Our Top Picks for 2016 |
| Written by Rob Goldman | ||||||||||||||||
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It is a new year and that means new ideas. In this week’s issue of The Goldman Guide we identify new themes that will drive stocks in the near term and stocks to play that leverage these themes such as this week’s CES show. Plus, for those investors seeking modest returns, we outline the most efficient and best way to engage in the Dogs of the Dow investment strategy which entails investing in the highest yielding stocks in the Dow Jones. (Hint: There is a low-priced ETF/ETN.) Plus… …last year, our small cap pick of the year, Orbotech (NASDAQ – ORBK), rose 39% for the year. For 2016, we not only identify our new small cap pick of the year but also a bottom fishing candidate trading under $2 that could jump 60% in 2016. The chart looks terrible and it dropped by 56% last year but oftentimes this year’s biggest winners are the worst performers of the year before. This stock seems primed to fit that bill. BEST STOCKS AND THEMES FOR 2016Welcome to 2016! You will no doubt continue to be bombarded with theories and ideas about the market, sectors, and stocks in the coming days. Some of the ideas are short term while other themes may take a while to play out. Since we recognize that we all have to get back into the work swing of things, we are going to highlight these items in a concise and direct manner. Enjoy! 5 Near Term Themes: #1: The beginning of the year usually brings more buyers than sellers to the forefront, driving stocks early on. However, the market will likely remain driven by oil prices to some degree—where oil goes, so goes stocks. The latest Saudi Arabia/Iran conflict could be a short-term double edge sword (prices higher for oil but prices lower for other stocks due to geopolitical concerns) so I would not play oil purely on this theme. #2: Talk about stricter gun control laws via Obama Executive Order is just another point for our Smith & Wesson (NASDAQ—SWHC—$21.98—NR) pick. It may up big in the past year or so but these types of themes could existing prolong upward trends. #3: Slowdown in key Asian manufacturing segments (in China and Korea) could weigh on stocks in conjunction with oil price declines on demand reductions. #4: The start of the CES show Wednesday means that virtual reality, wearables and OTT (Over The Top Television) segments will be in focus. Two stocks that will benefit from CES and these themes beyond include FitBit (NYSE—FIT—$29.59—NR) and Immersion (NASDAQ—IMMR—$11.66—NR). While you are no doubt familiar with FIT, IMMR is likely an unknown name, unless you are a 30-30 subscriber. With 2000 patents to its name, Immersion is the leading innovator of a touch technology known as haptics. The company provides touch feedback solutions to create realistic experiences that enable and enhance digital interactions. Immersion's technology has been adopted via license in more than 3 billion digital devices that include mobile, automotive, gaming, medical, and consumer electronics developed by world-class companies. One of the fastest growing applications is the use of the technology in devices used in virtual reality gaming such as wearables, gaming controllers, and even smart phones and tablets. With adoption of the technology accelerating, a 25-30% rise in the stock in the coming months is in the cards. Separately, MobileEye (NASDAQ—MBLY—$42.28-NR) is the global leader in the development of vision and data analysis for Advanced Driver Assistance Systems and autonomous driving. The technology reduces the risks of traffic accidents, saves lives and has the potential to revolutionize the driving experience by enabling autonomous driving. It too could see some play. (Note: Stock is down about 18% since we profiled it a few months ago but we like it now more than ever.) #5: Last year the Dogs of the Dow strategy performed better than most investment strategies and at least on the big cap side, we expect it history to repeat itself. The Dogs of the Dow approach, which traces its roots to 1991, purports that the best performing Dow Jones Industrial Average stocks for a given year tend to be the 10 highest dividend yielding stocks as of the last trading day of the year prior. There are trading vehicles like closed end funds and a Dogs of the Dow ETF ELEMENTS Dogs of the Dow DJ HY Sel 10 TR ETN (NYSE—DOD—$15.51—NR), for those interested in playing this strategy. The top dividend-paying stocks this year include Verizon (NYSE—VZ—$46.22—NR), Chevron (NYSE—CVX—$89.96—NR), and Caterpillar (NYSE—CAT—$67.96 - NR), which all yield 4.53% annual dividends or higher. (Caution: CVX was a poor performer in 2015 due to low oil prices). Industry and Small Cap Picks of the YearIn 2015, our small cap picks, by and large had a great year. For example, our pick of the year, Orbotech (NASDAQ—ORBK—$22.13—NR) ended the year up 39.4%. Others, such as Skechers (NYSE—SKX—NR) rose by over 125%. We had our share of stinkers, to be sure, such as JG Wentworth (NYSE—JGW—NR), that we did not pull of the recommended list fast enough. Speaking of timing, in a year that should see modestly positive returns, we believe that oil-related stocks will bottom in the spring and could be the biggest winner (as an industry) for the entire year. Still, it is too early to dip your toes in the space at this time. Upon further review, we have selected last week’s featured stock, Rovi Corp (NASDAQ—ROVI—$16.66—NR) as our small cap pick of the year. As we noted last week, with over 5,000 patents issued or pending worldwide, Rovi licenses its technology to providers that enable consumers to navigate content across multiple devices and screens via guides, metadata and recommendations. Wall Street forecasts a 40% increase in EPS next year from $1.43 to $2.01 for this software leader, on a 12% rise in revenue from $509 million to $570 million. Despite the huge expected increase in EPS next year, the stock trades at a ridiculous 8x earnings! Our target price is $28, which is just above Rovi’s 52-week high and reflects a 14x multiple on projected 2016 EPS. Bonus Bottom-Fishing Microcap Pick: We have mentioned that big losers in 2015 could be big winners in 2016. Down 56% for the year, Hovnanian Enterprises (NYSE—HOV—$1.81—NR) charts looks terrible which is one reason to consider it! Nonetheless, current EPS expectations call for EPS to grow from $0.22 for fiscal 2016 ended in October 2015 to $0.46 next year. At recent prices, even if forecasts are cut by a third, the stock is still attractive, as the well-known $2.8 billion in annual sales national homebuilder trades at a P/E valuation that is much lower than the 10x afforded its peers. Our target is $2.75, which reflects a 6x P/E multiple. If the EPS ends up at $0.30, or 1/3 lower than current estimates, our target of $2.75 is still a discount to the industry average. The Stock Market Today AAII Sentiment Survey (figures rounded)
Ok, let me get this straight. Half of the respondents are Neutral and the other half are evenly divided between Bullish and Bearish? Talk about the epitome of uncertain. I guess the downticks last week spooked investors. Regardless stocks have room to move higher. This is especially the case given low oil prices, lack of sellers early in the year, and the expectation of decent earnings this year. As illustrated below, small stocks offer the best upside relative to their year highs and closed the year at a level lower than in both 2014 and 2013, so we are due for an uptick. Moreover, with the 12-month forward P/E multiple on the Russell 2000 and S&P 500 indices almost identical, small stocks also offer greater value. 
Say What?
Investor’s Business Daily A quick preview of the CES in Las Vegas this week. The Wall Street Journal http://www.wsj.com/articles/trump-and-his-debts-a-narrow-escape-1451868915 A very different Trump expose. The New York Times Numbers that matter this week. Marketwatch How could we be left off the list!?! ZeroHedge http://www.zerohedge.com/news/2016-01-03/nassim-black-swan-taleb-real-financial-risks-2016 Alarmist, but noteworthy. 1498 Reisterstown Road, Suite 286 Baltimore Maryland 21208 Phone: 410.609.7100 [email protected] www.goldmanresearch.com Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. 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