10 stocks to watch

Professional investors are finding it increasingly difficult to find stocks to buy. The stock market is up 22 per cent since early June and the list of cheap stocks has evaporated before our eyes. As the rally powers on it will require more research than simply spotting high yielding stocks to get ahead this year. Here are 10 stocks to watch.

PLATINUM ASSET

MANAGEMENT

Kerr Neilson's fund's management company has underperformed the market for some time now. Over the past two months though, through outstanding performance, the group's funds under management have grown by just under 14 per cent.

Expect this growth to continue with Platinum heavily invested in a rising Japan and a recovering China.

Platinum is valued at about 15 per cent of its funds under management. This is high by any standards. Platinum has the best fee structure in the industry and it has enormous leverage to rising international markets. This stock could easily rise 30 to 40 per cent if recent performance continues.

BELL FINANCIAL

If you believe the market is going to travel higher for the remainder of this year exposure to a listed stockbroker is essential. Bell listed on the ASX when the market was hitting its high in late 2007. The stock traded at $2.30 a share but over the next five years fell back to 40c. In the past two months Bell shares have bounded more than 50 per cent higher to 63c a share. Don't expect a stellar profit for 2012 but the outlook commentary should be bright. The company has enormous leverage to stock market activity, printing a profit of $27 million in 2009, and falling to a loss of $1.8 million in 2012. With a market capitalisation of $163 million and excess cash of around $30 million the group is trading on about five times peak earnings. The shares could easily jump to $1 a share if the market keeps rising.

CAPRAL

Another area that is showing signs of life after a lull is residential property.

Housing starts fell to a decade low of 120,000 during the past year. Most economists are forecasting the market can climb back to about 160,000 dwelling constructions over the next two to three years to meet the undersupply.

Shares in aluminum fabrication group Capral are still languishing with investors scarred by $270 million of accumulated losses in recent years and the prospect of GPG selling its 47 per cent stake.

The company has about $16 million in cash and an enterprise value of $70 million. Capral has enormous excess capacity and if it increased production from 45,000 tonnes to 55,000 tonnes its EBITDA would jump to between $15 and $20 million. This means the stock could easily double.

DEVINE

Sticking with a possible recovery in the housing market, Queensland residential property developer Devine could have a big year. The group's near-term earnings will not impress, however the market will be eagerly awaiting commentary about any improvement in the market, especially in south east Queensland.

The RBA's decision to cut interest rates over the past 14 months has forced investors to look at the property market and since early December, Devine's shares have powered 50 per cent higher. Despite this spike the shares still trade at less than half stated asset backing of $1.98 a share. While the chances of climbing all the way to asset backing the stock could easily go from 91c to about $1.40.

RXP SERVICES

When a central bank starts cutting interest rates the first group to respond are consumers.

Months later, when they see end demand improving, companies start to spend as well. An area that should benefit from this dynamic is technology.

A group that has appeared on the scene over the past two years is RXP. Run by former Telstra operative Ross Fielding, the company has a market capitalisation of $43 million and net cash of more than $5 million. It has forecast earnings before interest and tax of $4.5 million to $6 million in financial year 2013. This should grow strongly in 2014 as a number of acquisitions contribute a full year of profits.

BANK OF QUEENSLAND

The regional bank has had a terrible time in the past 12 months, with escalating bad debts caused by a significant exposure to a moribund Queensland property market. This has seen the stock underperform the financial sector by about 15 per cent.

In more recent times, the need to provide for bad debts has abated and funding costs for the bank are falling. BOQ is trading on a fully franked dividend yield of about 6.3 per cent and the stock is trading at marginally below book value. All this points towards BOQ shares catching up to the pack in 2013.

AUTOMOTIVE HOLDINGS

Car sales have been firing in 2012 because of cheap financing. This scenario is unlikely to change in the next six to nine months. The share price in Perth-based auto dealer Automotive Holdings has been rising in tandem with car sales. The stock is trading on a PE multiple of 12.5 times this year's earnings.

Adding spice to the story is that rival Brisbane-based AP Eagers has bought just under 19 per cent of Automotive Holdings shares. A deal between the two would realise sizeable synergies and create tremendous value for shareholders of both groups.

BHP BILLITON

With virtually every major economic entity stimulating their economies in some form, there is a better than even chance global growth could accelerate this year from the current levels of about 3 per cent. Such a scenario would see interest rates around the globe rise from historically low levels. Interestingly, this is usually a terrific environment for resource stocks that flourish later in the economic cycle.

There are many ways in Australia to take advantage of this phenomenon but the safest way to play is through BHP that operates in virtually every commodity including energy.

HILLS HOLDINGS

Turnaround stories are fraught with danger but if it works investors can enjoy large gains.

Hills is in the middle of a major turnaround. A new management team is selling a string of assets to refocus the group of household electronics.

In the latest annual report the company had net tangible assets of about $335 million. This compares to the market capitalisation of $220 million. If management can offload some steel distribution and its shareholding in Korvest at reasonable prices this asset discount should close. It will also strengthen the balance sheet for future acquisitions. The stock could rise from its current level of 92c to about $1.30 if the turnaround works.

STW COMMUNICATIONS

If lower interest rates lead to a pick up in economic activity it will eventually flow into advertising and media spending. Many old world media companies have rallied hard this year, including Ten and Fairfax. Possibly a safer way to play a pick-up in advertising is to buy listed marketing group STW. Trading on a price-earnings multiple of just under 10 times with a yield approaching 8 per cent, the stock could kick higher as the year progresses and confidence lifts.

Matthew Kidman owns shares in Platinum Capital, Bell Financial, Bank of Queensland and Capral.