My Ten Favorite Stocks for 2018
Posted: December 26, 2017
It a sacred duty of stock-market pundits to name their recommended stocks for the new year. So, here are my favorite ten.
I’ll start with a pair of technology stocks. Applied Materials Inc. (AMAT) of Santa Clara, California, makes a variety of equipment used to manufacture semiconductor chips. This includes wafer fabrication, deposition (putting a thin film on the chip surface), etch (removing the film in selected parts to route a circuit), and testing equipment.
In the past five fiscal years, Applied Materials has seen its sales grow from $8.7 billion to $14.5 billion. Earnings have grown even faster.
Lam Research Inc. (LRCX) if Fremont, California, is also in semiconductor equipment, and is best known as a leader in etch. Its return on stockholders’ equity was 30% in the past four quarters, its best showing since 2007.
I like emerging markets now. The U.S. market is valued on the high side, at about 22 times earnings. Emerging markets are cheaper, and they have younger populations and faster economic growth.
The SPDR S&P Emerging Markets Dividend ETF offers a mix of daring and caution. It’s daring because these markets are immature and volatile, with inferior regulation. It’s cautious in that this security contains only stocks that pay a dividend.
China is flexing its big-power muscles, Russia is opportunistically bellicose, the Mideast remains a powder keg, and President Trump strikes a harder posture internationally than his predecessors.
Therefore, I think it’s smart to hold at least one defense stock. My favorite is General Dynamics Corp. (GD) of Falls Church, Virginia, which makes warships, submarines, rockets, munitions, ranks and military electronics. It has been profitable in 14 of the past 15 years, and the past year has been the best.
A high level of international tension is usually favorable to gold. The SPDR Gold Shares exchange traded fund (GLD), is a convenient way to own an interest in the physical metal.
The price of oil dropped from more than $100 a barrel to under $30 from June 2014 to February 2016. Since then, black gold has been staging a halting but genuine recovery at about $58. My favorite energy play ow is Helmerich & Payne, a contract driller from Tulsa, Oklahoma. Analysts project a small loss for 2018 but I wouldn’t be surprised to see a profit.
Banks should benefit from rising interest rates, which may allow them to earn wider spreads between what they pay on deposits and what they reap on loans. One of my favorite banks is JP Morgan Chase & Co. (JPM).
The stock is reasonably priced at 15 times earnings. It offers a 2.1% dividend yield, and could easily afford to raise the dividend. And it is led by Jamie Dimon, whom I regard highly.
I also like Lazard Ltd. (LAZ), a New York investment bank that does a lot of work in mergers and acquisitions. Both the economy and the Trump administration seem to be conducive to an increase in merger activity.
In 2003-2006 America built more than a million homes a year. Then came a long plunge, with a trough of 306,000 in 2011. As of last year, we were back to half a million. Last month, the pace was above 700,000.
I like Toll Brothers Inc. (TOL) mostly because I respect the management (especially chairman Bob Toll, whom I consider unusually candid), and partly because I like its price point, toward the upper end of the spectrum.
For my final recommendation, I pick Sony Corp., based in Minato-Ku, Japan. Among its many enterprises are the PlayStation for home entertainment, components for Apple’s iPhone, and a movie studio. The studio was a weak point in recent years. It’s doing better now, so the company is firing on all cylinders.
My favorites for 2017 show a total return of 31.3% from Dec. 27, 2016 (when my last list was published) through Dec. 22, 2017. By comparison the Standard & Poor’s 500 Index returned 20.6%. The best gainer was NVR Inc., a homebuilder, up 106%. The worst loser was Antero Resources, a natural gas company, down 23.7%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Long-term my record on “Favorite Stocks for the New Year” is punk. I’ve averaged 6.3% on my recommendations, versus 9.7% for the S&P 500. I report this fact because if I don’t, no one will believe me when I report good or excellent results.
Disclosure: I own all ten of today’s recommended stocks personally and for clients.