Stock of the Week
The start to 2017
2016 was a boring year until November 8th. Through the first half of the year Utilities, Telecom and Consumer Staples led the way. Healthcare and Financials were the two worst performing sectors for the first six months thanks to their own transgressions and political attacks. However, with the start of the third quarter and the second half of the year, the investment opportunities changed. Utilities, Telecom, Consumer Staples topped out. Gold topped out as well as interest rates started to creep higher.
With the start of the second half of the year, the financials perked up as money rotated out of defensive issues. Then everything changed on November 8th as Trump surprised everyone by beating Hilary Clinton. Investors quickly jumped on board speculating a Trump administration would be good for business. The financials were the main beneficiary as the sector jumped 17% after the election. Investors now expect Trump's people to loosen regulations not only for the banks, but for other sectors as well. Thanks to the election, the major averages had a nice run into year-end. The Dow finished up 13.4%, the S&P 500 9.5% and the Nasdaq up just 7.5%. Besides the financials, the big winner was the small cap and mid cap Russell 2000 up 19.5% for the year.
With the big run up into year end, the big question is what will 2017 bring us and where to invest in the New Year? Similar to six months ago, betting on the sectors that have already performed well may not be the best option. The financials should hold up well as deregulation gets under way. Many of the regional banks look fully valued, but the investment banks like Morgan Stanley (MS) and Goldman Sachs (GS) may have further to climb. Goldman was one of our picks six months ago and has reward us and shareholders. Wall Street is speculating the company can grow earnings 15% while the stock only trades for 12 times earnings. Goldman and many of the large cap banks may hold up well and continue to appreciate in the first half of the year.
My favorite sector for the New Year is healthcare or in particular, biotech. Healthcare was the worst performing sector for 2016 and only one of two sectors that closed in the red for the year. Its true drug pricing has gotten out of control, but the sector as a whole is not expensive. Similar to last year, Celgene (CELG) remains my top picks. The company is projecting 20% annual growth for the next four years thanks to a plethora of drugs in the pipeline. Celgene has at least 18 late-stage clinical trials by 2018.with the potential for 50 new product approvals through 2025. Currently the stock trades for 16 times earnings, but only 13 times 2018 numbers. An investor with a long term horizon should be rewarded with 50% upside in the next year or two and 100% upside in the next three to four years. Other biotechs to look at include Biogen (BIIB), Allergan (AGN) and Amgen (AMGN).
Another drug stock that should perform well going forward is Mylan (MYL). The generic drug maker was signaled out my politicians and rightfully so for dramatically rising the price for their life saving drug, the epicene. The stock was punished dropping 30% in 2016, but the last four months of the year, the stock stabilized as investors may be coming to the realization that the worst is over for Mylan. The stock currently sitting at a 3 year low trading for 7 times earnings and 1.5 times sales. Mylan has more than 240 drug application in the FDA approval pipeline and 41 of those have first-to-file opportunities that represent $32.5 billion in annual branded sales. The stock could double in value and still look cheap or at least fairly valued. Mylan should be a good stock for investors that don't mind a little volatility or headline risk. For income investors, big cap drug companies sport great dividends. Pfizer (PFE) yields nearly 4%, Merck (MRK) at 3.2%, J&J (JNJ) at 2.8%, and Bristol Myers (BMY) at 2.7%.
The Industrials improved their performance 2016, buy they have a long way to go. Trump tried his best to take down Boeing (BA) with a tweet or two about Air Force One, but the stock held up well. Boeing is one of my favorites due to their shareholder friendly management. The stock is right back to where it stood last year this time, but the cash flow keeps improving. The company continues to use their free cash flow to buy back stock and boost their dividend which now yields 3.68%. In the short term, business and growth has slowed, but the company has a back log of over 5000 planes to get it through this slowdown. Long term the stock is well. As a hedge, United Tech (UTX) is another industrial that makes engines for Boeing's rival, Airbus.
With the markets seemingly extended at this point, one commodity stock that looks attractive is gold (GLD). Gold had a great start to the year rallying 20% in the first three months. The commodity proceeded to move sideways for the next seven months and then with the surprise election, gold went into free fall dropping 10% while virtually everything else moved up. The strong US dollar has not helped, but if we're to have some volatility next year, say Trump starts a trade war with China or if more military skirmishes stir up, gold may become a safe haven.
With the major averages at all time highs and valuations seemingly a little stretched, investing a little defensively in the cheap healthcare sector or the popular financial stocks may be a good place to start. Adding a little gold to the portfolio for a hedge seems wise at this point, but 2017 may be the year volatility rears its head again so being cautious to start the year doesn't sound like a bad idea. Buckle up and let's see what 2017 and the Trump administration have in store for us.