The Top 10 Stocks to Invest in for 2018
Today’s market is totally different from it was at the start of 2018. Volatility has made a comeback and although it remains modest when we look at the historical levels, big companies such as Procter & Gamble (PG) and WalMart (WMT), have been shown a fast decline on the share price after hitting record highs.
It’s a more cautious environment now. However, this is not entirely a bad thing. After an uninterrupted post-election rally, a lot of stocks are seeing pullbacks and have provided much better entry points.
Others haven’t received their due credit from the stock market just yet. Although there may be some reasons to stay cautious, trade war concerns, higher interest rates, and more opportunities also exist. It seems that the market has become a stock picker’s market. If you consider yourself a stock picker, then check out these 10 best stocks to invest in right now.
Like everyone else, we are surprised that Exxon Mobil Corp (XOM) made it to this list. We have long been skeptical about this company. The internal hedge in between their downstream and upstream operations has made them a surprisingly poor play in higher oil prices. Generally, this has led XOM to be somewhat range-bound, which is what it’s been for a decade now.
However, price really matters, and XOM is at its lowest level in more than two years now right after its steady decline since the January. Having a dividend of more than 5% and a 16 times forward P/E multiple, the XOM seems like a value play. In the meantime, the management is expecting that the earnings could double around 2025 and will add a modest growth to their story.
Apparently, there’s a risk that the management of Exxon is just being very optimistic. After several years of underperformance in comparison to its peers like the Chevron Corporation (CVX) as well as BP Plc. (BP) Has battered the confidence in the stock market. If Tesla (TSLA) could become a true electric car revolution, then that company too will have an impact on the demand and pricing moving forward.
However, given the current level, the market is pricing a close to zero chance of Exxon reaching its targets. This is why XOM is looking attractive at the moment. The continuation of this status quo gives investors 4% plus income each year. Any improvement in the pricing and production will provide an upside. After a 2-year low, Exxon doesn’t really need to be perfect to be seeing upside in the XOM stock.
For this stock market, recommending a restaurant owner, specifically a hot dog restaurant owner might sound silly, but there’s currently a strong case for Nathan’s Famous (NATH). The company has also seen a sharp pullback as of late. Its stocks touched a 52-week high (all-time) in just more than $100 last November. However, it has since come down to 25%, although merely one-sixth of the decline can be attributed to $5 per share of a special dividend paid last December.
Yet, the story hasn’t really changed that much. The Q3 earnings in February have been looking very solid. Their agreement with John Morrell, the company that manufactures Nathan Famous’ products, offers huge margins and revenue continuously grows. Sales of food services are also increasing.
The restaurant industry has since been choppier. However, the industry remains profitable. Just like with the mostly-franchised models in the likes of Yum! Brands (YUM) and Domino’s Pizza (DPZ), all of these stocks are doing well above market multiples.
Altogether, Nathan’s Famous has a truly attractive licensing model that leverages an increase in revenue growth across the business operations. Yet, at 20x P/FCF and 13x EV/EBITDA, NATH has certainly stabilized in the past few weeks. Their Q4 earnings last June can be a catalyst for upside. Investors will surely do well when investing in NATH ahead of the report.
Bank of America
Bank of America Corp (BAC) has traded at its highest level ever since the financial crisis, and it has gained more than 150% from its July 2016 lows. Trading with Bank of America tends to be rough lately, which is not a surprise for this macro-sensitive stock.
However, we have always loved BAC, and as we have written in the past month, we are not really seeing any reason to back off. The growth of their earnings should be solid for the predictable future, given the increasing Fed rates as well as the strong economy.
The Bank of America itself has been performing nicely in the past years, and their credit profile is rock-solid. In fact, its stock has outperformed some of the bigger banks such as the JP Morgan Chase & Co. (JPM) as well as Citigroup Inc. The easing capital restrictions and tax reform mean that a big dividend hike is well on the way. Despite the big run, it’s not like BAC is expensive. Its stock is still being traded at less than 11x 2019. Except if the company quickly turns south, that still is very cheap. Thus, it seems like the big run is not over yet.
Nutrisystem Inc. (NTRI) is another candidate to invest on a pullback. During a disappointing release of their Q4 earnings, which took place at the end of February, the company disclosed having a rough start this year. The start of 2018 is seen as the diet season and is an important period for companies like Weight Watchers and Nutrisystem since many customers are expected to act on their New Year’s Resolutions that include losing weight.
However, marketing missteps could lead to poor results. The 2018 guidance has implied a zero growth in revenue, right after analysts predicted a 13% increase for the entire year. Nevertheless, Nutrisystem is now priced as if growth is going to end soon for good. But as an argument at this time, that is just a bit too pessimistic. The average target stock price is still well above $40, which implies more than a 30% upside. NTRI is now trading at 14x the midpoint of the 2018 EPS guidance, yielding 3.5%.
This valuation just shows that the management of Nutrisystem is wrong about the 2018’s deceleration as being a permanent change. If it turns out that the management is right, they will earn credibility thanks to their leading revenue and profit soar in the past few years. Thus, $29 is just far too cheap for Nutrisystem.
Roku Inc. (ROKU) is no doubt the riskiest in this list, and there’s reason for caution. This company has remained unprofitable, and ~7x EV/revenue is not cheap. It’s even higher knowing that almost half of their 2018 revenue would come from the player business, a loss leader regarding platform revenue and advertising.
However, the management has also detailed a truly interesting future in their Q4 call. The company is considering building a true content ecosystem, and from the standpoint of a subscriber, it has already surpassed the Charter Communications Inc. (CHTR) trailing only at AT&T and Comcast Corp.
But then again, this stock is a high-risk play. However, it also comes with a high opportunity for reward. The margins used in the platform segment are truly very attractive and allow Roku to become profitable fairly quickly.
Brunswick Corporation (BC) is predicted for a breakout. This company manufactures engine, boat, and fitness equipment and is nearing resistance at $63, that’s held for almost a year now. Despite being a boating sector that has soared of late, BC, the industry leader, has been left out mostly.
In the past year, smaller manufacturers like Malibu Boats (MBUU), Marine Products Corp (MPX), as well as MCBC Holdings Inc. (MCFT), have gained 71%, 51%, and 68% respectively. In contrast, BC has earned less than 2% and actually trades at a discount to MCFT and MBUU, despite its strong earnings growth and leadership position as of late.
Efforts to develop a fitness business often come with mixed results and may support the market’s skeptic look on this stock. However, Brunswick is now spinning the business off and becoming a pure boating play.
The cyclical risk is also worth noting, and there are many questions as to whether Millennials will have a similar interest in boating as that of their parents. However, at 12xEPS, and with earnings still increasing at double digits, Brunswick is still easily worth the risks.
If the stock finally breaks the resistance, a breakout towards $70 is highly possible.
Only a few investors would prefer a pharmaceutical space at this time or even the healthcare industry as a whole. However, despite all the negativity, Pfizer Inc. (PFE) looks forgotten even though it’s still the most valuable pharmaceutical company in the world. As of the moment, it’s neck and neck with Novartis (NVS). Trading at just 12x EPS, this is a multiple that signifies profits are going to stay flat in eternity. And to top it all, Pfizer offers a 3.8% dividend yield.
There are obviously some risks involved here. Drugs pricing continues to be a subject of government scrutiny, although the spotlight has somehow become dimmed lately. The revenue growth has flattened recently, yet Pfizer still continues to increase its earnings with an adjusted EPS increasing 11% over the past year and guidance suggesting a similar increase for this year.
Valmont Industries, Inc. (VMI) provides a diversified portfolio. Across the board, the business has become relatively weak lately. The irrigation industry has been slapped by years of declining income. Support structures that were manufactured for highways and utilities have been showing a low demand because of the government’s uneven spending. Weakness in the mining industry has also affected Valmont’s smaller business.
Valmont Industries is a cyclical type of business where the cycles have simply not been in the company’s favor lately. Yet this is expected to change. 5G, as well as the increasing wireless usage, could help company’s deals with mobile phone companies. The demand is expected to return at some point, and the possible infrastructure plan from the Trump administration could be beneficial for the company as well.
American Eagle Outfitters
American Eagle Outfitters (AEO) is perhaps one of the best stocks when it comes to retail, yet that can also become a problem. Mall retailing, in particular, has become a very tough space in the past few years. It’s not only the impact of Amazon (AMZN) as well as other online retailers. Traffic is declining continuously, and that has put pressure on the sales leading to an intense competition in price which ends up hurting the margins.
However, American Eagle Outfitters has survived well by far, which keeps comps positive and earnings stable. Yet, this stock also trades around 12x EPS, which backs out its net cash. Furthermore, American Eagle Outfitters has an ace and its aerie line, which has been growing continuously at a rapid pace. The Aerie brand’s comparable sales increased to 27% in fiscal 2017 on top of a 23% increase in the past year.
Eagle Outfitter’s bralettes along with their other products are clearly taking shares from Victoria’s Secret and L Brands Inc. (LB). The growth of e-commerce in the business and the company as a whole, suggests an ability to dodge an intense pressure among the mall-based retailers. In brief, American Eagle Outfitter is not really going anywhere. There’s enough here to conclude that American Eagle Outfitters Inc. could soon find some growth.
United Parcel Service
United Parcel Service, Inc. (UPS) has fell along with the broad market back in February, and it hasn’t recovered yet. The disappointing report of its Q4 earnings where investors saw signs of higher spending contributed to its decline. However, UPS’ stocks have fallen 22% in only a matter of weeks, and that looks like an unjustifiable selloff.
The United Parcel Services is going to spend more to add capacity, but there’s the ever-present threat from Amazon. However, UPS is a well-established leader and along with its rival, FedEx Corp (FDX), and even at its worst, could co-exist with Amazon. The overall growth of e-commerce is expected to increase the demand continuously and there’s enough room for several players in the global market.
So those are the top 10 stocks for 2018 that you may want to invest in.