Stock of the Week
Stocks for 2016
After a negative 2015, the good news is most Wall Street analysts aren't expecting much from 2016. On average analysts are expecting 5% to 7% returns if that. Through history, the S&P 500 averages over 9% a year. Looking back at the S&P 500 over the last 25 years, the S&P has generated 3% return or less 10 times or 40% of the time. Only twice did the S&P 500 follow up a negative year with another negative year. Both times were 2001 and 2002 when the S&P 500 was working off the tech bubble of the 90s when the S&P 500 PE rose to 25 times earnings. Currently, the S&P 500 is trading for 17 earnings, but the earnings of the S&P 500 has a large asterisk due to what earnings the energy sector can generate if anything. The other eight times in the last 25 years the S&P 500 fell or rose only 3%, the following year the S&P 500 generated an annual return of 20.75% or twice the annual return. So by December of 2016, investors may be very happy with their returns. The downside may be that the first half of the year, the Wall Street prognosticators may look correct. So with 2016 upon us, where do we want to invest?
The safe bet seems to be blue chip dividend stocks. With most companies generating strong cash flow, the dividend yields keep going higher even as the major averages stalled. Telecom and consumer staples are a good place to start. AT&T (T) yields 5.5% while Verizon (VZ) yields 4.8%. The autos are another high yielding sector. Ford (F) yields 4.22% and trades for just 7 times earnings. GM (GM) yields 4.17% and trades for just 6 times earnings with plenty of large investors like Warren Buffett and David Tepper counted as shareholders. Another high yielding sector is energy for good reason. Many energy stocks may need to cut their dividends next year. If you want to invest in energy, it's best to go with the best quality. We highlighted three energy stocks Conoco (COP) yielding 6.2%, Chevron (CVX) yielding 4.7%, and Exxon (XOM) yielding 3.7%. Each made statements they would do whatever it takes to maintain the dividend. In the Industrial space, GE (GE) had a good 2015. But even with the run up, the stock still yields 2.94% although it trades for a hefty 21 times earnings. The one theme with these high yielding stocks is they may not provide much capital appreciation at least in the first 6 to 9 months, but then again you don't need much in capital appreciation when you're get 4% to 5% in just dividends.
My favorite segment of dividend stocks yield 2% to 3% with above average capital appreciation potential. The financials are a good place to start. With a rising interest rate environment and the financial crisis behind us, the banks and other financials look good. The biggest and best, JP Morgan (JPM) yields 2.6% and trades for 11 times earnings. Similarly, Wells Fargo (WFC) yields 2.7% and trades for 12 times earnings. My favorite is Goldman Sachs (GS) yielding just 1.4%, but trades for just 9.5 times earnings. Investors are also bullish on tech to remain strong. The biggest and best, Apple (AAPL) still looks good. Posting its first negative year since 2008, Apple yields 2% and trades for 10 times earnings and with the largest cash hoard and buyback in history. Microsoft (MSFT) is also looking like its old self expanding sales and earnings in the cloud space. Microsoft yielding 2.6%, but a hefty PE of 17 times earnings. Seagate (STX) and Western Digital (WDC) are at the other end of the tech spectrum, yielding 6.8% and 3.3% and both trade for 8 times reduced earnings estimates. The fundamentals for both are cyclical, but the valuation seems to be pricing in a lot of the risk.
Besides tech and financials, healthcare continues to be a safe bet. The blue chip drug companies include Pfizer (PFE) yielding 3.7%, Merck (MRK) yielding 3.4%, and Bristol Myers (BMY) yielding 2.2%. Bristol is not cheap trading for 30 times earnings, but Merck and Pfizer are much more attractive trading for 14 times and 13 times earnings respectively. In the biotech sector, Amgen (AMGN) yielding 2.6% may have more capital appreciation trading for 15 times earnings. Gilead (GILD) yields just 1.7%, but trades for just 8 times earnings. Biogen (BIIB) and Celgene (CELG) provide no dividends, but plenty of capital appreciation potential. Industrials are one of my favorite sectors for the long term. Boeing (BA) has been one of my favorites for a long time yielding 3.02% and trading for 15 times earnings. United Tech (UTX) yields 2.66% and trades for 14 times earnings. Caterpillar (CAT) has taken its lumps the last several years thanks in part to slowing demand out of China. In the short term, Caterpillar yielding 4.5% and trading for 18 times reduced estimates may remain under pressure, but longer term provides attractive valuations. Consumer Discretion did perform well thanks to Amazon, Nike and Under Armour, but many of the box retailers took their lumps in 2015. Macy's (M) yielding 4% and trading for 10 times earnings looks very attractive.
My favorite sector that didn't go anywhere in 2015 is the airlines. No one is benefitting more than the airlines from the drop in crude. Many of the oil hedges for the oil companies and airlines are coming due this year, bad for the oils, but great for the airlines. Delta (DAL) alone is expecting a $3 billion windfall this year from the drop in crude. Last May, near the top in the market, Delta announced they would double their dividend, increase their buyback to $6 billion (15% of their market cap) and reduce their long term debt by nearly 50% in the coming years. Since then the stock is barely higher trading for 7.8 times earnings. The rest of the airlines are trading for similar valuations.
My final featured stock is my home run stock, Wynn Resort (WYNN). Wynn is not conservative and the stock is very volatile, but provides attractive valuation for the long term. Basically, Wynn is a $7 billion company that just spent $3 billion on a news casino in Macau, China to open in June of next year. Wynn is a play on the rebound in China and the Chinese middle class which is expected to double in the next 5 years. Once the new casino opens and the Chinese economy, Wynn's earnings could easily double which means the stock could easily double or triple. It's just a matter of how long this will take, one year, two years or more? Inside buying including Steve Wynn buying a million shares could be an indication that the rebound is sooner rather than later.
Wynn is a good microcosm for the broader market. Weak oil and slowing growth in China and other parts of the world have brought valuations for many stocks and sectors down to great long term levels. Now we need to wait for better economic numbers, better supply demand numbers to bring investors back to push the major averages to new highs. Let's hope its sooner rather than later.