Investing outlook for 2015: What will be big

Finding undervalued investment opportunities in the U.S. stock market is getting ever more challenging.

Major U.S. stock indexes continue to flirt with all-time highs and the bull market is now heading into its sixth calendar year.

In this kind of market environment, it may be worth looking at the sectors and companies that were beaten down in 2014 for potential turnaround plays.

2015 outlook

Investors who find the comeback stories before they appear on the covers of business magazines are sometimes rewarded.

In that spirit, here are some unloved stocks and exchange traded funds that, though risky, could surprise on the upside in 2015.

India

This emerging market has long been overshadowed by faster-growing China. Maybe not in 2015.

India’s growth rate should rise from a projected 5.6% this year to 6.4% in 2015 according to the IMF and the World Bank.

China, meanwhile, has been downshifting from 10% growth rates to around 7%, and may heading lower in coming years.

If India looks attractive to you, India-focused funds such as the WisdomTree India Earnings Fund (EPI) and the iShares MSCI India ETF (INDA) might be worth a look.

Thanks to the economic policies of Indian Prime Minister Narendra Modi, some analysts argue that India currently has the best economic prospects compared to that of Brazil, Russia and China, the other three so-called BRIC emerging markets.

Energy

The sell-off in energy stocks was fast and furious in the last quarter of 2014. And few expect a rebound in oil prices this year.

Goldman Sachs (GS) is forecasting long-term crude price of $75 a barrel.

And OPEC’s recent decision not to cut production to eliminate an oil-supply glut may push prices to $60 a barrel short-term, according to firms including Nomura Holdings and Deutsche Bank AG.

That outlook has battered energy and production stocks such as Exxon Mobil (XOM), Chevron (CVX), Halcon Resources (HK) and Chesapeake Energy (CHK).

However, as Covestor manager Ben Dickey, who oversees the Pure Growth and Growth Plus Income portfolios, recently pointed out in a post, not all energy stocks are necessarily facing a tough short-term outlook.

The midstream sector, companies deriving income from fee-based revenue through their pipelines and natural liquid gas (NGL) processing, are shielded from price swings in hydrocarbons.

Dickey likes Enterprise Products Partners (EPD), which owns pipelines, processing plants, NGL fractionators, and condensate processors.

Another holding is Kinder Morgan (KMI), which has completed its acquisition of all their MLP units and now is operating as a C Corporation.

Sony

That’s right, Sony (SNE).

The diminished Japanese tech icon has been pounded in the business press for its poor performance and its handling of a recent hack of the company’s sensitive emails and films such as The Interview.

Yet while Sony is forecasting to lose 230 billion yen ($1.9 billion) for the fiscal year that ends in March 2015, its shares have been on a tear, and finished up 43 percent in 2014.

Sony has delivered a one-year return that’s on par with that of Apple (AAPL) and is one of the top performing stocks in Japan in 2014, easily beating gains of about 9 percent in Japan’s Nikkei 225 and Topix benchmark indexes.

The majority of Sony analysts tracked by Bloomberg continue to have buy ratings on the stock and their average 12-month share outlook suggests a 10% upside from current levels.

These Sony bulls are betting that but a restructuring push by Sony Chief Executive Officer Kazuo Hirai and his new Chief Financial Officer, Kenichiro Yoshida, will return the company to profitable growth in 2015 and 2016.

Tesco

The British retailer’s stock tumbled almost 50% in 2014 thanks to a messy accounting scandal that led to the ouster of top executives.

Last October, Covestor manager Felix Tong, who oversees the Concentrated Risk portfolio, started accumulating Tesco (TSCDY) shares.

Tong argued in a post the sell-off is overdone. Tesco still holds the largest market share of the U.K. grocery market and economy of scale its competitors cannot match.

Others see value in Tesco as well despite the accounting issues at the company.

Recently private equity firm TPG has offered $3.2 billion for Tesco’s clubcard subsidiary.

Nobody can be sure the worst is over at Tesco and other analyst opinions vary widely.  Still, if Tong is right, the upside from the company’s stock depressed levels could be substantial.

Finance

Banks and brokerages have been scandal-prone since the end of the financial crisis back in 2009.

Yet Wall Street CEOs have done an admirable job fixing their balance sheets and improving risk management.

With interest rates set to start rising in 2015 and 2016, and the U.S. economy on solid footing, the sector’s earnings and dividend payout outlook look good, according to research firm Zacks.

As a result, suggests Zacks’ analysts, ETFs focused on finance such as the SPDR Financials ETF (XLF) and Vanguard Financials Index Fund (VFH) may be worth consideration in 2015.

Here’s a useful list of other financial sector ETFs.

Takeaway

None of these investments are a sure thing of course.

But in a market that’s getting a little on the pricey side, investors need to work harder at finding the turnaround plays before they fully surface.

Such is the current market environment. Good hunting.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.