The 2015 Year in Review
My Top Ten Stocks for 2016
The Year in Review
Junk bonds are in free fall. Oil is tanking. The Chinese GDP is sagging. Brazil’s economy is a disaster. Stocks are overvalued by just about any traditional measure. And Janet Yellen and company just raised interest rates. Great Scott!
And yet, the S&P 500 closed December 16 less than 3% from its all-time high set on May 20, 2015. During 2015 (as of December 16), the Dow Jones Industrial Average has lost 0.4%, the Standard & Poor’s 500 Index is up 0.7%, and the Nasdaq has climbed a notable 7.1%.
If your stock performance lagged the stock market averages, you’re not alone. Stock market gains were concentrated in a very few stocks, including the so-called FANG stocks (Facebook up 161%, Amazon up 118%, Netflix up 37% and Google—now known as Alphabet, up 44%).
Did you have some serious losses in 2015? If so, figure out where you went wrong and try your best not to make the same mistakes in 2016. Investing is a constant learning experience. We all need to review our past performance, and adjust or refine our methodologies to do better in 2016 and beyond.
What will happen in 2016? Which stocks will make big moves?
What about 2016?
The end of 2015 and the new year will enjoy a spirited rally in stocks. Oil and other energy stocks are selling at historic lows, but could lead the stock market higher in 2016. Healthcare, technology and financial stocks will also perform quite well. The end result will be modest, but a 5% gain in the major indexes could enable you to garner large gains in your portfolio. Temporary setbacks will be encountered along the way, but my guess is that stock prices will be higher at the end of 2016 than they are now near the close of 2015.
Which stocks will perform well in 2016?
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 and 2015, growth stocks have outperformed blue-chip value stocks. This divergence has created attractive investment opportunities for you, which I’ve collected in a special report.
For the report, I scanned my database to find 10 stocks with the right credentials to perform very well in 2016. My top 10 picks are stocks of U.S. companies with exceptional prospects for 2016. I report on five of my Top Ten stocks for 2016 in the following summaries. You can find out the other 5 stocks by clicking here. (Please note, I originally requested our readers to email me to find out the other 5 stocks.)
All of my stock selections are selling at bargain prices, and all have the potential to easily beat the stock market indexes in 2016! The stock prices in the summaries below are the closing prices on December 16.
BJ's Restaurants (BJRI: Current Price 43.57) is small, with only 165 restaurants in 21 states, but management’s new initiatives are beginning to achieve faster growth. The company has added unique items to its food offerings, which have been met with enthusiastic response by patrons. Part of management’s goal is to expand the company’s number of restaurants by 10% each year.
The aggressive plan is attainable because of BJ’s experienced management team, coupled with the company’s strong balance sheet featuring minimal debt. To generate higher profitability, management has implemented a plan to bolster efficiency and productivity in BJ’s kitchens. The company has also lowered its cost of goods sold due to its increasing size and clout when ordering from vendors.
Sales will likely advance 13% and EPS (earnings per share) will jump 21% to $1.90 in 2016. At 27.8 times current EPS and with no dividend, BJRI’s stock price is a bit high. BJ’s Restaurants’ PEG ratio is below average for a restaurant business and stands at 1.88 (lower is better). Buy BJRI at the current price. Sell when BJRI rises 30% to my sell target of 56.85—likely before the end of 2016.
Dollar General (DG: Current Price 71.83) is one of the largest discount retailers in the U.S. with 12,200 neighborhood stores in 43 states. Dollar General helps shoppers “Save time. Save money. Every day!” The company offers quality items at low prices in convenient neighborhood stores. Because of its large size, Dollar General is able to offer a wide array of products from America's largest manufacturers.
Dollar General is aggressively remodeling existing stores and adding new stores, and as a consequence, is taking market share from Walmart, the merged Dollar Tree/Family Dollar stores and others. Dollar General’s expansion will ensure rapid growth in the next 12 months and beyond.
I forecast sales to increase 9%, EPS (earnings per share) to climb 18% to $4.35, and same-store sales to advance 4% during the 12 months ending October 31, 2016. The company recently initiated a quarterly dividend, which will attract new investors. At 18.7 times current EPS, the stock price is undervalued. Buy DG at the current price. DG will likely advance 28% and reach my sell target of 92.10 within 12 months.General Motors (GM: Current Price 35.14)designs, manufactures and markets vehicles under the Buick, Cadillac, Chevrolet and GMC brands. New CEO Mary Barra has led GM away from its past difficulties, and commanded a successful restructured turnaround. GM boasts a solid balance sheet with $15 billion of cash. Sales and earnings prospects for the next several quarters are much improved. Vehicle sales in North America will help propel total sales during the next 12 months. GM sales fell 3% during the past 12 months, but sales will likely rise 1% to 2% in 2016. Weak sales in South America are holding back sales growth. However, EPS jumped 57% during the past 12-month period, and could rise another 13% to 5.40 in 2016.
GM shares sell at just 7.4 times latest EPS, and the dividend yield is very attractive at 4.1%. Also, GM’s PEG ratio is 0.46, which is very low. Cash flow per share is huge, with $10.90 per share expected in 2016. Dividends are big as well—the current dividend, which provides a hefty yield of 4.1%, is expected to increase 25% per year. My 45.20 sell target seems easily reachable by the end of 2016. Buy GM at the current price.
Prudential Financial (PRU: Current Price 84.19), is a financial services leader with $1.2 trillion assets under management with operations in the U.S., Asia, Europe and Latin America. The over-65 population is growing three times faster than the 20-to-65 population in the U.S., Europe and China. This bodes well for companies that offer investment management and annuity products and services. In addition, Prudential will benefit from higher interest rates, which have finally been jump-started by the U.S. Federal Reserve.
Prudential is in good position to meet the huge demand for retirement benefit products for baby boomers. Prudential’s purchase of Hartford’s individual life insurance business is producing better than expected results. Also, net investment income and international operations are improving. Revenue will likely be flat and EPS will increase 5% to $10.55. Interest rates in the U.S. are starting to rise and could bolster Prudential’s results more than expected.
PRU shares are clearly undervalued. The company’s current P/E is 8.4, P/BV is 0.88 and the dividend yield is 3.3%. PRU’s PEG ratio is 0.73. Prudential generates high, above-average profit margins, driven by the strength of its international business and strong asset management, yet its valuation is the cheapest in the sector. I expect PRU to advance 21% to my 101.50 sell price target within one year. Buy at the current price.
Whirlpool (WHR: Current Price 153.10) is the largest manufacturer of home appliances in the world. The company’s acquisition of American Dryer in July is adding meaningful sales and earnings, and offers multiple expansion opportunities. Whirlpool has also entered into a contract to supply Ryan Homes, the nation’s fifth largest homebuilder, with all appliances for new homes.
Whirlpool’s sales growth in Europe and China is solid, but sales in Latin America fell 27% because of the recession in Brazil. Whirlpool has cut production to keep costs in line with the lower sales. The stock price has lost 27% during the past eight months and now presents investors with an excellent buying opportunity. EPS growth accelerated in the third quarter, though, and will continue to accelerate during the next several quarters.
Sales will rise only 7% in 2016, hampered by the severe slowdown in Brazil, but EPS will surge 17% to $15.05, aided by lower raw material costs and strong contributions from American Dryer. Whirlpool sells at 11.9 times latest EPS, its balance sheet is solid, and the dividend yield is 2.4% and rising. Buy at the current price. Sell when WHR rises 34% to my sell target of 204.60 within 12 months.
I will continue to follow BJ's Restaurants, Dollar General, General Motors, Prudential Financial, Whirlpool and my other Top Ten Stocks for 2016 in my Cabot Benjamin Graham Value Investor. My next issue will focus on additional undervalued blue-chip stocks. I hope you won’t miss it!
Lastly, I wish all you and your loved ones Happy Holidays and a safe, healthy and prosperous New Year!
J. Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
P.S. You’ll find additional stocks selling at bargain prices in the 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. Click here to start your subscription today!