One-third of the way into 2019, the U.S. stock market looked more resilient than ever with the bull snapping back from a devastating correction like a bovine half its age. Stocks hit a new high on April 30, delivering an early 2019 return of 18.3%, including dividends—nearly two years’ worth of the long-term average gain for stocks in just four months. Assuaging worries of a looming recession, the economy grew at a robust 3.2% in the first quarter of 2019. Instead of earnings dipping into negative territory, as analysts had expected, corporate America ended the first quarter slightly in the black. And perhaps most important, the Federal Reserve Board pivoted from telegraphing as many as three rate hikes in 2019 to zero rate hikes.
Then President Trump tweeted about trade. Stocks have been volatile since, and the downdraft served as a swift reminder that substantial risks are building in this aged bull market and in an economic expansion that in July becomes the longest one ever.
With the easy gains behind us this year, we think you’ll do best by scouting stocks that can eke out reliable earnings growth in a low-growth economy and looking to dividends to bolster returns. We favor large-company stocks over small, and we think investors can find good candidates in a number of market sectors and in overseas markets—but you’ll have to be discerning and selective within each category. In the second half of 2019, investors will have to stay defensive, while also taking advantage of tactical opportunities as they arise.
Here are five stocks we believe fit the bill and are worth considering for your portfolio:
Prices, returns and other data are as of May 17, unless otherwise noted. Click on ticker-symbol links in each slide for current prices and more.
In December, CarMax (KMX), the country’s largest used-car retailer, debuted a new business model in Atlanta, where customers can complete the entire car-buying process online or shop in the store. The Atlanta branch has already seen a bump in sales, and the firm plans to roll out the new car-buying process to the majority of its customers by February 2020. The rollout is not yet reflected in the firm’s shares, which trade at just 15 times projected earnings over the next four quarters, says Ira Rothberg, manager of the Hennessy Focus Fund (HFCSX). He sees annualized earnings growth percentages in the mid teens over the next decade on the strength of new stores, increasing sales and aggressive stock buybacks.
Cisco Systems (CSCO) is the dominant player in internet switches and routers, but about 40% of overall sales comes from steady revenue streams in its software and services businesses. Cisco’s $34.6 billion in cash and short-term investments gives it plenty of latitude to raise dividends or make acquisitions. The stock yields 2.5%. In May, the company reported that fiscal third-quarter earnings were 13% above the same period in 2018. And company executives said during a quarterly earnings call that Cisco has slashed its manufacturing in China, reducing potential damage from a trade war between the U.S. and China.
Danaher (DHR) is a health care equipment maker on a hot streak. Shares are up nearly 30% so far in 2019 and trade at 26 times projected year-ahead earnings. And yet, says Mike Bailey, director of research at FBB Capital Partners, the market doesn’t fully appreciate the growth potential stemming from Danaher’s recent mega-acquisition of General Electric’s biopharmaceutical business. The unit is a leading provider of instruments, equipment and software supporting the discovery, development and manufacture of complex, biologic drugs.
Not many retailers can give Amazon.com (AMZN) a run for its money, but Walmart (WMT) is giving it a go. Analysts at CFRA bumped up their rating on the stock from “buy” to “strong buy” after the retailer reported boffo first-quarter earnings, including a 37% jump in U.S. e-commerce sales. The retailer also announced plans to introduce free next-day shipping on orders over $35. “We think the offer will help it take e-commerce market share from Amazon,” say CFRA analysts. They see the stock trading at $115 within the next 12 months.
Ahead of the 2020 election, talk of potential Medicare and Medicaid changes, among other things, has spooked many health care investors. But Zoetis (ZTS), the world’s biggest animal health company, is immune to election-year rhetoric. Every major division of its business, which makes vaccines, medicine and health products for a diverse lineup of livestock and pets, expanded in 2018. Managers at Eaton Vance Worldwide Health Sciences fund like the firm’s predictable revenue and its growing overseas footprint.
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