Daimler And The Best Stocks Of 2013

With one quarter left to go, the Best Stocks of 2013 contest is settling into a two-horse race. Daimler AG (DDAIF) is in the lead with a 48% year-to-date return including dividends. Rick Pendergraft’s pick Mylan (MYL) is still well within striking distance at 39%. With three months to go, this race is still far too close to call.

Louis Navellier’s Sherwin-Williams (SHW), Jeff Reeves’ Intel (INTC) and Paul La Monica’s Qualcomm (QCOM) round out the top five with year-to-date total returns of 19%, 14% and 10%, respectively. As a point of comparison, the S&P 500 is up 16% year to date and the Dow Industrials 15%. So, taken as a portfolio, the top five are stacking up well.

At #6, Meb Faber’s contrarian recommendation of the Global X Greece ETF (GREK) is showing signs of life after enduring a brutal summer. It’s up by nearly 30% from its July lows and about 6% year to date.

Steve Freehill’s Two Harbors (TWO) and Jon Markman’s Femsa (KOF) both had great starts to the year but took a pounding during the summer “taper tantrum” and are now flat on the year. Greg Harmon’s infrastructure play Great Lakes Dredge & Dock (GLDD) is having a strong September, but the small cap is still recovering from a sharp sell-off in March. And Stephanie Link’s Vale (VALE) , which has had a terrible year along with the rest of the mining sector, is back from the dead. It’s up by a full 26% after hitting a 52-week low in July.

Taken as a single equally-weighted portfolio, the Best Stocks list is up a little over 9% year to date, including dividends.

With Daimler up 48% thus far, it’s fair to ask: is Daimler still a buy?

And to this, I would answer with a resounding “yes.”

Even after its recent run, the stock is still reasonably cheap. It trades for 12 times expected 2013 earnings, 0.5 times sales, and 1.5 times book value. Daimler also pays a market-beating 3.8% in dividends and happens to have nearly a quarter of its market cap in cold, hard cash.

The valuation numbers are roughly in line with General Motors (GM). And given that I consider General Motors attractive at current prices, this makes Daimler’s underpricing all the more apparent. Daimler is a higher-margin luxury automaker with better positioning among the emerging world’s nouveau riche. And while Daimler’s sales have not been completely immune to the effects of slowing global economic growth, Daimler’s customer base is far less sensitive to economic shocks.

Aside from Daimler’s attractive price—which should be catalyst enough—I see two catalysts that should propel Daimler higher.

First, China—Daimler’s most important growth market—appears to have bottomed for now. As I wrote in a recent article, anecdotal data such as property prices, rail volumes and government revenues all point to a Chinese economy that is expanding again. And the shocks to Chinese demand from earlier in the year—such as the crackdown on bribery and conspicuous consumption by public officials—look to have run their course.

Daimler expects to see demand for luxury cars in China rise 15% next year, and last month the company announced plans to invest €2 billion euros increasing its manufacturing capacity in China. In 2014 the company may or may not recoup the ground lost to rivals BMW (BAMXY) and Audi in recent years. But management sees a bright future in China, and I am inclined to agree.

Next is the stabilization of Europe. Yes, we’ve all seen the protests sporadically erupting in Greece, and yes, Silvio Berlusconi is making noise about bringing down the Italian government again. Yet the Eurozone bond market remains calm. Spanish bond yields are near their pre-“taper tantrum” levels of early May and Italian bond yields are only about 50 basis points their May lows.

I’m not expecting robust growth to return to Europe any time soon. But with investors already largely desensitized to the perpetual euro-zone crisis, I do see stability. And a stable Eurozone should help Daimler on two counts. First, it makes a pop in domestic sales more likely. But more immediately, it means that investors are more likely to award European stocks richer valuations.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long DDAIF and INTC. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.” This article first appeared on InvestorPlace.