As investors approach the end of the year, they are marveling at how everything did well, not just stocks, but bonds of all shapes and sizes and commodities as well, with even crude oil up 29%.  All 11 S&P sectors are poised to end the year positively, led by tech, up 41%. Only 64 companies are likely to end down for the year.  

A classic portfolio divided 50/50 between stocks and bonds is up 16%, best since 1993.  Notwithstanding the great returns, corporate earnings have been flat and bonds and commodities are not particularly sensitive to earnings.  

Analysts say the driving force behind the robust returns has been the easy money policies of central banks. Our own Federal Reserve cut rates three times after hiking rates vigorously in 2018.  So, the number one factor as to our success in 2020 may all pin on the path of interest rates and the Fed, two factors not easy to forecast.  

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We are constructive on 2020, seeing stocks prices up 5 to 10%.  While earnings were flat in 2019, that makes comparisons for next year’s earnings a tad easier.  

While analysts are currently forecasting corporate profitability to rise close to 10% next year, we know that analysts are optimistic at the year’s start and become more realistic as the year unfolds.  

On the other hand, companies’ penchant to buy back stock remains strong; given concerns about trade wars and still ultra low interest rates making debt repayment less attractive, we could see 1% to 3% growth in earnings per share attributable to stock repurchases.

The low interest rate environment also adds to the favorable backdrop to stocks.  Investors can’t make their investment goals tying up money for 10 years in Treasuries yielding just 1.8%.  The low interest rates also spur consumers to buy homes and other big ticket items, while incenting capital expenditures by companies.

Valuations, while at the high end of the range over the last several decades, can be justified by the low prevailing interest rates, and are still well short of the hyper levels seen in the Dot Com bubble.  Sentiment is not overly exuberant, from a contrarian perspective a positive, as most market tops are linked to markets that become over loved by retail investors.

What could go wrong?  As usual, plenty. While so far the impeachment proceedings have had little impact on the markets, that could change if Senate Republicans have a change of heart.  Any shake up in Washington will inject uncertainty in the markets.

The trade negotiations with China greatly affect confidence in corporate board rooms.  Markets have responded well to the current good news that both sides have tentatively reached a Phase 1 deal.  However, some pundits see little upside in the White House concluding a deal before the elections, reasoning that it will be roundly criticized no matter the terms.

Any whiff of inflation could bring the Federal Reserve back into play, potentially tightening monetary policy.  While that seems hard to imagine, that could come about if the labor market overheats and or the US Dollar slips in foreign exchange markets, thus permitting some imported inflation as overseas buys get more expensive.

In any event, we believe there are many opportunities out there for investors to outperform cash and bonds.  Here are ten:

Capital One (COF):  This financial service company has become synonymous with credit card lending. The ubiquitous question it poses of “what’s in your wallet” reflects its intense focus on consumer debt.  COF’s spending on technology and expansion of its brand constitutes long term investments, likely to pay off. Capital One also benefits from the occasional savvy acquisition, allowing it to pick up smaller competitors on the cheap.  It is a disciplined lender, remaining profitable even a decade ago during the subprime meltdown. Its national reach also affords it significant economies of scale.

Cisco (CSCO):  This storied tech was at the top of the heap at the height of the Dot Com craze, but has never regained that glory.  However, it remains the world’s biggest supplier in the networking space, including products and services for switching, routing, data centers, and wireless.  The revenue model is increasingly focused on Wall Street favored subscriptions and recurring revenues. It has new religion in terms of returning money to shareholders.  It boasts a market leading yield of 3.2%. That payout has nearly doubled over the last five years. When you couple the dividend with annual stock buybacks, investors are getting a near 9% return on their money.

CVS Healthcare (CVS):  CVS enjoys a duopoly with Walgreens as America’s drugstore, boasting nearly 10,000 outlets across the country.  However, CVS is far more than retail, as it’s leveraged its dominance into building up the nation’s largest pharmacy benefits operation, aggregating its buying power to reduce drug costs for large health plans while fulfilling two billion scripts annually.  CVS has vertically integrated itself with its purchase of Aetna, offering efficiencies and tie ins to Aetna’s 20 million customers. CVS is also experimenting with healthcare clinics within its stores, allowing customers and patients a one stop checkup and script fulfillment.

Dupont (DD):  The new Dupont came out of a break up the old Dupont, allowing new Dupont a greater focus on higher margin chemical products and shedding the commodity chemical portion of the business to Dow. Brands include Kevlar, Tyvek, and Nomex, with its customers spanning the electronics, automotive, and communications industries.  Dupont has recently combined it wellness division with International Flavors and Fragrances, leaving DD with 55% ownership in the new company plus cash of $7.3 billion. This can allow DD to further focus on the most profitable areas of its operations, while opportunistically returning money to shareholders. Chemical companies are undervalued generally, as investors have steered clear out of concern over global economic weakness and trade wars, but we believe this provides an opportunity to buy low.

Kraft Heinz (KHC):  Two of America’s best-known brands consolidated but the results have not been good for investors, despite the company being the third largest food company in North America and fifth largest worldwide. Sharp eyed financiers failed to reinvest in the brands, allowing its ketchups, cheeses, and other pantry shelf staples to lose market share and erode profit margins.  Surprisingly, this dismal performance has even shaken the reputation of Warren Buffett, a big investor in the outfit. However, with new management we believe KHC is poised to invest in restoring the brands’ luster. Opportunity for international expansion is great. Meanwhile, the company pays out a rich 5% annual dividend.

Molson Coors (TAP):  America’s second largest brewer has been buffeted by imbibers’ changing tastes, as wine, spirits, craft beers, and even hard seltzer have presented headwinds to traditional beer consumption.  However, TAP has some important craft offerings, including Blue Moon, while its stable of well-known labels, like Molson, Coors, Carling and Miller Lite, continue to appeal. The stock is down by over half from its recent high, but we think this company remains attractive for its distribution reach and could yet be a target for further consolidation.  We think it would be a good fit for London based Diageo.

Plains All American Pipeline (PAA): This company is one of the largest energy infrastructure plays in North America.  Notwithstanding the advent of renewable energy sources, most economists believe natural gas will remain a mainstay of electricity generation for years to come, and PAA is in the business of transporting gas to users like utilities and for export offshore.  Pipelines are not easily built, facing a myriad of practical and regulatory constraints. Pipelines boast less exposure to the value of the underlying commodity, acting more like a toll road, collecting its fee without regard to the price of the goods being transported.  Pipeline companies are very out of favor right now, but investors are seemingly well incented to buy in; PAA boasts a yield of 8%.

Schlumberger (SLB):  Although energy companies have been poor performers over the last decade this company stands out.  First, over just about every time period it has offered investors superior returns relative to other energy plays.  Second, it is in the vanguard of applying superior research and development to increase efficiencies of fossil fuel extraction.  SLB differs from many energy companies in that it offers services and skills to resource owners. This is less capital intensive and less risky since those services can be rapidly moved to more favorable regions.  SLB boasts a big dividend yield of over 5%, not typically seen with this high quality company.

ViacomCBS (VIAC):  Viacom and CBS were once part of the Sumner Redstone media empire but split up years ago.  Now, buffeted by streaming services making traditional cable distribution less profitable, these content kings have been reunited, with hopes that together they can more efficiently offer their own streaming distribution, plus more economically develop new content.  VIAC’s assets include the CBS TV network, local stations, a half interest in CW, a joint venture with Time Warner, book publishing, Showtime, Nickelodeon, and Paramount. Paramount Pictures has a library of 2500+ titles. CBS boasts rights to show the NFL and basketball’s March Madness.

Wells Fargo (WFC):  Wells is one of the largest banks in America, and long had a stellar reputation. It avoided investment banking, avoided investing overseas, and had very conservative underwriting standards. However, a change to its sales culture caused it to run afoul of regulators and Wall Street, eventually costing the CEO his job.  We are constructive on the company now, as it has new leadership from the former head of the Bank of NY. However, the Federal Reserve has penalized it, essentially capping its growth pending clear signals that past sales abuses will not occur again. The stock is nearly 20% off its all time high of January, 2018. If the US economy strengthen, the yield curve steepens, and the Federal Reserve takes Wells out of its penalty box, this stock could be a profitable holding in 2020.

2020 Investment Picks

   

12/6/2019

 

Investment

Symbol

Sector

Price

Yield

Capital One

COF

Financial

$101.38

1.55%

Cisco

CSCO

Technology

$43.84

2.95%

CVS Healthcare

CVS

Healthcare

$75.36

2.68%

Dupont 

DD

Industrials

$63.59

1.89%

Kraft Heinz

KHC

Consumer Def

$31.09

4.97%

Molson Coors

TAP

Consumer Def

$51.06

4.23%

Plains All American Pipeline

PAA

Energy

$17.30

7.77%

Schlumberger

SLB

Energy

$36.89

5.07%

ViacomCBS

VIAC

Consumer Cyc

$39.72

2.26%

Wells Fargo

WFC

Financials

$54.37

3.83%

Average

     

3.72%

S&P 500

   

3145.91

1.75%

IMPORTANT: Point View Wealth Management, Inc. (“Point View”) is an SEC registered investment adviser (Registration of an Investment Adviser does not imply any level of skill or training) and a subsidiary of Peapack-Gladstone Bank. This publication is only intended for clients and prospective clients residing in the states in which Point View is qualified to provide investment advisory services. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product including the investments and/or investment strategies recommended or undertaken by Point View, or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Point View. Point View is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of Point View’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request. 

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Disclosures:  DG Dietze, his family, and PV clients own all stocks mentioned.