Each year, we ask the nation’s leading newsletter advisors for their favorite stocks for the year ahead. Ten experts see upside gains in select consumer and retail names in areas from jewelry to power tools, liquor to restaurants, fitness centers to salons and specialty to department stores. Here's a shopping list of ideas from MoneyShow’s 35th annual Top Stock Picks report.

 

Jason Williams, Wealth Daily

Stanley Black & Decker (SWK) — our conservative pick for 2018 — is most commonly known for its hand and power tool lines. But it’s so much more than just tools. Stanley provides security, storage and industrial fasteners, too.

It has the best margins in the business at 12.88% operating margin and 9.79% profit margin. And it’s been at the top of the heap for years now — that doesn’t happen by accident. It also has a healthy dividend yield of 1.52% — that’s $2.52 per share per year. It’s not a high yielder, but with a payout ratio of only 30%, it has lots of room to grow payments.

And while it might not be the most exciting company, the gains it’s seen in 2017 are. The company was up over 47% as of December 20, 2017, and it has a lot more room to run. Management at Stanley is dead set on doubling revenue by 2018 — that’s from $11 billion. It’s no small feat, but the company is well on its way to achieving its goal.

Management has been executing a growth-by-acquisition strategy and has been aggressively scooping up smaller companies that fit into its repertoire. From the Craftsman brand that Stanley acquired from Sears in early 2017, energy storage companies, and drone surveillance Stanley is building up its market share at a rapid clip.

And combined with organic growth in all of its three major segments, this is translating into some serious stock price appreciation. I’m seeing this company heading up at least another 50% in 2018 — potentially even higher as the cost synergies and additional revenue from its acquisitions in 2017 continue trickling down the income statement.

 

John Staszak, Argus Research

Constellation Brands Inc. (STZ) is a global manufacturer and marketer of wine, spirits and beer with a wide range of brands, including Clos du Bois, Ruffino, Robert Mondavi and SVEDKA Vodka. The company also owns the rights to brew and market Modelo Mexican beers (including Corona) in the United States. With more than 12% of the U.S. market and nearly 2% of the global market, Constellation is the world’s largest wine producer and should continue to benefit from economies of scale.

We have a favorable view of recent additions to this company’s brand portfolio, including as it emerges as a leader in craft beer. We see its brands positioned to grow more rapidly than those of other alcoholic beverage companies.

It has a favorable product mix, and strong consumer demand for Corona and craft beers are driving growth in free cash flow and margin expansion. Capacity additions are expected to temper growth just slightly but will have long-term benefits.

Looking ahead, we expect sales and earnings growth at Constellation to be driven by new products, new packaging and line extensions. Based on our expectations for greater-than-expected cost synergies, management's guidance, and positive earnings surprises the past seven quarters, we are raising our FY18 EPS estimate from $8.40 to $8.55. For FY19, we are raising our estimate from $9.20 to $9.35.

 

Peter Mantas, Logos LP

Del Taco Restaurants (TACO) is a new name among our recommendations but I believe there are very interesting catalysts that will propel the name higher. The company has surprisingly consistent operating margins in the high single digits — which is almost double that of Chipotle Mexican Grill (CMG) — and trading at only 1x sales which is well below industry competitors. More importantly, this small cap is unloved at the moment (down 17% year to date) despite strong growth prospects.

Download MoneyShow’s 35th Annual Top Picks Report: The 100 Best Stocks for 2018

At only 5% revenue growth (which is well below their current forecast), 5% net margin (which we believe will be higher after corporate tax cuts and higher operating margins from increased economies of scale) and 20.5 times forward P/E ratio, the company is worth over $511 million in market cap which implies a very conservative 10% margin of safety. 

Moreover, the company has sublease income growth at over 22% over the last 5 years which is an underappreciated growth catalyst for the stock as the company scales and the contribution margin has increased every year to above 20% in its latest quarter.

Insider buying has also picked up at Del Taco Restaurants, with directors buying significant positions in the company over the last quarter. Overall, the stock has fallen high double digits from peak to trough but is now seeing double-digit earnings (and revenue) growth at low forward P/E multiple relative to its industry competitors.

 

Mike Cintolo, Cabot Growth Investor

Five Below (FIVE) is probably our favorite retail story from a fundamental perspective; the stock is a less aggressive idea for the coming year. The stock is strengthening as the weak hands have been worn out over many years and investors head back to the sector.

The company is a unique dollar store, offering teen and pre-teen merchandise for $5 or less, including everything from smartphone cases to makeup to sports equipment to books to candy to party supplies. The secret sauce here is the combination of the company’s outstanding store economics and the underlying attractiveness of its products.

On the economic front, a successful retail firm might make its initial investment in a new store back in two or three years, but Five Below has a history of making it back in a year or less, which has allowed for a rapid expansion plan.

The company is boosting its store count by about 20% this year (it had 625 locations at the end of October), with 15% to 20% store growth likely for years to come. Long-term, management believes there’s room for more than 2,000 locations in the U.S. alone.

And, as for its products, the company has notched 11 straight years of comparable store growth, and last quarter’s tally (up 8.5%) was one of its strongest in years. All told, 20%-ish growth is likely for a long time to come, and the stock, which built a seemingly endless consolidation during the past few years, has finally broken out on the upside. We think 2018 will be a great year for Five Below.

 

Jim Woods, Successful Investing

There’s a Wall Street adage that recommends you “buy what you know.” Now, I’m not generally of that opinion, but I am in the case of Planet Fitness Inc. (PLNT). You see, I’m a fitness freak, and I’m always in the gym when I’m not behind my trading desk.

Moreover, I currently serve as a consultant to a fitness industry startup. In Planet Fitness, I can combine my penchant for exercise with my love of picking great stocks. The company owns and operates more than 1,300 fitness centers in the United States, Puerto Rico, the Dominican Republic and Canada.

Planet Fitness also has nearly 9 million gym members, a number expected to grow rapidly in the years to come. The company’s membership growth in recent years has translated into a three-year earnings per share growth rate of some 28%. In 2017, that growth helped propel the shares up more than 70%. And despite that kind of share price hypertrophy, I’m expected another big year of muscular gains for this fitness industry winner.

So, what distinguishes Planet Fitness in the commercial gym space? The company’s low membership fees are perhaps the most attractive aspect of its appeal to customers. Hey, we all want a clean, well-equipped place to work out, but nobody wants to pay big bucks for a place they generally only visit a few times a week. With an expected earnings growth of some 24% in 2018, PLNT shares are poised for another very healthy year.

 

Azmath Rahiman, Cabot Benjamin Graham Value Investor

On the aggressive side, Signet Jewelers (SIG) is a stock that can yield a good return at the cost of a higher risk. The company owns Kay Jewelers, Jared and Zales. The stock was already trading at a discount when the last quarterly results were released. Further, the stock had a 30% drop on the day the quarterly results were announced.

Signet has a variety of headwinds that have led to large-scale negative publicity, and ultimately, its depressed market valuation — technical hiccups faced while outsourcing its in-house credit portfolio, an investigation on its credit practices by the Consumer Finance Protection Bureau and decreasing same-store sales. Under the new leadership of Virginia Drosos, who is strategically focusing on long-term stability and growth, the company may continue to maintain its market leadership.

On stability, Signet is outsourcing its $1 billion prime credit portfolio, and on growth, and the company is focusing on its omnichannel (online) sales, including the acquisition of R2Net, which owns online diamond retailer JamesAllen. Signet is the largest player in the diamond retail industry, and a strategic online push will deliver a robust result. In case of such a turnaround, the company has a significant upside potential.

 

Doug Gerlach, Investor Advisory Services

We have admired Ulta Beauty, Inc. (ULTA), the largest beauty retailer in the United States, for quite some time. Ulta sells cosmetics, fragrances, bath and skincare products and salon services. The company operates 990 stores in 48 states, 90% of which are located outside of malls.

It markets more than 20,000 products from 500 well-established and emerging beauty brands across all categories and price-points, including its own private label, the Ulta Beauty Collection. Each store runs a full-service salon with hair, skin and brow services. The typical store is 10,000 square feet with approximately 950 square feet devoted to the salon.

The beauty market is highly fragmented with more than 70,000 places to purchase products. Ulta has plenty of room to grow as its market share of beauty products is 6% and salon services less than 1%.

Its loyalty program, Ultimate Rewards, has grown to 25.4 million active members; the company believes its rewards program has been key to driving growth as it data mines to measure marketing program effectiveness across its stores and growing e-commerce capabilities.

What has held us back is the stock’s high valuation, with shares trading over $300 and a P/E over 40 as recently as June. Since then, shares have fallen about a third for several reasons. The first is concern that sales in the cosmetic industry are slowing. The second is “the Amazon discount,” that is, any retailer in an industry where Amazon expresses an interest takes a hit. Thirdly, Ulta expects same-store sales growth will slow. We think these concerns are overblown and patient investors can be rewarded.

 

John Dobosz, Forbes Dividend Investor

Founded in 1912 as the Metal Office Furniture Company, Grand Rapids, Michigan-based Steelcase (SCS) designs and sells furniture and interior architectural design products through a network of 800 dealers. Its furniture portfolio includes panel-based and freestanding furniture systems and complementary products, such as storage, tables and ergonomic work tools.

Brands include Steelcase, Coalesse, Designtex, PolyVision and Turnstone. Its main emphasis is on seating. In fact, your desk chair may be one of Steelcase’s “task” chairs. Revenue for the current fiscal year ending February 2018 is expected to grow 2.4% to $3.1 billion, with net operating cash flow up 14.1% to $196.8 million.

Steelcase has grown its dividend by 14.9% a year since 2012, and with an annual payout of $0.51, the stock yields 3.7%.  Steelcase trades at valuations significantly below five-year averages on multiple metrics, including price-to-sales (-16.9%), price-earnings (-8.4%), price-to-cash flow (-29.3%), and price-to-book value (-25.5%).

 

Ingrid Hendershot, Hendershot Investments

TJX Companies (TJX) is my top conservative pick for 2018; celebrating 40 years in business, the firm posted record financial results in fiscal 2017 with sales topping $33 billion. T.J. Maxx began operations with just two stores in Worchester, MA. In 1990, TJX acquired a five-store chain called Winners, which has grown into a winner by becoming Canada’s leading off-price retailer.

In 1992, HomeGoods was introduced to expand TJX’s presence in the booming home fashions market. Closely named T.K. Maxx was launched in 1994 and introduced the off-price concept to the United Kingdom. In 1995, TJX acquired Marshalls, which doubled the company’s size. The newest store divisions include HomeSense, Sierra Trading Post and Trade Secrets. 

TJX delivers a rapidly changing assortment of quality, brand name merchandise at prices that are 20%-60% less than department and specialty store regular prices. TJX can offer these savings as a result of their opportunistic buying strategies.

As the largest off-price retailer, TJX has tremendous buying power and solid relationships with more than 18,000 merchandise vendors in 100 countries around the world. This retail recipe engenders strong brand loyalty from global consumers of all ages. 

As part of its disciplined capital allocation policy, TJX announced a 20% increase in its dividend for fiscal 2018, marking the 21st consecutive year of dividend increases. Over this time period, the dividend has grown at a 23% compound annual rate. 

In addition, management plans to repurchase approximately $1.5 billion to $1.8 billion of its stock during fiscal 2018 and still end the year with $3.3 billion in cash and investments, reflecting the company’s strong cash flow generation and financial flexibility. Long-term investors shopping for a bargain should consider the TJX Companies, a well-managed high-quality business with strong brand loyalty, outstanding cash flows, steadily growing dividends and substantial share repurchases. Buy.

 

Russ Kaplan, Frank, Fox & Hoagstrom’s Heartland Advisor

Our selection for a growth company is Macy’s (M), a growth-oriented pick for 2018. With the rapid growth of online shopping, department stores have taken a drubbing over the past few years. They are perhaps the most unpopular segment of the stock market. Our current selection, Macy’s is indeed a department store and we like it for a number of reasons.

First of all, we think that there is a future for department stores and for the better ones such as Macy’s. The sharp reduction in the stock price is way overdone. Back in 2015, Macy’s sold as high as $73.60. Today it is selling at a recent price of $25, which is a massive drop.

To us, this represents an overreaction and makes Macy’s a wonderful buying opportunity. The fundamentals of the company are sound, and according to our measures of values, Macy’s is undervalued. For example, the price/earnings ratio on the stock is 11.

As a reaction to the emergence of online selling, Macy’s has reacted to its own online shopping capabilities and so far this has been proving fruitful. The combination of department store sales and online shopping has shown an excellent return on equity of 22.5%. This is not reflective of a company that is going out of business.

Besides its profitability, Macy’s is sitting on expensive real estate, which we think is greatly under-reported in its financial statements. This is especially so with its flagship Manhattan property. For those of you who are interested in income, Macy’s pays an astounding dividend of 5.84% and is unlikely to be cut. All and all, we think Macy’s has the potential for excellent growth in the future.

 

 

 

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