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All Contents © 2018The Kiplinger Washington Editors
By Tom Petruno, Contributing Writer
| From Kiplinger's Personal Finance, January 2018
If this bull market survives beyond August, it will be the longest-running bull ever. And yet, there's reason to believe it still has has some room left to run. One key factor: A modestly growing economy that's spared us the sort of boom-and-bust cycles that can end a bull market. That also bodes well for companies that do well when the economy is growing, so-called cyclical stocks. Also poised to outperform in 2018: the financial sector, especially banks, and technology firms.
Here are 8 stock picks that we see offering promise in the year ahead.
52-week low/high: $27.88/$56.69
Market value: $60.2 billion
P/E ratio: 14
Exploding global demand for computer chips is a bonanza for Applied Materials (AMAT), the world’s leading maker of chip-manufacturing equipment. The firm should benefit from the proliferation of chips in cars, industrial machinery and smartphones. And the rise of artificial intelligence—computers that can learn on their own—adds another layer of long-term demand for chips, says investment firm RBC Capital. Although Applied’s stock has surged 95% over the past year, it still looks appealing, trading at a modest 14 times estimated year-ahead earnings.
52-week low/high: $142.95/$189.78
Market value: $461.2 billion
P/E ratio: 24
Berkshire Hathaway (BRK.B), the company that's synonymous with master investor Warren Buffett, offers investors a three-fer. It owns dozens of businesses that touch virtually every corner of the economy, from insurance (Geico) to railroads (Burlington Northern). So its portfolio of businesses stands to benefit if U.S. economic growth picks up in 2018, which we think it will. And if the market forges ahead, Berkshire’s stock holdings, including big stakes in Bank of America (BAC) and Apple (AAPL), should deliver gains. A third attraction: If the market stumbles, Buffett and his team of ace value hunters have $100 billion in cash to swoop in on bargains.
52-week low/high: $30.60/$45.33
Market value: $60.1 billion
P/E ratio: 25
You may think of Charles Schwab (SCHW) as a discount brokerage, but that’s now a fraction of its business. By offering a broad menu of financial products and services at low cost, Schwab continues to attract individual investors and financial advisers alike. Client assets top $3.1 trillion. Schwab also benefits from rising interest rates, thanks to a wide gap between what it pays on short-term accounts such as money market funds and what it earns on investments. Schwab “has the best strategic position of any retail broker,” according to analysts at SunTrust Robinson Humphrey.
52-week low/high: $62.59/$103.14
Market value: $26.4 billion
Delphi (DLPH) has remade itself since emerging from bankruptcy protection in 2005. The auto-parts giant is a leading low-cost supplier of electronics and other components for electric and self-driving vehicles—a market expected to boom for years. In the near term, Delphi (which is renaming itself Aptiv) could face pressure from a U.S. slowdown in auto sales. But investment firm Cowen views Delphi as “the bridge between the tech sector and the auto sector.” The stock, trading at 14 times estimated 2018 earnings, “is just beginning to reflect the shift,” reports Cowen.
52-week low/high: $52.78/$92.11
Market value: $26.1 billion
P/E ratio: 12
DXC (DXC) is in the midst of a turnaround. The firm, one of the world’s largest providers of technology-consulting services, was formed in April 2017 by the merger of Computer Sciences Corp. and the business-services arm of Hewlett Packard Enterprise. DXC’s precursor businesses were disappointing. Now, a new team is working rapidly to boost profitability and ratchet up the level of tech expertise to help DXC’s 6,000 clients navigate the digital age. Analysts expect DXC to earn $6.84 a share in the fiscal year that ends in March 2018, then earn $8.22 a share the following year.
52-week low/high: $224.03/$375.36
Market value: $42.1 billion
P/E ratio: 43
Intuitive Surgical (ISRG) makes robotic systems surgeons use for minimally invasive procedures. Its “da Vinci” system is expected to generate $3.4 billion in sales in 2018 and earnings of $9.22 a share. Bulls see potential for growth as the firm sells more systems and tools for an increasing array of procedures and expands in foreign markets, such as China. A price-earnings ratio of 43, more than double the broad-market average, makes the stock a high-risk bet. Analysts at JPMorgan say the price is worth it for one of health care’s “most significant” growth opportunities.
52-week low/high: $56.47 - $83.47
Market value: $641.7 billion
When Satya Nadella became chief executive of Microsoft (MSFT) in 2014, he vowed to shift the firm’s focus from personal computers to mobile computing. Shareholders are reaping the rewards: Microsoft’s sales jumped 12% in the quarter ending September 30, powered by soaring usage of its Azure cloud service. Strong sales of Microsoft Office software show that it remains the most popular workplace tool of its kind. The stock’s P/E of 24, based on estimated year-ahead earnings, isn’t excessive for a revitalized tech titan.
52-week low/high: $135.58 - $212.60
Market value: $203.72 billion
P/E ratio: 20
With almost 50 million members, UnitedHealthcare (UNH) has become “the indisputable industry leader in managed care,” say analysts at BMO Capital Markets. The health insurer operates in all three major insurance markets: individual, group and government-sponsored. It also fills 1.2 billion prescriptions each year via its OptumRx unit. UnitedHealthcare’s navigation of the Affordable Care Act boosted confidence in its ability to prosper under whatever new policy regime emerges from Washington. The firm is “well positioned for a long runway of growth,” BMO says.
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