and utilities. Stick instead with sectors likely to see rising global demand, says R.W. Baird strategist William Delwiche.

YOUR BEST MOVES

Think industrials. Greg Thomas -- whose ThomasPartners dividend growth strategy, available through Schwab, beat the S&P 500 over the past decade -- favors global blue chips such as United Technologies (UTX, Fortune 500) (Avg. P/E: 16.5). Top holdings of Industrial Select SPDR ETF (XLI) (Avg. P/E: 17.5) include GE (GE, Fortune 500) and UTX.

Think technology. Business spending is expected to pick up in 2014, says Russell Investments chief economist Mike Dueker. And the productivity-enhancing tech sector will benefit. Jeff Layman, chief investment officer at BKD Wealth Advisors, favors firms such as Cisco Systems (CSCO, Fortune 500) (Avg. P/E: 11.0) that provide infrastructure parts and services, not consumer companies. Cisco, Qualcomm, and Intel are among the top stocks in the Technology Select SPDR ETF (XLK) (Avg. P/E: 15.8).

Make More in 2014

The economy: What's ahead in 2014 Bonds: Tweak your mix in 2014 Real estate: Look for value in in 2014 Jobs: Boost your career in 2014 How 2013 shaped up

PBR Stock Update – Why Petrobras Is Plummeting

Add pricing issues to long-suffering Petrobras (PBR) shareholders’ pile of worries. Shares of PBR stock are falling hard today, currently down 10% at press time.

Why the mass selling of PBR stock? Because of transparency issues for Petrobras on the back of a recent announcement of an 8% price hike on diesel fuel and a 4% hike on gasoline.

Including today’s tumble, shares of Petrobras stock are sitting about 27% in the red year-to-date.

PBR Stock Investors Worried About Transparency

PBR stock investors aren’t likely worried as much about the price hike itself … but the fact that Petrobras may not be doing enough to raise profits and stop the bleeding with respect to its earnings.

PBR has suffered more than $12.8 billion in losses over the last two years as prices for what it sells have been outpaced by the costs associated with producing that oil and refined products. Petrobras reported a $3.8 billion loss in its downstream/refining segment during the quarter because of fuel price subsidies in place. PBR is very much controlled by the Brazilian government, which has pressured Petrobras to keep prices for its gasoline and diesel at lows in order to rein in inflation.

After last quarter’s continued earnings losses, Petrobras promised to unveil a new pricing strategy to help turn the tide and boost profitability at the firm. But what the market got from PBR wasn't so great.

The issue for PBR stock shareholders is that the increase will apply only to the amount distributors pay before tax. Analysts estimate this will really only result in a 3% bump for PBR. Secondly, according to the official press release touting the Petrobras price increase, “the parameters of the pricing method will be kept strictly in-house for commercial reasons.”

The fact that no one really knows how or when Petrobras will calculate the price increases has truly spooked PBR stock shareholders. And several analysts have cited concerns about how to model the financial condition of PBR stock over the next coming quarters. That’s a huge concern.

Publicly traded companies thrive on trust. But PBR stock has become a “guessing game” for investors and analysts, with some now anticipating that the hikes won't actually happen at all under the adopted program do to that statement.

President Dilma Rousseff was reluctant to sign off on the new fuel price policy this year and Brazil's government could be just pulling the wool over investor's eyes. 2014 is an election year in Brazil. And with PBR still very much a tool of the people, the price gains could be muted.

Given the issues, analysts at Credit Suisse (CS) moved PBR stock into the sell category. Other analysts followed suit with downgrades and sell recommendations on Petrobras stock. That prompted mass selling from investors, with shares of PBR stock trading at twice its average volume.

Skip PBR Stock

For investors, the recent lack of transparency at Petrobras highlights the issues with the state-owned companies that are used as populist tools. PBR continues to suffer, while other independent oil stocks flourish. Given that that some analysts have pegged the price increases as smoke and mirrors or not even enough, investors may want to avoid PBR stock in favor of other producers.

The issues at Petrobras continue to mount and that doesn't make PBR stock a great portfolio play.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.