Investors looking for ways to outperform during a period of heightened market uncertainty may be wise to build a diversified portfolio of leading companies in different industries.

At the close of each calendar year, Bank of America Merrill Lynch publishes a list of its top 11 favorite stocks for the following year. Each pick belongs to one of 11 Global Industry Classification Standard sectors. This year's top 11 picks are: Public Service Enterprise Group (PEG), Walt Disney Co. (DIS), Simon Property Group (SPG), International Paper (IP), General Motors (GM), Microsoft Corp. (MSFT), Raytheon (RTN), CVS Health (CVS), Morgan Stanley (MS), Exxon Mobil (XOM), and Molson Coors Brewing Co. (TAP), per Business Insider.

Value Plays Outperform

The bank's basket of stocks from the S&P 500's 11 different sectors outperformed the market last year. Since 2017’s report was published, the list generated a 3.2% average return rate, compared to the S&P 500’s 1.6% growth, according to BAML. To be included in the basket, a company must have a buy rating at the firm and have exceptional fundamentals.

Overarching characteristics of these 11 stocks include healthy free cash flows and balance sheets, attractive dividend yields, as well as being held underweight by large cap funds, historically performing well during periods of heightened volatility and being less vulnerable to changes in the economic backdrop. 

BAML cited inexpensive valuations as a main reason to own stocks in the basket. Many had posted negative returns YTD when the list was published, such as International Paper, Morgan Stanley and Molson Coors, which are all off by more than 20%.   Others, including CVS and Disney, posted only modest gains in 2018 . BAML’s earnings estimates for many of these value plays are above the consensus, including Microsoft and Simon Property.

Microsoft

While Big Tech fared the worst in 2018’s series of sell-offs, Microsoft has continued to beat the broader market. Shares of the IT giant were up 20.3% YTD when the list was published, compared to the S&P 500’s 2.8% loss and the Nasdaq Composite Index’s minimal gain of 0.1% over the same period. 

“High quality, dividend grower/medium equity duration, healthy balance sheet (net cash),” wrote BAML. The firm also cited Microsoft’s investment in future growth, writing that, “R&D spenders [are] typically rewarded.” BAML expects Microsoft’s stock to get a boost on stronger than expected results next year, despite broader fears regarding a deceleration in corporate earnings growth.

Walt Disney

Within Communications Services, BAML likes long-time industry leader Walt Disney, which it calls “one of highest quality S&P 500 stocks.” Analysts highlighted the entertainment giant’s strong free cash flow, medium equity duration and low leverage as positive growth drivers. 

Moving ahead into 2019, BAML expects major catalysts including the launch of Disney’s on-demand streaming service, to boost shares, currently held underweight by large-cap active funds.

After a decade of stellar returns, in which Disney shares have grown nearly 400%, shares were up about 3% YTD and roughly flat over three years when the list was published. Disruption of the media landscape, in which consumers have ditched cable for streaming services, has many concerned regarding Disney’s ability to rapidly transform and ward off new competition from players such as Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN).

Meanwhile, Disney’s loyal investors were upbeat on the pending acquisition for the movie and television studios of Twenty First Century Fox (FOX), as well as a strong slate of movies, new Star Wars-themed attractions, opportunities to grow its streaming business and share repurchases.

Molson Coors

The parent company of Coors, Miller, Blue Moon and an assortment of other beer brands has struggled since late 2016 as consumer demand shifts to craft brews. 

The mass-market beer maker, which lost nearly half of its value from its peak in 2016 to December 2018, has been weighed down by weakness from its main rival Anheuser-Busch InBev (BUD), which reported dismal 2018 Q3 results. Molson Coors caught a break when it posted 2018 Q3 results which beat expectations.

While bears focus on the broader issues facing the traditional U.S. beer industry, Molson Coors’ international presence, potential in the cannabis market and development of higher-end craft beers have led some to make a more bullish case. 

BAML highlighted the Consumer Staples name as a “high quality” stock trading at an inexpensive valuation, at 13 times forward p/e, adding that the company typically “does well in periods of rising volatility.”

What’s Next for Investors?

While BAML’s strategy for a diversified portfolio has proved successful in the past, it’s important to note that in the case of a sharp slowdown and a potential bear market, its baskets of stocks could face heavy declines next year. A number of these stocks were losers in 2018, making them both potential turnaround plays and possible victims during further rounds of selloffs.