The Year in Review
6 Great Stocks for 2015
The stock market produced excellent results in 2014 despite plummeting oil prices, the end of the Federal Reserve's quantitative easing program, slower growth in China and Europe, serious economic problems in Russia and myriad other problems throughout the world. As of December 22, the Dow Jones Industrial Average has gained 8%, the Standard & Poor's 500 Index is up 12%, and the Nasdaq has climbed an impressive 14% thus far in 2014.
If your stock performance lagged the market averages, you're not alone. Mutual fund managers under-performed the indexes, and hedge fund managers fared poorly. Managers forecast a big drop in stocks in 2014, but they were wrong because the drop never materialized.
But that's old news. What will happen in 2015? Which stocks will make big moves?
Whoa! I forgot one thing. Did you have some serious losses in 2014? If so, figure out where you went wrong and try your best not to make the same mistakes in 2015. Investing is a constant learning experience. We all need to review our past performance, and adjust or tighten up our methodologies to do better in 2015 and beyond.
What about 2015?
The new year will start off with a bang. Sales are up, profits are at record levels and the U.S. economy is gaining strength. Lower oil prices could enable GDP (gross domestic product) to rise 4%: higher than many current forecasts. Temporary setbacks will be encountered along the way, but my guess is that stock prices will be considerably higher at the end of 2015 than they are now at the close of 2014.
Six Great Stocks for 2015
As the Chief Analyst of the Cabot Benjamin Graham Value Investor, I follow value stocks closely. For the past several decades, value stocks have outperformed growth stocks consistently, but in 2014, growth stocks outperformed blue-chip value stocks. This divergence has created attractive investment opportunities for you.
I scanned my database to find six stocks with the right credentials to perform very well in 2015. My six picks are the stocks of U.S. companies with exceptional prospects for 2015. All of these stock choices are selling at bargain prices, and all have the potential to easily beat the stock market indexes in 2015.
My first recommendation is Apple (AAPL 112.94). Apple makes and sells smartphones (iPhones), tablets (iPads), computers (Macs), media players (iPods) and now Apple watches. Demand for iPhones continues to rise quickly after the highly successful launch of iPhone 6 and iPhone 6 Plus. iPhones are the number one seller in Apple's growing stable of electronic products.
Apple has introduced Apple Pay, a new payment method allowing the owners of iPhone 6, iPhone 6 Plus and Apple Watch devices to pay for purchases with their phones or watches rather than with their credit or debit cards. The new system is more secure and more private than plastic cards with magnetic tape. The Apple Watch could also become a big winner after the new device becomes available in early 2015.
Apple signed a multi-year agreement in December 2013 to provide the iPhone 5s and 5c via China Mobile, which has more than 760 million customers. The sale of iPhones in China in 2014 has been "off the charts," according to Apple CEO Tim Cook.
Apple purchased privately owned Beats Electronics, a leading maker of high-end headphones and a promising music streaming service. The $3.2 billion price tag is reasonable. Beats is very creative and will add a spark to Apple's quest to become more innovative.
After reporting lackluster results in 2013 and 2014, sales and earnings will accelerate during the next couple of years. Sales for the 12 months ending December 31, 2015 will climb 16% and EPS (earnings per share) will advance 24% to 7.40, after rising 10% and 4% respectively in calendar 2014. At 18.9 times current EPS with an expected 5-year EPS growth rate of 13.0%, AAPL shares are undervalued. The balance sheet is very strong with low debt and $6 per share in cash. The recently increased dividend now yields 1.7%. Buy AAPL now.
Baxter International (BAX 74.70) is the original producer of commercially prepared intravenous (IV) solutions. Founded in 1931 and headquartered in Deerfield, Illinois, Baxter currently makes and distributes medical products and equipment. These focus on blood and the circulatory system.
Baxter's BioSciences division (40% of revenues) produces various clotting factors for hemophilia, as well as bio-pharmaceuticals for treating immune deficiencies, cancer, and other disorders. The company's Medical Products division (60% of revenues) makes IV solutions and various specialty products such as pre-filled IV vials and syringes and inhalation anesthetics. Baxter's Renal Care unit produces dialysis equipment and other products for kidney failure patients.
In September 2013, Baxter acquired Gambro AB, a Swedish maker of dialysis care products. In July 2014, Baxter recently sold the company's commercial vaccines business to Pfizer for $635 million. The sale is part of Baxter's plan to split into two companies in mid-2015 and to become centered on specific disease areas.
I forecast sales to increase 6% and EPS to rise 8% to 5.25 in 2015. Baxter has many promising new products, and expansion into emerging markets is going well. The split into two companies will greatly increase shareholder value. One of the new companies will focus on medical devices, and the new company could receive a boost if Congress eliminates the medical device excise tax imposed by the Affordable Care Act.
At 15.3 times current EPS and with a dividend yield of 2.8%, BAX's stock price is undervalued. BAX has paid dividends every year since 1934 and carries Standard & Poor's highest Quality Rating of A+. Buy BAX now.
Cognizant Technology (CTSH 54.31) offers complete start-to-finish solutions for designing, testing and integrating complex software systems for corporations. More companies are outsourcing partial and full responsibility of their technology functions to Cognizant. The objectives of clients are to cut costs and become more efficient. Cognizant assists businesses to quickly transition to cloud computing and other new technologies that can be performed electronically. The company was spun off from Dun & Bradstreet in 1996.
Cognizant is gaining significant market share. Sales likely jumped 15% and EPS surged 17% in 2014. Revenue growth was weakened by slower demand from certain clients, partially offset by three new contracts, one of which is the largest deal in the company's history. Economic pressures and industry shifts are causing fundamental changes in client needs. Cognizant is helping clients improve their performance and beat their competition.
Cognizant's expansion overseas and advancement into the telecomm, media and entertainment sectors offer outstanding opportunities for future growth. The company is already the outsourcing leader in the financial services and healthcare industries. In addition, management's focus on recruiting, training and retaining employees in the U.S. and India will enable Cognizant to remain ahead of competitors.
I expect sales to increase another 20% in 2015. Earnings will likely rise 14% to 2.70. CTSH shares are reasonably valued at 23.0 times current earnings per share. Cognizant has no debt and lots of cash to fund future expansion and new endeavors. Management spent some of the company's cash to expand its data centers and to upgrade cloud offerings. The company's new contracts and huge cash hoard, available for acquisitions, expansion and stock repurchases, bode well for the future. Buy CTSH now.
Fluor Corp. (FLR 59.64) is one of the largest infrastructure engineering firms in the world. The company serves a diverse set of industries, including oil and gas, chemicals and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing. Fluor is also a primary service provider to the U.S. federal government.
FLR's stock price has dropped dramatically from a high of 84 earlier this year to the present 59.64. Investors abandoned FLR when the price of oil plummeted during the past several months. The company derives 56% of sales from customers in the oil and natural gas industry, but Fluor has garnered huge new contracts during the past six months, including several from companies in the oil sector. Most of the company's projects involve large, long-term commitments, which are less exposed to short-term fluctuations in the price of oil.
Fluor also won new contracts to build hefty infrastructure projects, including the span that will replace the Tappan Zee Bridge across the Hudson River near New York City. The company's backlog increased 5% in the third quarter compared to the prior quarter. Fluor's impressive $42 billion backlog is 16% higher than a year ago. In addition, 80% of the company's contracts are "cost plus," which allows Fluor to pass along higher costs to its customers.
Revenues will likely increase 18% in 2015 after falling 19% in 2014. EPS will climb 15% to 4.93 in 2015. Revenues and earnings could rise further if Fluor can win additional contracts in 2015. While the stock price bumps along near 52-week lows, the company will spend part of its $2.4 billion cash hoard to buy back 10% of its shares. Seems smart, after watching other companies buy back gobs of shares at 52-week highs rather than buying at lows.
At only 13.9 times current EPS and with a dividend yield of 1.4%, FLR is undervalued. Buy FLR now.
Fossil Group (FOSL 108.70) is an international designer, marketer and distributer of consumer fashion accessories. The company's offerings include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses and clothing. Fossil's products are distributed in myriad ways: wholesale in countries where it has a physical presence, direct to the consumer through its retail stores, from websites and through third-party distributors.
Fossil's wide range of products are sold under many brand names, including: MICHELE, Relic, Burberry, Emporio Armani, Michael Kors, Marc Jacobs, DKNY, adidas Originals and ZODIAC. Fossil operates more than 400 retail stores and 4,000 wholesale locations.
Fossil has benefited from strong demand for high-end well-known brands, such as Michael Kors and Armani. The Fossil name is attracting many new buyers in China, which bodes well for future growth. New products, such as smart watches, are also attracting a lot of attention. Fossil has an agreement with Google and Intel to introduce a new smart watch in 2015.
First half earnings were hurt by higher spending on new store openings, corporate infrastructure and marketing initiatives. Earnings rebounded in the quarter ended 9/30/14, and forecasts call for accelerating growth during the next several quarters.
Sales will likely rise 9% and EPS will surge 37% to 8.15 in 2015. Results could receive an additional boost if Fossil's new smart watch takes off. The company's weak second-quarter results caused the stock to drop from a high of $135. The healthy rebound in financial results in the third quarter is a harbinger of better sales and earnings ahead.
FOSL shares are somewhat expensive at 18.2 times current EPS, but EPS are forecast to rise 13% per year during the next five years. The balance sheet is strong with low debt and lots of cash available to fund future needs. Shares do not pay a dividend, but that could change within the next couple of years. Buy FOSL now.
United Technologies (UTX: 117.14) conducts a wide range of businesses through five divisions: Otis Elevator; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems and Sikorsky Helicopters.
Otis Elevator (20% of 2013 sales) is the world's largest manufacturer of elevators, escalators and moving walkways. International revenues were 82% of total segment revenues in 2013.
UTC Climate, Controls & Security (27% of sales) is the leading provider of HVAC (heating, ventilating, and air conditioning) and refrigeration equipment. Products and services are sold under the Carrier and other brand names. The division also makes and services security and fire safety products, including intruder alarms, video surveillance systems, and fire detection alarms. International sales were 61% of total Climate, Controls & Security revenues in 2013.
Pratt & Whitney (23% of sales) is a leading supplier of aircraft engines for large commercial aircraft, business jets and military fighter and transport aircraft.
UTC Aerospace Systems (21% of sales), which was formed from the purchases of Hamilton Sundstrand and of Goodrich, is a leading supplier of a wide array of technologically advanced aerospace products and services. Sales to Boeing and Airbus, which are UTC Aerospace Systems' two largest non- governmental customers by sales, were 20% of the division's sales in 2013. Sales to the U.S. Government were 21% of division sales in 2013.
Sikorsky (9% of sales) is the world's largest manufacturer of military and commercial helicopters, including the world-famous Black Hawk helicopter. International revenues were 30% of division revenues in 2013 and U.S. government sales were 58%.
Sales likely increased 4% to $65 billion in 2014 while EPS rose 13%. Strong demand for many of UTX's products and services was partially offset by divestitures of slower growing, less profitable segments. Management's cost-cutting programs bolstered earnings. Sales will likely climb 6% and EPS will advance 10% in the next 12 months to 7.75. The company's broad product mix, and substantial and steady parts and service business will provide dependable growth in future years.
UTX has paid dividends consecutively since 1975 and has increased its dividend every year for 20 years. Another dividend hike is expected in early 2015. United Technologies is another blue-chip company that is well worth buying for long-term investment. Buy UTX now.
I will continue to follow Apple, Baxter, Cognizant, Fluor, Fossil, United Technologies and other blue-chip, high-quality investments in Cabot Benjamin Graham Value Investor. My next issue, coming soon, will focus on additional undervalued blue-chip stocks. I hope you won't miss it!
Lastly, I wish you and your loved ones a Merry Christmas and a safe, healthy and prosperous new year!
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
Editor's Note: You'll find many more stocks selling at bargain prices in Cabot Benjamin Graham Value Investor. In every issue, you'll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.