New Year, New Picks For List of 10 Favorite Stocks
Posted: December 29, 2015
Investors are hoping for a better year ahead after the sullen and choppy stock market of 2015.
I think the chances of that are good.
I suspect corporate profits will be a pleasant surprise. Interest rates are strikingly low, and the Federal Reserve will raise them, but slowly. The stock market as a whole isn’t cheap, but some stocks are.
That said, here are my 10 favorites for 2016.
Alaska Air Group Inc. (ALK) is on my list for a second consecutive year, and for the same reasons as last year: airline-industry consolidation and low fuel costs. Planes are flying fuller and cost less to fly. This helps all airlines, but I especially like Alaska Air because of its route structure (heavy on California destinations) and high profitability.
Cooper Tire & Rubber Co. (CTB) of Findlay, Ohio, makes replacement auto tires. With the average car on American roads being the creaky old age of 11, I think demand for replacement tires will be brisk. The stock sells for less than 10 times earnings, which is my kind of multiple.
DST Systems Inc. (DST), an electronic payment processor based in Kansas City, Mo., does a lot of bookkeeping work for mutual funds. The financial industry, which is DST’s main market, is out of favor. That’s why you can buy DST shares for just eight times recent earnings.
FlexSteel Industries Inc. (FLXS) sells furniture for homes and offices. It got its name from the springs inside its furniture, which were a relatively new technology when the company started using them in the early 20th century. I like the furniture industry because I think home construction is early in a recovery. I favor FlexSteel because of its consistent earnings — only one loss year in the past 15.
Gilead Sciences Inc. (GILD) is a biotech company in Foster City, Calif., with nearly two dozen drugs on the market and a larger number in the pipeline. Among its specialties are the treatment of hepatitis and HIV. Fear of increased price regulation has hurt the stock a bit, so Gilead shares can be bought for less than 10 times earnings. That’s remarkable in my opinion for such a successful company.
HollyFrontier Corp. (HFC) of Dallas operates refineries in Kansas, Oklahoma, New Mexico, Wyoming and Utah. Refiners usually benefit when the price of oil — their raw material — drops. My guess is that oil, recently $35 a barrel, will stabilize between $40 and $60 for quite a while, allowing refiners to make good profits.
Spirit AeroSystems Inc. (SPR) of Wichita, Kan., makes wings, fuselages and other parts for the aerospace industry, mainly for Boeing and Airbus. Its earnings per share should easily hit a record next year, as it has left behind an unprofitable private-jet venture. At 12 times earnings and less than one times revenue, the stock seems attractively valued.
Lear Corp. (LEA) is an auto-parts maker based in Southfield, Mich. Its specialties are seating and electrical systems. Its customers include all the major American auto companies and most major international ones, including Volkswagen, Honda and Toyota. New-car sales have been rising in the United States, and I expect that trend to continue.
Northrop Grumman Corp. (NOC) makes military aircraft, drones, electronics, surveillance equipment and other defense products. In October, the Falls Church, Va., company won a gigantic contract to produce a next-generation bomber. Military challenges from Iran, China, Russia, the Islamic State and others should keep the nation’s defense budget growing over the next several years.
PulteGroup Inc. (PHM) is the third-largest American homebuilder by revenue. Based in Atlanta, the company primarily sells mid-priced homes. Its average selling price last year was about $329,000. I like the homebuilding segment, as the industry has climbed only halfway to the high point it reached in 2005-06.
Candor compels me to say that the record of my new year’s picks has been undistinguished, with an average annual return of 4.1 percent, compared with 8.6 percent for the Standard & Poor’s 500 Index.
Why should this year’s picks do better? I can only say that my overall record as a money manager and a columnist leads me to expect that results will improve.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Disclosure: I own all 10 of the stocks recommended in this column in client accounts, and I own most of them personally.