My 10 choices for 2017 beat their benchmark by the widest margin since 1993, when I began this annual exercise. Two stocks more than doubled. There were eight winners, two losers and a whopping average total return (price increase plus dividends) of 43.5%, compared with 23.6% for Standard & Poor's 500-stock index. With no guarantee that my winning ways will persist--and a good chance that next year my picks will revert to the mean--here is the 2018 list, chosen, as usual, from the selections of experts, with a stock of my choosing thrown in. Returns and other data are as of October 31. I own none of the 2018 recommendations.
See Also: 18 Best Stocks to Buy for 2018
The first selection, by tradition, goes to the top stock picker of the previous year. That would be Parnassus Endeavor (symbol PARWX), one of my all-time favorite mutual funds. Jerome Dodson, its founder and manager, owns only 32 stocks, all of them meeting his qualifications for socially conscious investing. Dodson's 2017 winner was Micron Technology (MU), which returned 158%. It remains one of the fund's top eight holdings. Over the first three quarters of 2017, Dodson added only six stocks, and of these, his biggest investment was in United Parcel Service (UPS), a steady performer benefiting from the sharp rise in online sales. UPS carries a price-earnings ratio of 19, based (like all P/Es noted here) on consensus analysts' estimates for 2018 earnings. The stock has a dividend yield of 2.8%.
The second 2017 stock that more than doubled, Take-Two Interactive Software (TTWO), a maker of video games, originated in the portfolio of Wasatch World Innovators (WAGTX). In 2017 the fund added Kornit Digital (KRNT), an Israeli maker of high-speed printers for the textile industry, to its top 10 assets. Kornit stock is down nearly 30% since July, pummeled by investors when a huge expected order failed to materialize. The setback, however, may be only temporary, and at this price, investors can afford to wait for business to pick up. Be aware that Kornit, with a tiny market capitalization (price times shares outstanding) of $525 million, will be volatile.
Fidelity Contrafund (FCNTX) is simply the greatest giant mutual fund in the world. Manager Will Danoff's top holding is Facebook (FB), which trades at a forward P/E of 31. That's not high for a company that increased its revenues in the third quarter by 47% over the previous year. In the wake of revelations about Russian spending on election ads, Facebook has warned investors that increased spending to protect its network from manipulation will eat into profits in the near term, but patient investors will be rewarded.
Terry Tillman has been a stock picker on this list for the past six years, and he has beaten the S&P every time. In 2017, he returned to his selection of both 2014 and 2015, Salesforce.com (CRM), a cloud-based software company that helps businesses manage customer relations. Tillman moved midyear from Raymond James & Associates to SunTrust Robinson Humphrey. He still loves cloud companies, considering them both good values and potential takeover targets. He continues to rate Salesforce a buy, but I think it's getting boring as a pick. Another of his cloud-based buy recommendations stands out: HubSpot (HUBS), whose software-marketing platforms help companies attract visitors to their websites and convert them to customers. HubSpot, based in Cambridge, Mass., is not profitable yet but should be soon. Sales are forecast by analysts to rise 31% in 2018.
At Raymond James, analysts Brian Gesuale and Ryan Rackley rate Cubic (CUB) a strong buy. The company's diverse lineup includes providing combat training for the armed services and the defense industry, and making automated fare systems for mass transit. In October, Cubic won a contract in New York City that will allow bus and subway commuters to pay by waving their smartphones. If the firm meets analysts' targets, by 2020 revenues will rise by one-third and the stock by one-half.
My micro-cap maven, Dan Abramowitz, of Hillson Financial Management, in Rockville, Md., chose CPI Aerostructures (CVU) for 2017 and was rewarded with a return of 38.5%. For 2018, he likes The Goldfield Corp. (GV). The company provides electrical construction and maintenance services for the utility industry. It has a market cap of just $146 million. Abramowitz writes that Goldfield reported record revenues and earnings in 2016, but that sales and earnings declined in the first half of 2017 due to the completion of some large projects. The stock's subsequent sharp decline is one reason Abramowitz likes it now. He says the stock is "cheap on an absolute basis and relative to the peer group.... Any kind of infrastructure bill or tax reform out of Washington would be gravy."
It's a rare stock that gains top marks from the Value Line Investment Survey in three categories: timeliness, safety and financial strength. McDonald's (MCD) just hit this trifecta. Value Line analyst Matthew Spencer forecasts earnings will rise at a 9.5% annualized rate for the next three to five years. With a P/E of 25, McDonald's isn't cheap, but it has a lot going for it: strength in China, successful introductions of premium sandwiches in the U.S. and more-efficient technology everywhere.
In my November 2017 column, I extolled the virtues of the few great managers of mutual funds with long track records and an effective personal stock-picking style. On the very short list were Bill Nygren and Kevin Grant, who have run Oakmark Fund (OAKMX) since 2000. The large-cap fund's top holding is Citigroup (C), one of America's four largest banks. The stock was crushed in the Great Recession but has nearly doubled since early 2016. With a P/E of 13, it remains attractive. The stock now yields 1.7%, and the dividend should rise briskly.
I'm a believer in Matthew 25 (MXXVX), a mutual fund whose name refers to a biblical passage that seems to encourage investing. Financial columnist Barry Ritholtz had some fun in the Washington Post a few years ago, disparaging the fund's name as a "gimmick or shtick." But you can't knock its returns. The fund's performance over the past 10 years puts it at the top of its category (diversified, large-company stock funds), and it has landed in the top 20% of similar funds for six of the 10 years. Matthew 25 has minimal turnover and, in fact, added no new names to the portfolio in 2017. So let's go with the longest-held of its 21 stocks: Polaris Industries (PII), first purchased in 2000 and still among the top 10 holdings. Polaris makes snowmobiles and other recreational vehicles. The company's sales jumped 25% in the quarter ending September 30 compared with a year earlier, and even though the stock shot up 15% in a single day, shares still appear underpriced.
My own choice for 2017, Amazon.com, performed exceptionally, returning 39.9%. I am still a fan for the long run. But for 2018, I like Lululemon Athletica (LULU), an athletic clothing manufacturer and retailer that provides the best way for investors to buy into yoga and fitness, trends that will only keep rising. I'm passionate about Lulu, a company with an almost cult-like following among customers that has no debt, a hefty profit margin and prospects for double-digit earnings and revenue growth for 2018.
I'll conclude with three warnings: These 10 stocks vary in size and industry, but they are not meant to be a diversified portfolio. I expect the stocks to beat the market in the year ahead, but I do not believe in holding shares for less than five years, so think of these as long-term investments. I am just offering suggestions here. In the end, the choices are yours.
James K. Glassman owns shares in Amazon.com.
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