After the sullen and choppy stock market of 2015, investors are hoping for a better year ahead. I think the chances of that are good. I suspect corporate profits will be a pleasant surprise. Interest rates are strikingly low, and the Federal Reserve will raise them, but only slowly. The stock market as a whole isn’t cheap, but some stocks are. Here are my ten favorites for 2016.
Alaska Air Group Inc. (ALK, Financial) is on my list for a second straight year, and for the same reasons: airline-industry consolidation and low fuel costs. Planes are flying fuller and cost less to fly. This helps all airlines, but I especially like Alaska Air because of its nice route structure (heavy on California destinations), and high profitability.
Cooper Tire & Rubber Co. (CTB, Financial) of Findlay, Ohio, makes replacement auto tires. With the average car on American road at the creaky age of 11 years, I think demand for replacement tires will be brisk. The stock sells for less than 10 times earnings, my kind of multiple.
DST Systems Inc. (DST, Financial), an electronic payment processor based in Kansas City, Missouri, does a lot of bookkeeping work for mutual funds. The financial industry, which is DST’s main market, is out of favor now. That’s why you can buy DST shares for only eight times recent earnings.
Steel Springs
FlexSteel Industries Inc. (FLXS, Financial) sells furniture for homes and offices. It got its name from the springs inside its furniture, a relatively new technology when the company started using them in the early 20th century. I like the furniture industry because I think home construction is early in a recovery. I favor FlexSteel because of its consistent earnings – only one loss year in the past 15.
Gilead Sciences Inc. (GILD, Financial) is a biotech company from Foster City, California, with close to two dozen drugs on the market and an even larger number in the pipeline. Among its specialties are the treatment of Hepatitis and HIV. Fear of increased price regulation has hurt the stock some. Currently, Gilead shares can be bought for less than 10 times earnings, remarkable in my opinion for such a successful company.
HollyFrontier Corp. (HFC, Financial) of Dallas, Texas, operates refineries in Kansas, Oklahoma, New Mexico, Wyoming and Utah. Refiners usually benefit when the price of oil, their raw material, drops. My guess is that oil, recently $35 a barrel, will stabilize between $40 and $60 for quite a while, allowing refiners to make good profits.
Taking Wing
Spirit AeroSystems Inc. (SPR, Financial), of Wichita, Kansas, makes wings, fuselages, and certain other aerospace parts, mainly for Boeing and Airbus. Its earnings per share should easily hit a record this year, as it has left behind an unprofitable private-jet venture. At 12 times earnings and less than 1.0 times revenue, the stock seems attractively valued.
Lear Corp. (LEA, Financial) is an auto-parts maker based in Southfield, Michigan. Its specialties are seating and electrical systems. Its customers include all the major U.S. auto companies and most major international ones, such as Volkswagen, Honda and Toyota. New-car sales have been rising smartly in the U.S., and I expect that trend to continue.
Northrop Grumman Corp. (NOC, Financial) makes military aircraft, drones, electronics, surveillance equipment and other defense products. In October the Falls Church, Virginia company won a gigantic contract to produce a next-generation bomber. Military challenges from Iran, China, Russia, ISIS and others should keep the U.S. defense budget growing over the next several years.
PulteGroup Inc. (PHM, Financial) is the third-largest U.S. homebuilder by revenue. Based in Atlanta, Georgia, the company primarily sells mid-priced homes: Its average selling price last year was about $329,000. I like the homebuilding segment, as the industry has climbed only halfway to the high point it reached in 2005-2006
Caveats
Candor compels me to say that the record of my new year’s picks has been undistinguished, with an average annual return of 4.1%, compared to 8.6% for the Standard & Poor’s 500 Index. Why should this year’s picks do better? I can only say that my overall record as a money manager and a columnist leads me to expect that results will improve.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results. Disclosure: I own all ten of the stocks recommended in this column in client accounts, and I own most of them personally.
