Rumblings Up, Down, and Around Wall Street – Issue #458 dated December 10, 2017 with Ray Dirks of Raysearch and his team of Securities Analysts and Money Managers, along with the internationally-followed Web Sites www.Corporate Profile and www.CPreports, where Fashion meets Finance, and where Stocks meet Blonds.
‘Twas another exciting week on Wall Street last week as two of the major indexes hit all-time highs on Friday, and Rumblings’ Favorite Stocks for 2017 continued to perform well, led by Fusion (FSNN) and Aflac (AFL).
Barron’s, The Dow Jones Business and Financial Weekly, is publishing its “10 Favorite Stocks for 2018”, and we are providing for Rumblings’ Investors and Readers that list of companies in the following paragraph, so Rumblings will publish its list of Rumblings’ Ten Favorite Stocks for 2018 in our Issue next week. Stay tuned…!
Here’s Barron’s list of their “10 Favorite Stocks for 2018”:
Alphabet (GOOG), Delta Air Lines (DAL), Berkshire Hathaway (BRKA), Volkswagen (VLKAY), Pioneer Natural Resources (PXD), Applied Materials (AMAY), Enterprise Products Partners (EPD), Ally Financial (ALLY), Anthem(ANTM), and US Foods Holdings (USFD).
Barron’s writes that their list of 10 companies “was chosen on the basis of discussions with institutional investors and Barron’s own analysts, and include some companies featured in Barron’s this year.”
In their cover story, Barron’s says that “In a raging bull market, true bargains are harder to find. But some winners have more room to run in the year ahead. In the paragraphs below, We are summarizing for our Readers/Investors the reasons for including these stocks on their list of 10 Favorites for 2018. Rumblings suggest that you purchase a copy of Barron’s to obtain all of the reasons for their recommendations.
Alphabet has a dominant franchise, and the valuation of its non-voting shares still looks attractive after a 34% rise this year to $1,030.93. The stock trades for 25 times projected 2018 earnings of $41.47 a share. The company’s operating margin of 30% is considerably below Facebook’s (FB) 50%, reflecting heavy spending on the cloud. Meanwhile, company franchises such as YouTube and Android are valuable. Alphabet has started buying back stock and shows greater cost discipline. J.P. Morgan analyst analyst Douglas Anmuth sees revenue and profit growing at an 18% to 21% clip through 2018. Alphabet is one of the world’s great businesses.
Anthem might generate the best earnings growth among the five leading U.S. health insurers in the next few years. Earnings at Anthem, which operates for profit Blue Cross companies in New York, California, and 12 other states, could increase to $20 a share in 2020 from an estimated $12 this year. The growth should be driven by the company’s move to extricate itself from a suboptimal pharmacy-benefit -management contract with Express Scripts Holding (ESRX) at the end of 2019, by better cross-selling of dental and other benefits to self-insured commercial customers, and by share repurchases. Bernstein analyst Lance Wilkes gives the stock an Outperform rating and a $248 price target. Shares closed at $223.64.
Applied Materials, the leading maker of semiconductor equipment, has been riding a wave of spending from industry customers that is likely to persist for at least several years. Its shares, which have pulled back to %52.30 from $59.00 in the recent tech selloff, trade for 13 times projected earnings of $4.00 a share for the company’s fiscal year ending in October 2018. At its investor day in September, Applied Materials set a fiscal year-2020 earnings target of about $5 a share. JPMorgan analyst Harlan Sur wrote recently that strong industry spending related to memory chips , artificial intelligence, and Big Data, plus expanding profit margins and market share gains, could put the company on track to meet or exceed its fiscal-2020 target. He has an Overweight rating and a $70 price target.
Berkshire Hathaway is among the most defensive blue chips, given its Fort Knox -like balance sheet with more than $100 billion in cash, and a diversified after-tax stream of income totaling $15 billion annually. The Class A shares, now around $294,000, are a good bet to beat the S@P 500. The U.S. businesses, including the Burlington Northern railroad, are benefiting from a stronger economy. “There could be an upside surprise to earnings next year in an increasingly positive economic environment,’ says Richard Nackenson, the portfolio manager of the Neuberger Berman Multi-Cap Opportunity Fund.
Delta Air Lines is the best-run of the major U.S. airlines, with strong cash flow and a shareholder-friendly management team. Delta’s shares, at $53.41, look inexpensive at 10.5 times projected 2017 earnings of $5 a share and 9.7 times estimated 2018 profits of $5.52 a share. Next year could be better, due to stronger passenger unit revenue. Management has emphasized balance-sheet improvement and shareholder returns. The dividend has been rising steadily, and got a 50% boost in September to an annualized $1.22 a share. The current yield is 2.3% Delta also is buying back stock., and has shrunk its share count by 3% in the past year. JPMorgan analyst Jamie Baker is a fan, citing “best-in-class management” and the “most rational” strategy in holding off low-cost airlines. He has an Overweight rating and a $68 price target.
Enterprise Products Partners is one of the better plays in the area of master limited partnerships. Its shares closed the week at $24.69, and it operates a huge integrated network of U.S. energy pipelines, storage facilities, and processing plants. Despite declining returns industrywide, Enterprise Products could show annualized earnings growth of 9% through 2021. The stock trades for 16.7 times projected 2018 earnings of $1.48 a share. JPMorgan analyst Jeremy Tonet carries an Overweight rating and a “dominant North American midstream franchise” with solid distribution coverage. He cites a strong balance sheet and a capacity for opportunistic acquisitions.
Pioneer Natural Resources is one of the leading oil and natural-gas producers in the Parmian Basin, which has emerged in less than a decade as one of the best world’s energy-producing regions. Parmian has the largest acreage position in a prize part of the Parmian the Midland Basin, and may have decades of drilling opportunities. The company has an ambitious goal of expanding its energy production nearly fourfold, to to one million barrels a day of oil equivalent, by 2026, from an average of 270,000 barrels this year, a 15% compound annual growth rate Pioneer is one of the lowest-cost shale oil producers in the U.S., with a break-even price of about $24 a barrel. Morgan Stanley analyst Evan Calio has cited Pioneer’s growth outlook as a “differentiator,’ as well as its rising returns. He rates the stock Overweight and has a $197 price target. Free cash flow could build if oil stays around $55 a barrel. As a top Permian producer, Pioneer could become a takeover target for energy companies looking for greater exposure to the prolific basin.
U. S. Foods, the No. 2 American food producer behind Sysco (SYY), has seen its shares suppressed by concerns that Amazon might enter the business. Yes, it would be tough for Amazon successfully break into the field, given the relationships that US Foods has with thousands of restaurants and other customers and the company’s willingness to extend credit to them. A 2% operating margin gives Amazon less room for disruption. Shares of US Foods are trading around $30, or for 18 times projected 2018 earnings of %1.69 a share. Earnings per share are expected to rise at a 10% clip in the coming years. And an overhang from private-equity owners was recently eliminated. The company bought back 10 million shares, or nearly 5% of the total outstanding, as part of the private-equity sale. “It’s still a fragmented business with opportunities for organic growth and acquisitions,” says Neuberger Berman’s Nackenson. He says the shares could trade into the mid-$30s.
Volkswagen is moving past its diesel-emissions scandal, and investors have been warming to its shares, which are up 35% from the summer lows. Volkswagen stock closed Friday at $39.50. There could be considerably more upside potential because the shares trade for 6.5 times projected 2018 earnings. The P/E ratio is low even by the depressed standards of the global auto industry, where industry leader Toyota Motor ™ trades for 11 times 2018 projected profits. Volkswagen, Europe’s largest auto maker, recently gave financial guidance, calling for 25% revenue growth by 2020, higher profitability, and moderating capital expenditures, even as it plans to spend %40 billion on electric cars and other new technologies. In the next three years.
Volkswagen also looks cheap on a sum-of-the-parts basis, given its valuable luxury-car franchises: Porsche and Audi. It has a strong truck business, led by Scania, that could be spun off to shareholders in coming years. VW is sitting on net cash equivalent to 25% of its current market value. “It’s increasingly hard for investors to ignore the turnaround at VW,” wrote Evercore/ISI analyst Arndt Ellinghorst, who has an Outperform rating and recently lifted his price target.
Rumblings suggests that Readers/Investors check with their investment advisers and limit the amount of their investable funds in each corporation to no more than 1%. It pays to diversify…!