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How to Invest in 2017: Don’t Chase Trump Stocks
Our colleagues at Barron’s have just published their annual Best Stocks for the coming year story, and three of the 10 picks are components of the Barron’s Next 50 index: Alphabet. Apple. and Disney. We are making the story free for Barron’s Next readers — Top 10 Stock Picks for 2017 — or you can just read the summary below. Author Andrew Bary decided the best approach for investors next year is not to bet on “Trump” stocks climbing higher on optimism that tax cuts and economic stimulus will continue to send those shares higher. Instead, Bary makes the case for cheap stocks that investors seem to be under appreciating. If you are new to investing, we don’t recommend you jump right into these stocks. Start by building a diversified portfolio ; only after that should you consider making bets on individual names.
Apple: The iPhone maker dominates in technology, but its stock has one of the cheapest valuations among big tech companies. Shares have declined to a recent $110 on fears of slowing smartphone sales. By one popular measure of valuing stocks — dividing their market value by their profits — Apple looks to be trading at a discount at 9 times 2017 estimated earnings. (For those keeping score at home: Andrew subtracts Apple’s huge cash hoard from its market value when doing that calculation, since investors are getting the cash in addition to the company’s business value.)
Alphabet: The second-largest company in the S P 500, formerly known as Google, is still growing. Revenue and earnings per share are expected to rise 17% in 2017. At its recent price of $750 and its valuation shrinks from 23 times 2017 estimated earnings to just 18 times, excluding annual stock-based compensation.
Citigroup (C): Shares are up only 10% while bank stocks such as JPMorgan Chase (JPM), Bank of America (BAC), and Goldman Sachs (GS) have on average climbed 25%. At $57, Citigroup is trading at 90% of its tangible book value — that means investors can buy the stock for less than the company would be worth if it was sold for parts.
Telecom and Media
Disney: The Magic Kingdom stretches beyond theme parks with consumer products and cable TV offerings such as ESPN. Earnings growth for its fiscal year ended September is expected to come in at just 4% compared to last year’s 11%, but double-digit profit growth is possible in 2018 when Disney collects on four Marvel movies, three animated features and two Star Wars movies. Shares at a recent $99 have about 11% upside, based on one analyst’s estimates.
Deutsche Telekom (DTEGY): Its U.S. listed shares took a 13% tumble to around $15 when the German wireless operator decoupled from its majority stake in T-Mobile US (TMUS) assets. Its core European business is valued at $9, and roughly $6 accounts for its 65% stake in T-Mobile. Wall Street analysts see shares lifting to $20. Shares yield nearly 4%
Merck (MRK): Competitor Bristol-Myers Squibb suffered a big setback when a drug failed in a clinical trial. As a result, Merck’s Keytruda remains the leading treatment for lung cancer. Bernstein analyst Tim Anderson thinks the drug could generate $8 billion a year in 2020 up from $1.5 billion now. Merck shares are up 15% this year, but at $61 or just below 16 times 2017 estimated earnings, still look affordable.
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Novartis (NVS): The Swiss drug company’s shares took a 20% hit this year, making it one of the worst performers in Big Pharma. Investors expected a faster ramp up of its new heart-failure drug Entresto, but Bernstein’s Anderson isn’t worried. Eventually it will pull over $3 billion in yearly sales, up from about $200 million. Shares trade at $68 and pay a more than 3% dividend yield.
Delta Air Lines (DAL): Flatter earnings and higher oil prices kept the airline’s stock price from gaining altitude, but there’s still a lot to like about Delta. At a recent $49, shares trade at 9 times both 2016 and 2017 estimates, but if it were valued like other transportation companies like railroads, it could rise to $100 — a stretch, yes, but even half of that would be a 50% gain.
Unilever (UL): After a 20% fall from its September high, the stock at $39, or 18 times projected 2017 earnings, looks cheaper than peer stocks. But the owner of brands such as Dove and Ben Jerry’s has been stricter on its expenses, and has focused on higher-growth household products like laundry detergent and food. One analyst thinks the shares could rise 30%. And every time you dip into a pint of chocolate fudge brownie, you are helping the cause.
Toll Brothers (TOL): The leading builder of luxury homes looks like a value buy. Its stock trades at around $29, or less than 10 times estimated earnings. And it’s growing — analysts expect Toll’s earnings to rise 20% this year.