Published 3:36 PM EST Jan 2, 2019
After a bruising year for virtually all stocks, what companies are worth buying next year?
USA TODAY offers up 19 top picks for 2019 from some of the nation’s top mutual fund managers.
Next year’s winning stocks, the portfolio managers say, will be those that can survive and thrive no matter how rocky things get.
Companies best poised to rebound, they say, will be ones that can grow their earnings at a faster clip than the rest of the market, even if the economy slows sharply as many fear.
Stocks that fit the profile include companies that will benefit from new product cycles, technological innovations or leading positions in emerging businesses like reality-enhanced gaming. Stocks on their buy lists also include names that are despised, well off their highs and out of favor with investors.
More:From Alaska to New York: These states are raising minimum wages in 2019
More:Economy’s strengths in 2019: Strong job market, consumer spending, and low inflation
More:5 ways to trim businesses expenses, cut costs and make more money in 2019
The luxe American jeweler known for its blue box, diamonds and flagship store on New York’s Fifth Avenue is undergoing a refresh to boost its cool factor with a new generation of shoppers. The reboot of the 181-year-old retailer, driven by CEO Alessandro Bogliolo and chief artistic officer Reed Krakoff, is seen driving its lagging stock higher, says Dan Chung, chief investment officer at Alger, which manages the Alger Small Cap Focus and Alger Spectra funds. Moves inspired by the new management team, such as rolling out its first new engagement ring in nearly a decade and launching its Paper Flowers jewelry line this fall, Chung says, will help make the brand “more current and contemporary” and boost sales and profits. He says It’s an “excellent time to buy” Tiffany’s stock, which has tumbled more than 40 percent from its July peak. “Tiffany has been around a long time and isn’t going anywhere.”
Take-Two Interactive Software (TTWO)
This video game maker is a beneficiary of some key long-term trends: the ongoing shift towards more profitable digital gaming and eventual move to games enhanced by virtual reality and other whiz-bang technologies, as well as the demographic sweet spot of millennial gamers moving into their peak earning and spending years, says Alger’s Chung. Take-Two Interactive Software has a lineup of games with a “fanatical fan base,” Chung says, including titles such as “Grand Theft Auto,” “Red Dead Redemption” and “NBA 2K”. What makes the stock attractive is the difficulty of upstarts breaking into this tech-centric entertainment business, the greater profit potential from distributing games digitally and even better technology down the road that will lure in even more players. “Video gaming is here to stay as a form of entertainment and way of socializing,” says Chung. “Virtual reality and gaming is a match made in heaven.”
Blackstone, one of Wall Street’s most powerful private equity firms, has one thing working against its shares: its partnership structure makes it ineligible for inclusion in index funds, such as those that track the Standard & Poor’s 500 stock index. And index funds, often referred to as “passive” investments, have been where the bulk of the investment dollars have been flowing to in recent years. Without the help of index-driven cash, the investment company’s shares are selling at a much cheaper price relative to their earnings than the broad market gauge, says Charlie Bobrinskoy, head of the investment group at Ariel Funds in Chicago and manager of Ariel Focus and Ariel Focused Value funds. “Everyone acknowledges that this is a great company in a great business, but people are not buying the stock” because it’s not part of a popular index like the S&P 500, Bobrinskoy explains. Given the company’s 10 percent earnings growth rate and below market price-to-earnings ratio, the shares are undervalued, he says.
BorgWarner makes drive trains which power autos. The reason the stock is so undervalued and has room to rise, however, is that investors mistakenly perceive the company’s propulsion business as focused solely on gas-powered vehicles, missing out on the electric car revolution, says Ariel’s Bobrinskoy. But that’s wrong. Its technology is already deeply embedded in electric cars and hybrids, he says. On its website BorgWarner estimates that by 2023 “it will have content on about half of the hybrids and over 30 percent of EV vehicles produced globally.” What makes the stock more enticing is that BorgWarner still has a big business in gas-powered vehicles, which Bobrinskoy predicts will “still be the dominant fuel for the next 15 years.”
MGM Resorts International (MGM)
More than a year removed from the deadly mass shooting at a concert at its Mandalay Bay hotel in Las Vegas, Jeff Rottinghaus, manager of the T. Rowe Price U.S. Large-Cap Core fund, is placing a bet on MGM Resorts International shares. While the stock is down about 40 percent from its January 2018 peak, the fund manager says its earnings and cash flow will get a boost next year from the ramp-up of its new MGM Cotai property in Macau, the reopened and renovated Park MGM Las Vegas, and a rebound in convention bookings after the tragic mass shooting on Oct. 1, 2017. “Given the market’s decelerating earnings growth, we are focusing on ideas or companies with easy earnings comparisons and on new product cycles that will allow for growth rates to look better than the broader market,” Rottinghaus says.
Corning’s big role in the fiber build-out for 5G, the fifth generation of cellular mobile communications, is just one of the reasons why Rottinghaus of T. Rowe Price feels connected to the stock. Corning, which also makes the glass used in smartphones and flat panel TVs, has seen many of its fiber competitors disappear over the years due to a fiber glut. As a result, it is poised to take advantage of the 5G revolution. “5G is unique and will generate better growth due to the new product cycle,” says Rottinghaus. Corning’s “Gorilla Glass,” which is thin, light, damage-resistant and shatter-proof, will also see new uses beyond the iPhone. “Gorilla Glass is just starting to be adopted in electric vehicles in dashboard displays and windshields,” he says. The market for the glass will be small at first, but build as electric cars start to penetrate the market in higher numbers, he adds.
Capital One Financial (COF)
Despite benefits from tax cuts and gains in net income, bank stocks performed far worse than the broad market in 2018. But Bill Nygren, manager of the Oakmark fund, thinks they are setting up for a good year in 2019. One bank stock he likes is Capital One, a leading credit card lender that the value investor says sells at a much cheaper price relative to its earnings than other big banks, such as JPMorgan Chase, Citigroup and Wells Fargo. While noting “there is risk to any loan in a bad economy,” Nygren doesn’t see a recession next year. That’s good news for Capital One, he says, which continues to seek out new customers to lend to, even those with lower credit ratings but which they charge a higher interest rate. Nygren also likes that the bank is using its excess capital to buy back its shares, which he believes are undervalued.
Ally Financial (ALLY)
Online bank Ally, one the nation’s largest independent auto lenders, is also on Nygren’s 2019 buy list. One upside is Ally’s lower-cost Internet-based focus has enabled it to pay higher interest rates on savings and checking accounts, which has attracted a lot of deposits from a key targeted customer: millennials. While critics contend that Ally will run into more bad loans if the economy sours, Nygren argues that those fears are inflated because investors are measuring the possible downside based on the last recession, which was among the worst in history.
Conagra Brands (CAG)
You might not heard of Conagra, but you probably have heard of its brands like Healthy Choice, Birds Eye and Boom Chicka Pop. And that’s good because Kevin Dreyer, co-chief investment officer and portfolio manager at Gabelli Funds, says those Conagra brands are part of two of the trendiest and best-selling areas in the food space: frozen foods and snacking. The food giant is also at the center of the health and wellness movement. “It’s core of what they do,” Dreyer says. “They are very much on trend.” Frozen foods, he notes, don’t require a lot of preservatives and rank high in convenience. And its snack lineup also is leaning healthier with last year’s purchase of Angies Boom Chicka Pop.
Madison Square Garden (MSG)
Are you a diehard Rangers or Knicks fan? Or a regular at big-name concerts at Madison Square Garden, often dubbed the “world’s most famous arena”? If so, now’s a good time to own a piece of the teams and iconic arena, says Chris Marangi, co-chief investment officer and portfolio manager at Gabelli Funds. There are a few catalysts that could catapult the stock price. Millennials’ focus on experiences, like spending money on concerts and sporting events, is one. Another is the prospect of spinning off the sports part of the business from the entertainment side. “That would unlock value,” says Marangi.
Guidewire Software (GWRE)
The maker of software for property and casualty insurers is moving its business to the cloud. And that digital transition comes with big revenue potential as migrating clients to the cloud will generate 3 dollars in billings for every dollar now, says Michael Lippert, manager of the Baron Opportunity Fund. Insurers will now be able to outsource all things tech to Guidewire, who will manage data and everyday business needs ranging from policy underwriting to claims processing and billing.
Need to build a website? Wix.com, a website building platform, can help. But the reason Lippert of Baron Opportunity Fund likes the company’s stock is that the Israeli-based company also is involved in many revenue-gathering businesses such as eCommerce-based web apps, including bookings, payments and marketing help. “Wix.com has leading market share and generates a lot of cash flow,” says Lippert.
Investors looking for a tech play with growth potential and a chance to become the next tech stock rock star should seek out companies with far lower profiles than Facebook and Netflix, says Kevin Landis, manager of Firsthand Technology Opportunities fund. Roku, the pioneer in streaming video content from the internet to your TV, fits the bill. “If you already own Netflix, Roku is the second streaming stock you want to buy,” he says. Roku is a pure-play on chord cutting, or the trend towards consumers canceling higher-priced subscription services such as cable TV in search of more convenient and cost-effective options. The stock is a volatile one, however, so beware wild price swings.
Cree, thanks to its silicon carbide components, better known as SiCs, is also on Landis’ stocks-to-buy list. The company, he says, has “finally found a great end market for this esoteric material”: its use in the emerging electric vehicle market. One of its newer switching devices, for example, power the drivetrain of electric vehicles, the company said earlier this year. “The stock,” says Landis, “has a lot of upside.” One benefit of owning Cree, he adds, is it is not an overly popular stock that every investor around the globe has heard about.
Who says cash is dead, replaced by plastic payments? Those Brink’s trucks you see in front of retail outlets with armed guards are still relevant, says Ward Sexton, manager of William Blair Small Cap Growth Fund. “There’s still money to be made moving money by truck,” he says. Brink’s, which serves customers in more than 100 countries, began bolstering its management ranks back in 2016 with the appointment of CEO Douglas Pertz. The new team, Sexton says, is focused on “driving returns, taking out costs and being more efficient,” moves that helped boost its operating profit by 25 percent in 2018’s third quarter. Brink’s recent partnership with Canopy Growth, Canada’s leading cannabis producer, will provide a business boost. Brink’s will not only provide secure logistics and cash management services for the the pot company, it will also provided transport services for its growers and retail customers.
Coca-Cola is more than just a seller of soda these days. It has branched out, for example, into the fast-growing coffee business with its August purchase of Costa Coffee, which follows earlier acquisitions of vitamin water, tea and other drink-related companies. “They are transforming from a mostly soda company to a total beverage company by making acquisitions outside their core brand,” says Saira Malik, head of global equities at Nuveen. What also makes their stock attractive is that Coca-Cola sells products that consumers purchase on a regular basis in good times and bad, a trait investors like when economic times get tough.
Boston Scientific (BSX)
Medical device maker Boston Scientific has two things investors will be looking for in 2019: the ability to deliver growth in any kind of economic environment and “levers to pull” on its own to boost its business, says Nuveen’s Malik. The health care company’s November acquisition of U.K.-based BTG, a company that sells products that help doctors treat patients using minimally invasive procedures, provides an opportunity to boost profit margins. Its also seeing growth in the cardio area.
The fortunes of drug maker Alkermes could be riding on the success of two drugs, says Connor Browne, manager of the Thornburg Value fund. The drugs that he says can drive their earnings, price-to-earnings ratio and stock price higher in 2019 are Vivitrol, which treats opiod dependence, and Aristada, a drug for schizophrenia and bipolar disorders.
Online real estate site Zillow hasn’t had many investors placing high bids on its stock this year. Shares of Zillow, known for its home price value “Zestimates” and which owns brands such as Trulia and apartment search site HotPads, are down . The stumble, says Browne of the Thornburg Value fund, is due in part to the broad selloff on Wall Street as well as frustration from homebuyers and real estate brokers regarding Zillow’s buyer lead-generation system and its move to buy homes directly from sellers in search of quick cash in places like Phoenix and Las Vegas, says Browne. “But we think these issues are short-term in nature,” says Browne.