U.S. stocks are ending the year on a high note. The S&P 500 index (.SPX) boasts a total return of 29% year to date—a great showing in the 11th year of an extraordinary bull market.
With stocks near record highs, where can investors turn for 2020?
Barron’s has identified 10 top stocks for the coming year, as it has every December for the past decade. Our list for next year takes a tilt toward value, with Berkshire Hathaway (BRK/B), Comcast, (CMCSA), Royal Dutch Shell (RDS/B), Pfizer (PFE), ViacomCBS (VIAC), Anthem (ANTM), and Dell Technologies (DELL).
Rounding out the list is Google parent Alphabet (GOOGL), U-Haul owner Amerco (UHAL), and United Technologies (UTX).
The group has an average projected 2020 price/earnings ratio of 14, against 18 for the S&P 500. The average dividend yield is 1.8%, in line with the overall market. Our 2019 picks have returned 24.6% (including dividends) since last December’s article, slightly ahead of the S&P 500 at 24.3%. Here are our 10 stocks for 2020, in alphabetical order.
Alphabet is reasonably priced, given its growth prospects and dominant competitive position.
Shares of the Google parent, at about $1,350, recently hit a record after gaining nearly 30% in 2019. The stock trades for 25 times projected 2020 earnings of $55 a share. But the effective P/E ratio is closer to 20 after adjusting for the losses in Alphabet’s “other bets” businesses, like Waymo, the leader in autonomous driving technology, and net cash of $117 billion.
Compare Alphabet with Apple (AAPL), whose shares are up about 75% this year. Alphabet’s revenues have regularly grown at a 20% quarterly pace, while Apple’s sales fell in its latest fiscal year. Alphabet has the leading global search engine, as well as YouTube, Android, Chrome, Maps, and Waze. Waymo alone could be worth more than $50 billion. “The Alphabet franchise is a strong as ever,” says RBC Capital Markets analyst Mark Mahaney, who has an Outperform rating and a $1,500 price target on the shares.
The stock could get a lift if the company takes shareholder-friendly steps that it has long resisted, including increasing its share-repurchase program, paying a dividend, reining in expense growth, and offering more financial transparency about major businesses. Chances for such moves improved recently, after co-founders Sergey Brin and Larry Page gave up their management roles.
The parent of U-Haul has a nearly impregnable market position as the dominant provider of do-it-yourself moving vehicles and services, with 21,000 locations nationwide. It also has a fast-growing self-storage business.
The shares, which have risen 8% this year to $354, look appealing after having lagged behind the overall market in the past few years. The chief investor concern is that the company has expanded too rapidly in the overbuilt self-storage business.
The company remains a well-kept secret because there is virtually no analyst coverage and it is run like a private business by the controlling Shoen family, which owns about 40% of the stock. The shares trade for 16 times forward earnings and yield less than 1%.
“Amerco is on a path to lower storage investment and much higher cash flow,” says Steve Galbraith, the chief investment officer at Kindred Capital Advisors. He thinks that the storage business alone is worth almost as much as the company’s current $7 billion market value.
Gail Boudreaux, a former top executive at industry leader UnitedHealth Group (UNH), has energized Anthem during her two years as CEO. She has shaken up a sleepy corporate culture while setting ambitious financial targets, notably a 12% to 15% increase in annual earnings.
The stock, at $284, looks inexpensive, given the outlook. It trades at 12 times projected 2020 earnings of $23 a share. Bulls see earnings of $30 by 2023, helped by the company’s decision to start its own pharmacy-benefit manager. Medical for All is a key risk, but its prospects are waning along with Elizabeth Warren’s standing in the polls.
Anthem, a group of for-profit Blue Cross insurers in 14 states, wants to increase the number of people, now 40 million, covered by its health-insurance programs; expand profitable supplemental policies, including dental and vision, to existing customers; and develop newer businesses like data analytics.
“Every time I look at it, I see new sources of earnings growth,” says Adam Seessel, a longtime holder who runs Gravity Capital Management, a New York investment firm. Seessel sees both revenue and margin improvement in the coming years and thinks the stock could hit $450.
After lagging badly behind the S&P 500 in 2019, Berkshire Hathaway looks like a good bet for 2020, based on its rising book value and earnings. The Class A shares, at about $338,000, are up 11% in 2019, against a 29% total return for the S&P 500.
The weak showing reflects investor frustration with the continued buildup of cash on Berkshire’s balance sheet. Some investors are also concerned about which direction the company will take when Warren Buffett, who turned 89 in August, is no longer CEO.
Still, Berkshire trades for 1.3 times projected year-end 2019 book value—low by the standard of recent years. The stock’s P/E ratio of 21, while above that of the S&P 500, is also historically low and understated because of Berkshire’s big equity portfolio and cash position.
“Berkshire is pretty cheap,” says Jay Gelb, a Barclays analyst. “It’s a great collection of businesses and is a high-quality defensive stock trading below its intrinsic value.” He has an Overweight rating and a $401,000 price target on the Class A shares.
A giant conglomerate, Berkshire has a $25 billion-plus annual earnings stream from dozens of businesses, including the Burlington Northern Santa Fe railroad and Geico insurance, plus a huge cash position of $128 billion—about a quarter of its market value.
Given Berkshire’s size, Buffett needs to think big with acquisitions. Possible targets include Walgreens Boots Alliance (WBA), Delta Air Lines (DAL), Southwest Airlines (LUV), FedEx (FDX), and United Parcel Service (UPS).
Cable TV has emerged as a great business in recent years. And most cable companies have focused on their lucrative high-speed internet services. But the leader, Comcast, has pursued a diversification strategy, highlighted by its acquisition of European satellite provider Sky last year. Comcast also plans to invest $2 billion over the next two years to start a streaming service called Peacock, which will use programming from its NBCUniversal division.
Wall Street doesn’t like Comcast’s approach and prefers No. 2 Charter Communications (CHTR), which uses its free cash flow for an aggressive share-repurchase program. Comcast stock, at $43, is up 26% this year and has trailed the overall market in the past five years. Charter has climbed 65% in 2019 and has crushed the S&P 500 over the past five years. But Comcast now looks like the better bet. It trades at a discount to Charter, based on pretax cash flow, and carries less risk because of its lower debt-to-cash-flow ratio. Comcast fetches just 13 times projected 2020 earnings.
“We believe the shares are inexpensive, relative to peers, especially given the quality of the company’s assets,” wrote Credit Suisse analyst Douglas Mitchelson. He expects Comcast’s buybacks to restart in 2021 after the cable operator pays down debt related to the Sky deal. He has a price target of $55 on the stock, which he rates Outperform.
Dell Technologies has been a disappointment since it went public a year ago through a complex deal involving the tracking stock for the Dell-controlled software company, VMware (VMW). The shares, which recently traded at $49, are up 1% this year. Recent weakness reflects a small cut in revenue guidance for the current fiscal year ending in January.
Based on sales, earnings, and asset value, however, the stock looks inexpensive. Dell has more than $90 billion in annual sales, mostly from tech hardware such as servers and PCs. Its most valuable asset is 82% of VMware, worth about $50 billion, or more than Dell’s $36 billion market value. This reflects Dell’s high leverage. Dell’s core net debt is about $34 billion. Investors are effectively putting little value on the hardware business.
Dell trades for eight times the $6 a share it’s expected to earn in the current fiscal year. (This figure includes stock-compensation expense.) J.P. Morgan analyst Paul Coster has an Overweight rating and a price target of $70 on Dell, based on a sum-of-the-parts valuation. In 2021, Dell should have more flexibility to spin off or monetize the VMware stake without paying taxes. Speculation about VMware could boost the stock.
Pfizer plans to combine its generic-drug business, as well as off-patent products, including Lipitor, with Mylan Labs (MYL) and then spin off a 57% stake in the combined company, to be called Viatris, to its holders. That stake is worth about $2.50 per Pfizer share. Wall Street isn’t thrilled about the earnings impact of losing those businesses, and the stock, at about $38, is off 12% this year.
Nonetheless, the valuation on new Pfizer looks appealing, given management’s expectation of 6% annualized sales growth through 2025, which could produce 10%-plus yearly gains in earnings per share. New Pfizer has important patent-protected drugs like Ibrance for breast cancer and the pneumonia vaccine Prevnar, plus a strong pipeline. It trades for 15 times projected 2020 earnings of $2.25 a share, adjusted for the spinoff, expected at midyear. Pfizer holders are likely to get the same dividend from the two companies.
Cantor Fitzgerald analyst Louise Chen has written that the revenue gains, “operating leverage, pipeline advancements, return of capital to shareholders, and M&A are all underappreciated.” She rates the stock Overweight, with a $53 target.
Royal Dutch Shell
Energy has been the worst stock sector this year and for the past decade. The next 10 years could be better, as the industry scales back spending on new oil and natural-gas projects and returns more cash to shareholders. Royal Dutch Shell has adopted the investor-friendly approach and could be the best play among the global supermajors.
The British-Dutch company’s U.S. shares trade near a 52-week low, at about $57, or 13 times projected 2019 earnings, a discount to U.S. peers Chevron (CVX) and Exxon Mobil (XOM). The shares yield 6.5%, and the dividend looks secure, even if oil prices decline moderately. Investors can buy American depositary receipts of the United Kingdom (RDS/B) or Dutch stock (RDS/A). The U.K. shares look like the better bet because their dividends aren’t subject to withholding tax.
Shell has a goal of returning $125 billion in dividends and stock buybacks to investors from 2021 to 2025—more than half of its current market value. Bernstein analyst Oswald Clint sees 50% upside in the shares, which trade no higher than they did in 2009.
Wall Street likes simple investment stories. United Technologies’ will get easier to understand in 2020 after the company completes its merger with Raytheon (RTN) and spins off its Carrier and Otis divisions to shareholders.
The shares, at $149, trade for about 17 times projected 2020 earnings, a discount to peers. The Raytheon merger will create a top aerospace and defense company, while Carrier (climate control) and Otis (elevators) are leaders in their fields.
Wall Street is warming to the Raytheon transaction after some initial skepticism, because it will reduce leverage and decrease risk, thanks to the stability of Raytheon’s defense business. United Technologies shares are up 40% this year, but have trailed those of rivals like Honeywell International (HON) in the past five years.
United Technologies is a top pick of J.P. Morgan analyst Stephen Tusa, who sees “top-tier organic growth, margin expansion, and free-cash-flow inflection driven by the aerospace business.” He also sees upside for Carrier and Otis.
The recent merger of CBS and Viacom creates what Evercore ISI analyst Vijay Jayant calls a “content powerhouse,” with 20% of U.S. TV viewers and a shareholder-focused management team led by an underappreciated CEO, Bob Bakish.
The stock—recently at $38, down 14% on the year—has a rock-bottom valuation of six times projected 2020 earnings of $6 a share. In contrast, industry leader Walt Disney (DIS) is up 34% in 2019. ViacomCBS’ $23 billion market value is just 10% of Disney’s, and its P/E ratio is less than a third of Disney’s.
Investors worry about the impact of cord-cutting, rising programming expenses, competition from streaming services like Netflix (NFLX), and the potentially high cost to renew CBS’ National Football League contract in 2023. The stock recently took a hit when ViacomCBS projected weaker-than-expected free cash flow for 2020. But the concerns seem well discounted in the stock price. The company is expected to be a large buyer of its shares in coming years.
“We subscribe to the idea that the company will be able to have its cake (continue monetizing a robust content library) and eat it, too (invest in new productions while building direct-to-consumer digital platforms),” Jayant wrote. He rates the stock Outperform, with a $51 price target.
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