Some of the more exciting action in the U.S. stock market happens on the Nasdaq, a part of the stock market that is home to large technology stocks and off-the-beaten-path smaller stocks.
Since 2001, I’ve written 10 columns recommending my favorite stocks on the Nasdaq. My recommendations have posted a 12-month return averaging 16.7%, compared to 13.7% for the Nasdaq Composite Index and 10.8% for the Standard & Poor’s 500 Index.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year my picks rose 9.5%, badly trailing both the Nasdaq Composite (which was up 26.4%) and the S&P 500 (up 20.9%). My worst pick was Cal-Maine Foods Inc. (CALM), which dropped 22.9%. My best was Net 1 UEPS Technologies Inc. (UEPS), which advanced 50.1%.
On a limb
In some years, I’ve also climbed out on a limb to predict where the Nasdaq Composite Index will go. In December 1999, I said the Nasdaq “won’t repeat its great 1999,” and that “I expect weakness to begin affecting this year’s high fliers as early as January.” The weakness actually started in March, and it was catastrophic.
In June 2000, I said that Nasdaq “could behave like Japan’s Nikkei, which fell 57% in 1990-1992, and stayed depressed for a long time.” The Nasdaq index fell 39% in 2000, 21% in 2001 and more than 31% in 2002.
In June 2002, I predicted that “Nasdaq’s days as a whipping boy will end soon.” If “soon” means 90 days later, I was right. The index rose 50% in 2003 and posted gains for the next four years.
My prediction for the twelve months ahead is less exciting. I think the Nasdaq Composite will be within a few percentage points of its present level (5900) a year from now.
The economy is doing fine, which bodes well for profits. But stock valuations are high. The Nasdaq Composite sells for 43 times the aggregate earnings of its 2,539 members. The tug-of-war between rising profits and optimistic valuations will end in a standoff, I believe.
Now, here are five stocks I like on the Nasdaq today.
Intel
Intel Corp. (INTC, Financial), the world’s largest maker of computer chips, recently increased its dividend again, and has been doing so steadily. I like dividend increases: I consider them a sincerity barometer showing that management believes earnings progress is sustainable.
The chip giant is shelling out big money to acquire Israel’s Mobileye, a pioneer in auto vision. It can use its offshore cash hoard to pay for a good part of the acquisition.
Biogen
Biogen, the fourth largest US biotech company by market value, posted an admirable return on capital last year, more than 22%. Yet it sells for less than 15 times earnings, frugal by the standards of today’s heated market.
Based in Cambridge, Massachusetts, the company has a diverse portfolio of drugs, combatting arthritis, lymphoma, multiple sclerosis and many other diseases.
The U.S. healthcare system is in limbo now: No one knows what the rules will be. But a company that saves lives and reduces suffering has a good chance of continuing to show strong profits.
AV Homes
As a speculation, I like AV Homes Inc. (AVHI), a small homebuilder with headquarters in Scottsdale, Arizona. Few analysts follow it, which creates the potential for the stock to be “discovered.” The stock sells for less than book value (corporate net worth per share).
In 2016, AV Homes got about half its revenue in Florida, 31% in the Carolinas, and 19% in Arizona. The focus on the South should be an advantage, as people in the U.S. continue to gradually move south for a better climate and lower taxes.
Herman Miller
A more conservative pick is Herman Miller Inc. (MLHR, Financial), which makes furniture primarily for offices but also for homes. It has shown slow but steady growth in the past, and analysts expect more of the same.
With a dividend yield of 2.3%, and a stock price only 0.8 times revenue, I think Herman Miller would hold up pretty well if the market should decline.
T. Rowe Price
Mutual fund purveyor T. Rowe Price TK (TROW, Financial) has been whacked lately, as investors flee actively managed mutual funds in favor of various funds that mimic market indices. Indexing has become popular, almost a fad. I think that trend will reverse in the next couple of years.
Disclosure: A few of my clients own Intel shares, and most of my clients own T. Rowe Price.
