In an annual exercise, Barron's picks their ten favorite stocks for the following year, based on a combination of their own analysis and consultations with institutional investors. After a record-breaking 2017 for equity markets around the globe in 2017, "it has gotten difficult to find stocks with significant upside potential" for 2018, Barron's writes. For the 12 months up to publication of this article, they report that their 2017 picks delivered an average total return (including dividends) of 29.8%, versus 22.8% for the S&P 500 Index (SPX) as a whole. "Given current valuations, we'd be happy with half that return next year," they conclude. (For related reading, see: 4 Best Tech Stocks to Own in 2018: Fortune.)
Stocks for 2018
Here are Barron's choices, with their year-to-date net price changes through 1:00 PM New York time Thursday, per Barron's data:
- Alphabet Inc. (GOOG), the parent of Google, +34%
- Delta Air Lines Inc. (DAL), +12%
- Berkshire Hathaway Inc. (BRK.A), +21%
- Volkswagen AG (VLKAY), +41%
- Pioneer Natural Resources Co. (PXD), -13%
- Applied Materials Inc. (AMAT), +60%
- Enterprise Products Partners LP (EPD), -3%
- Ally Financial Inc. (ALLY), +51%
- Anthem Inc. (ANTM), +58%
- US Foods Holding Corp. (USFD), +11%
These stock picks were announced in a December 9 story. We offer summaries of Barron's reasoning behind five of these stocks below.
The holding company run by master investor Warren Buffett is "among the most defensive blue chips, given its Fort Knox-like balance sheet with more than $100 billion in cash," per Barron's. They expect the class A shares to beat the S&P 500, getting a big boost if corporate tax rates are cut. In particular, the company has huge deferred tax liabilities from unrealized capital gains on its $177 billion equity portfolio. Meanwhile, a strong U.S. economy is a positive for earnings at operating subsidiaries such as the Burlington Northern railroad.
Barron's calls Delta the best-run major U.S. airline, citing strong cash flow and shareholder-friendly management. The dividend yield is 2.2% and valuation is an inexpensive 11x trailing earnings per share, as of December 14. The company also is returning capital to stockholders through share repurchases. Delta also has done a better job than its peers "in segmenting its fares to help blunt the impact of low-cost carriers," and in forging strong international alliances, Barron's says.
Anthem operates for-profit Blue Cross health insurers in 14 states, including New York and California. Tax reform can add about $3 to annual EPS, per Barron's, an increase of about 25% from the current 2017 estimate of $12, with $20 possible by 2020. New CEO Gail Boudreaux formerly was an executive at UnitedHealth Group Inc. (UNH), which Barron's calls the "best-managed big health insurer." They expect her to "shake up a sleepy corporate culture" at Anthem, and propel it into profitable managed-care alliances and unregulated businesses.
Applied Materials is the leading maker of equipment used in the manufacturing of semiconductors, Barron's indicates. Growing demand for chips in an increasing number of applications has been spurring investment in plant and equipment by chipmakers, which, in turn, has been a boost to sales by Applied Materials. Moreover, the company excels in developing "high-performance manufacturing technology" used in making increasingly complex chips for applications in artificial intelligence (AI), per comments by CEO Gary Dickerson cited by Barron's.
Shares of the biggest automaker in Europe are cheap, at a forward P/E of only about 6.5x estimated 2018 earnings, versus about 11x for Toyota Motor Corp. (TM) of Japan, Barron's says, adding that VW has the euro equivalent of nearly $30 billion in net cash, or about 25% of its market value. Also, management recently forecasted a 25% increase in revenue by 2020, higher profitability, and moderating capital expenditures despite planning to spend $40 billion on electric cars and other new technologies during the next five years, Barron's adds.
Strong franchises owned by VW include Scania trucks (which may be spun off eventually, per Barron's) and luxury car brands Audi and Porsche. Audi is a leader in the development of self-driving technology, and has the first production vehicle on the market that offers so-called Level 3 hands-free driving in select highway conditions. Audis with more advanced Level 4 capability are scheduled for release in 2020–21. (For more, see also: How Big Automakers Will Speed Past Tesla.)