Top stock picks for 2011

TRADING individual equities is always a risky business for contracts for difference (CFD) traders. An ill-considered, poorly executed trade will leave your fingers severely burnt and your account balance in the red. But get it right and you’re on track to rake in the profits.

Even though equity strategists are cautiously optimistic about the prospects for the FTSE 100 and the European markets this year – with many expecting upside of about 10 to 15 per cent – some are tipping individual stocks destined to outperform the wider index.

Robert Quinn, chief European equity strategist at Standard and Poor’s (S&P) Equity Research, says that equities are only worth investing in when there’s a hint of a gamble. “This time next year, equities just won’t look as attractive,” he says.

His top 10 European stocks are mostly listed in north European markets, reflecting his belief that the peripheral markets will fare relatively badly. However, Banco Santander and Telefonica both make the cut. In terms of the former, Quinn points out: “Fears about the Spanish banking market are more than priced in, especially given the bank’s higher exposure to Latin America.” And the same applies to Spanish telecoms group Telefonica, which is less of a Spanish/European story than most investors appreciate, according to Quinn. Furthermore, he says: “The attractive valuation is leading to an estimated dividend yield of more than 8 per cent in 2011. Perhaps more importantly, this yield is well supported and could increase further in 2012.”

Quinn has also plumped for Credit Suisse, which in his view is probably one of the most profitable diversified financials and it has lagged both Deutsche Bank and UBS for no real reason.

Emerging market exposure is also a crucial feature of any single stock. Danish-listed brewer Carlsberg’s exposure to Eastern Europe and Russia offers interesting long-term growth prospects while French luxury goods group LVMH has exposure to the fast-growing Chinese and Asian high-end goods market through a diverse set of premium brands.

Quinn also favours two miners, Xstrata and Rio Tinto, and two energy service companies, Paris-listed Vallourec and London’s Amec.

He says he has focused on companies with high margins, such as German car manufacturer BMW, which has benefited from recent higher investments in fuel efficiency relative to luxury peers. But be aware that the stock had already done well in 2010, so traders might be tempted to take some profits in the early part of this year.

While not all of these stocks may come through this year and make a profit for CFD traders, you can use these single stocks to hedge your physical share positions or to amplify the effects of a long index trade. However you choose to trade, it is clear that seeking out companies with emerging market exposure, strong balance sheets and income potential as well as those that lagged their peers last year is the right way to approach this year.