John Buckingham, chief investment officer at AFAM Capital and editor of The Prudent Speculator, portfolio manager Jason Clark and senior research analyst Chris Quigley are industry-leading value investors. In MoneyShow’s Top Picks 2020 report, they highlight their favorite ideas for the coming year.
John Buckingham, The Prudent Speculator
Last year, we chose Citigroup (C), Target (TGT) and for IBM (IBM) as favorites for 2019. We still find Citigroup and Target to be attractively valued, but given their tremendous performance – Citi rose 57% and Target rose 101% — we might argue for looking elsewhere for those seeking just a couple of our recommendations.
Given our long-term orientation and long-held belief that patience is a critical component of successful investing, IBM, up 22% over the past year, would be a name to which folks should still give strong consideration. This is especially true given its single-digit forward P/E ratio and near-5% dividend yield.
Flags fly outside General Motors Co. world headquarters in Detroit, Michigan, U.S., on Monday, Nov. … [+]
For 2020, auto and truck maker General Motors (GM) is a conservative idea. The company turned in a strong Q3, especially as the now-over UAW strike took $1 billion from EBIT and $0.52 from diluted EPS. That said, the company still turned in better-than-expected adjusted EPS of $1.72.
There is no doubt that the strike will also impact Q4, especially in the highly profitable pickup business, but we think the recent results demonstrate GM’s evolution as a company and think that management has done a terrific job of ensuring that earnings won’t collapse in the next cyclical downturn in auto sales.
While the competition is always fierce in the auto industry and input costs can be a wildcard, we believe that GM’s core business continues to shine, while the company has conservatively deployed capital toward higher-return opportunities. This is not the GM of old as the company has fully participated in Autonomous Vehicle development via its investment in Cruise Automation and in ride-sharing services through investments in Lyft and Maven.
We still like its solid balance sheet (more than $26 billion in cash and marketable securities), cost controls initiatives, ability to generate free cash flow, generous capital return programs, and electric and autonomous vehicle programs. With EPS expected to trough above $4.75 in 2019 and rebound above $6.00 in 2020, we think GM is very inexpensive, especially as the stock also yields 4.1%.
Foot Locker (FL) — a more risk-oriented idea for 2020 — is an athletic footwear and apparel retailer, operating 3,160 stores in 27 countries in North America, Europe, Australia and New Zealand, as well as the popular Eastbay.com and Footlocker websites.
Although FL posted EPS of $1.13 in fiscal Q3 (vs. $1.07 est.), the stock sold off as investors remain concerned about store traffic, margin pressures due to increased operational and digital development costs and direct-to-consumer competition from its largest partners Nike and Adidas.
Given that the bottom line was fine, we thought the latest quarter was solid, but we realize that shortsighted folks were taken aback by the announcement that Foot Locker will no longer provide quarterly guidance, but instead offer annual projections.
We like that change, as we prefer less focus on quarterly numbers and more attention to long-term initiatives. We continue to believe that the company has several competitive edges, including broad distribution channels, geographic locations, and multiple banners and product categories.
Click here for access to MoneyShow’s 100+ page Top Picks Report featuring the nation’s most respected and well-known newsletter advisors favorite investment ideas for 2020.
We also think the company will continue to benefit from its strategic cost control and productivity plans, in addition to further penetration of its apparel offerings and solid growth of its digital shopping platforms. Additionally, we like the strong balance sheet that sports more than $5 of net cash per share and the solid free cash flow generation, both of which support the generous dividend yield of 3.9%. The stock trades for 8 times next 12-months earnings.
Chris Quigley, The Prudent Speculator
Cisco Systems (CSCO) — a more conservative idea for the coming year — is a tech powerhouse that specializes in Internet Protocol (IP)-based networking equipment for professional, telecom provider and residential use. While shares rose strongly in the first seven months of 2019, the stock faded in the back half of the year. CSCO faced global macro pressures that resulted in weaker-than-expected EPS guidance for fiscal 2020 and pedestrian revenue growth.
The Cisco Systems Inc. sign sits outside of their headquarters in San Jose, California, U.S., on … [+]
These headwinds, plus competitive challenges coming primarily from Broadcom (another one of our holdings), caused the company to alter its course and open its chip portfolio to third-party development. CSCO announced the move in December, saying that it will start supplying chips to major data center operators, regardless of a customer’s choice for networking machines.
That is a significant change, as previous Cisco policy was for the company’s chips to be included only with its own networking equipment. The company said via press release, “Cisco’s new flexible business models will allow customers to consume solutions as they see fit. Some will buy the Series 8000 systems, others will subscribe to the software and perhaps run it on their own hardware. Still others will do something that’s a departure for Cisco.”
We like the added flexibility and believe that the competition for 5G-related hardware and software is both a significant opportunity to gain and a significant opportunity to lose. We also like the strong balance sheet and believe that shares are still inexpensive, with forward earnings projections of at least $3.25 each of the next three years, a forward P/E ratio of 15 and solid yield near 3%.
Shares of regional banking concern Comerica (CMA) — a more risk-oriented idea —trailed the S&P 500 Financials sector index in 2019, after the company struggled with charge-offs related to its energy portfolio and lower interest rates.
CEO Curtis C. Farmer explained last quarter, “Throughout our 170-year history, we have managed through many different economic, credit and interest rate cycles. We remain focused on building relationships within our diverse footprint and maintaining our credit and expense discipline in order to continue to produce strong performance metrics.”
Despite having what we think is one of the most attractive deposit franchises, Comerica continues to face operational headwinds as the potential for another interest rate cut by the Federal Reserve remains likely in the early part of 2020. The company is more sensitive to falling rates than many banks due to a large portion of its loan portfolio being made up of adjustable rate loans.
We think that in a “Bear” case, shareholders will get a near-4.0% yield with consistent earnings around $7.00 per share, not bad for a $71 stock. On the other hand, continued macroeconomic strength that results in the Federal Reserve returning to a less accommodative monetary policy could send CMA soaring.
Jason Clark, The Prudent Speculator
Memphis-based FedEx (FDX) — my more-conservative idea for the new year — is the world’s largest cargo airline and offers door-to-door package delivery services for consumers and businesses in more than 220 countries and territories. Shares of FDX were down in 2019 and have fallen more than 35% over the past two years.
There is little doubt that global trade tensions have taken their toll, with CEO Fred Smith, an outspoken critic of anti-free-trade policy, stating, “Global trade disputes were adversely affecting manufacturing in Europe and Asia, thereby slowing international shipping demand.”
Of course, FedEx stands to gain handsomely when products can move across borders freely, so the official position is not surprising. Even though we think that many of the headwinds are outside FedEx’s control, the company still must weather the turbulence and make long-term strategic plans that it sees best for the business many years from now.
That said, we like that FedEx is evolving relatively quickly (which has required near-term elevated spending), and is making strategic moves as opportunities present themselves, including things like adding 7-day service. FedEx, under Mr. Smith’s direction, has successfully navigated a variety of presidents, geopolitical issues, trade crises, wars and other major events. We would be surprised if this one plays out any differently.
We continue to believe that FedEx’s strong balance sheet, modest dividend yield and position as an industry leader are factors for long-term investors to like. FDX trades just above 13 times the midpoint of the recently revised-lower EPS guidance, with most analysts expecting fiscal 2020 (ended May 2020) to be a trough year for the bottom line. NTM earnings and EPS expectations for the next two years presently stand at $12.80 and $14.48, respectively.
Schlumberger (SLB) — an idea for risk-oriented investors — is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells. Not only have the last few years been a struggle for SLB’s stock, and its competitors, the average energy name hasn’t gone anywhere for the last decade.
There is no doubt that the U.S. rise in supplying low cost energy to the globe has impacted the space overall, but we believe things look brighter moving forward as costs have been right-sized, operations have been fine-tuned and much stronger cash flow generation is on the horizon. While business in North America will still face headwinds, international markets, led by Africa, Asia and Latin America, have been picking up.
Having the largest global oil services platform, a dominant international franchise, the potential benefits from recent acquisitions and the most balanced exposures of the diversified service providers, we like that management has positioned SLB not only to survive turbulence in the oil patch but to thrive from a sustained upturn in the historically cyclical industry. We think its global income diversification is a positive and believe that SLB is a clear technology leader.
Additionally, we continue to believe that global energy demand will increase over the long term, especially in emerging economies, as the world’s population is expected to eclipse 9 billion between 2040 and 2050 (with much of the population growth coming from emerging markets). With the price of crude having rallied over the last four months, we can’t help but like SLB and its 5.0% dividend yield.
Click here for access to MoneyShow’s 100+ page Top Picks Report featuring the nation’s most respected and well-known newsletter advisors favorite investment ideas for 2020.