05 Jan 10 favorite stocks for 2018 from top-ranked stock newsletter writers
You don’t always get what you pay for. But you don’t often get much more.
This twist on an old saw serves as a good reminder for self-directed investors hunting online for stock ideas. That’s because we’re deep into a “substance light” era of online content, dominated by vapid Twitter rants, pesky blogs offering puff posts and a hollowed-out financial press corps.
Sure, sell-side analysts on Wall Street still write substantial research, which sometimes appears online. But you have to take it with a grain of salt. Under the same roof there’s typically a division looking to do investment banking for the same companies that the analysts cover. Are the analysts really impartial?
All of this highlights the value of the humble stock newsletter writer — those scribes who charge a fee for what can often be high-quality, independent stock research.
Sure, I have a bias, because I write one of them: Brush Up on Stocks.
But quantitative analysis has shown that newsletter writers can be a profitable source of stock ideas. For years, financial columnist Mark Hulbert has painstakingly tracked dozens of newsletter writers. He’s found many performed consistently well.
Hulbert tracks newsletter performance at Hulbert Ratings. I’ve followed his work for over 15 years to find the best stock letter writers for an annual roundup of their market outlook and favorite stocks. Several letter writers regularly hit the top of his rankings.
Here are five newsletter writers and their two favorite picks for 2018, bringing the total to 10 stocks.
George Putnam, The Turnaround Letter
As the name suggests, Putnam is a deep-value investor looking for troubled companies that can right the ship.
Market outlook: Unsurprisingly, given his penchant for value, Putnam thinks the market looks pretty rich. He’s also troubled by elevated investor sentiment.
“Given that a lot of people have a rosy outlook, any surprises are likely to be negative,” he says.
One problem is that investors in popular exchange traded funds (ETFs) and index funds haven’t really researched the underlying stocks they hold. So they may lack the conviction to stick with them when the going gets rough. That could compound the selling.
“Exchange traded funds and index funds have been spiraling up. If there is a stumble, they could spiral down just as rapidly,” cautions Putnam.
Favorite stocks: Shares of General Electric Co. GE, +2.09% have declined over 42% in the past 12 months to levels not seen since the late 1990s. Chalk it up to a string of disappointing quarters and a dividend cut. But the venerable industrial giant is not down for the count.
Under new CEO John Flannery, GE will hunker down in three core areas: aviation, health care and power. These are all sectors where GE has a strong position. Flannery plans to sell non-core assets, and focus on cost cutting to boost cash flow.
“I think they are doing all the right things,” says Putnam. “They have good franchises in the businesses they are going to stay in.”
Next, Putnam singles out the turnaround Weatherford International Ltd. WFT, +0.54% in oilfield services. Under prior management, Weatherford branched out into too many businesses, and took on too much debt to do so. That didn’t work out so well. The stock now trades near an eight-year low. Under the new leadership of Haliburton Co. HAL, +2.24% veteran Mark McCollum, Weatherford is unloading non-core assets and paying down debt.
“There is a lot of inefficiency to be shaken out,” says Putnam.
Weatherford’s stock could produce big gains. Just remember, turnarounds require time — and patience.
John Buckingham, The Prudent Speculator
Buckingham invests in what he thinks are undervalued stocks with solid potential, both via managed accounts and his mutual fund, the Al Frank Fund VALUX, +0.32%
Market outlook: Buckingham is an eternal optimist. But this year he’s expecting no more than typical market returns of around 9%-10% for the S&P 500 SPX, +0.40% driven by continued economic strength, earnings growth and benefits from tax reform. He thinks value stocks will outperform this year, after a long spell of lagging growth stocks.
Favorite stocks: Buckingham dislikes singling out favorites because he thinks diversification is crucial. But he plays along. One favorite is Walt Disney Co. DIS, -0.04% Buckingham thinks the shares have been beaten down too far by investors overly worried about weakness in its ESPN division, and competition from Netflix Inc. NFLX, +0.28% and Amazon.com Inc. AMZN, +0.45%
After all, Disney has great content, too, says Buckingham. And it’s bulking up with a planned purchase of the entertainment assets of 21st Century Fox Inc. FOX, +0.67%
“They have history of making good acquisitions,” he says, citing the purchases of Pixar Animation Studios and Lucasfilm. “They have unparalleled content, and an unrivaled machine to monetize that content.”
Buckingham also likes the pharmaceutical giant Merck & Co. MRK, +1.62% whose stock has been hit by concerns about the prospects for cancer drug Keytruda, and upcoming competition as drugs roll off patent. Those worries have knocked Merck shares down to attractive levels. It trades for around 14 times forward earnings, compared with a 10-year average price-to-earnings multiple of 19.
“That is too low,” says Buckingham. “This is one of the highest-quality pharmaceutical companies out there.” He cites its strong pipeline of drug candidates and solid financial strength.
Kelley Wright, Investment Quality Trends
Wright favors “high-quality” companies, based on factors that include financial strength, and consistent dividend and earnings growth. Then he suggests them when they appear to be at relatively low valuations because their dividend yields are near historical highs. (When stocks decline, their dividend yields rise, barring dividend cuts.)
Market outlook: Wright thinks the S&P 500 could advance 8% to 10% in 2018, as long as the Federal Reserve doesn’t hike interest rates and proceed with quantitative tightening too quickly.
Favorite stocks: Plans in Washington, D.C., to increase spending on infrastructure have been overshadowed by tax reform. But Wright thinks infrastructure could be a big deal, especially for companies that will benefit. Two of them happen to look relatively cheap right now, because their dividend yields are not too far from historical highs.
One is Fluor Corp. FLR, +0.30% in engineering and construction. “Nobody can do big construction projects like Fluor,” says Wright.
Next, he likes Cummins Inc. CMI, +1.53% which makes engines used in heavy construction equipment like earth movers.
Richard Greifner, Motley Fool Inside Value
Greifner looks for well-run companies whose shares are trading at attractive levels, to hold for the long term.
Market outlook: A core tenet at Motley Fool is that it’s impossible to make market calls. So Greifner has none for 2018. If you have a long-term perspective with stocks, then the near-term market outlook doesn’t really matter, says Greifner.
Favorite stocks: Greifner singles out MRC Global Inc. MRC, +1.55% a huge distributor of equipment used in energy production and industry, like pipes, valves and fitting products. The company has been cutting costs, paying down debt and repurchasing shares. Meanwhile, its customers are increasing their spending because of strength in energy and the economy. Greifner also likes Michaels Cos. MIK, -0.04% a large arts-and-crafts retail chain. Unlike a lot of retailers, Michaels isn’t beaten down by worries about competition from Amazon. But this makes sense, says Greifner, because customers like to see and touch crafts products before they buy them, to make sure they are right for the task at hand.
Michael Brush, Brush Up on Stocks
I watch insiders closely to look for the right kinds of buying patterns, according to a system I’ve developed over the years. Then from among those names, I favor companies with financial strength that look relatively cheap, as long as there’s a plausible reason why business will improve. As a contrarian, I especially like stocks where insiders are challenging consensus negativity toward their companies either by investors or sell-side analysts. Unlike the letters above, I’ve never been ranked by Hulbert.
Market outlook: Investor sentiment is running high, a potential negative. But stocks overall still look reasonably valued given how low interest rates are. A selloff is possible at any time, given investor exuberance. But a recession is not on the horizon, so any significant weakness should present a buying opportunity.
Favorite stocks: My favorite company and largest personal holding at the moment is Tellurian Inc. TELL, -0.30% an undiscovered company that will become a big player in liquid natural gas (LNG) exports over the next few years. How do I know this? I don’t, for sure. But it’s a reasonably safe bet given that CEO and founder Charif Souki and his management team are responsible for creating 25% of the LNG export capacity around the globe.
Souki founded Cheniere Energy LNG, -0.47% a big company in the space. But he got edged out by investor Carl Icahn in a disagreement on how to use cash flow. Souki left and founded Tellurian, where he’s developing an LNG export project he presumably would have launched inside Cheniere.
I also recently suggested Lending Club Corp. LC, -2.15% in part because of the huge buying by Chinese technology and internet expert Tianqiao Chen, who founded the online gaming company Shanda Interactive Entertainment years ago while he was in his 20s.
He owns around 20% of Lending Club, an online peer-to-peer lending platform. LendingClub recently tightened its lending standards, which hurt loan growth, so the company missed earnings estimates and guided down. But it still expects 15%-20% annual revenue growth over the next few years. This seems plausible given how many people with OK credit would like to refinance their credit card debt with loans. Lending Club estimates $300 billion to $350 billion in credit card debt could potentially be refinanced in this way.
At the time of publication, Michael Brush held TELL. Brush has suggested GE, DIS, NFLX, AMZN, MRK, FLR, TELL and LC in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program.