As expected, once again, the markets didn’t crash in 2016. In a year when energy prices remained flat, terrorism spread throughout Europe and the Middle East, Britain voted to exit the European Union, the dollar spiked supressing exports, Donald Trump surprised the world being elected president, and the Cleveland Cavaliers finally won the NBA Championship, the markets’ winning streak continued. That is, the stock markets— in the U.S. and Canada anyway—forged ahead again, even more strongly for some indexes than last year.
That said, those of you who follow our stock picks will know that our core stock picks beat the market by about 3% last year, excluding the impact of dividends. Based on our market-based and fundamentals-based market timing indicators, we once again bet that the broad market winning streak would continue. We were really hoping for a market drop as we were well positioned to take advantage of a down market, but it didn’t happen.
Despite the fact that markets were up, we continue to approach the market defensively, which may prove disadvantageous if the market picks up speed. For 2017, we have to wait to see what U.S. policies will mean for export-oriented firms, and many industrial and energy-related stocks remain highly speculative. This is making it difficult to find truly great companies selling at the right prices. In the current market upturn, most companies are selling way above their fair valuations. Others, particularly retail companies like Macy’s (M, Financial), Buckle (BKE, Financial), Gap Inc. (GPS, Financial), Guess (GES, Financial), while now selling at reasonable prices, have so much negative momentum behind their positions it seems almost impossible to predict where they are headed over the next year.
We like to stray on the side of caution. That is, we like to look for businesses that, while maybe not the best “value bargains,” are competitively and operationally superior and are almost guaranteed to survive an economic fall. This should help make things a bit easier for you as well.
We’ve run multiple screens and found three solid, reasonably priced stocks operating in different markets that should offer investors a reasonable rate of return. We suggest taking a quick look at each to determine whether any fit well into your portfolio for 2017.
1. Morningstar Inc.
Morningstar Inc. (MORN, Financial) is an investment research and investment management firm. The company has operations in 27 countries. It provides data on approximately 525,000 investment offerings, including stocks, mutual funds and similar vehicles, along with real-time global market data on nearly 18 million equities, indexes, futures, options, commodities and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisory subsidiaries, with more than $180 billion in assets under management.
At today’s levels, its stock trades at just 25.4x trailing 12-month earnings per share of $2.95 and 24.2x fiscal 2016 estimated earnings per share of $3.00, both of which are reasonable compared to its five-year average PE multiple of 30.6x.
We project that Morningstar will generate 10-year average per share sales, earnings, free cash flow and book value of $23.40, $4.23, $5.08, and $19.2 respectively. We also believe that Morningstar’s stock could consistently command fair value multiples of 4.5x, 29.0x, 20.5x, and 4.3x sales, earnings, free cash flows and book value respectively. Weighting sales, earnings, free cash flows and book value at 17%, 5%, 73% and 5%, we place Morningstar’s shares upward at $104, representing upside potential of about 43% excluding dividends.
Morningstar pays a dividend of 88 cents per share annually, which gives its stock a 1.2% yield. Investors must also note that it has raised its annual dividend payment for six consecutive years.
2. Coca-Cola European Partners PLC
Coca-Cola European Partners PLC (CCE, Financial) is a multinational bottling company dedicated to the marketing, production and distribution of Coca-Cola products in Europe, and is the world’s largest independent Coca-Cola bottler based on revenue. Coca-Cola European Partners serves a consumer population of over 300 million across Western Europe, including Andorra, Belgium, continental France, Germany, Great Britain, Iceland, Luxembourg, Monaco, the Netherlands, Norway, Portugal, Spain and Sweden.
At today’s price, its stock trades at just 15.1x trailing 12-month earnings per share of $2.29 and 15.7x times fiscal 2016’s estimated earnings per share of $2.25, both of which are in line with its five-year average PE multiple of 15.8.
Consensus EPS estimates are $2.25 for 2016, $2.16 for 2017 and $2.40 for 2018. CCE’s stock could consistently command a fair multiple of about 15.5x earnings, which would place its shares upward of $48.31, representing upside of over 50% from current levels. CCE represents a great contrarian play.
3. Apple Inc.
Apple Inc. (AAPL) is one of the world’s leading designers and manufacturers of mobile communication and media devices, personal computers and portable digital music players and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. As most people know, it is the company behind the famous iPhone, iPad, Mac, iPod and Apple TV products.
At today’s levels, Apple’s stock trades at just 14.5 times trailing 12-month EPS of $8.29 and only 13.5 times expected future EPS of $9.00, both of which are reasonably priced compared to five-year average PE multiple of 13.8 and the S&P 500's average multiple of 19.
With the multiples above, a PEG ratio of 0.8, consensus EPS estimates of $9.00 for 2017, $10.15 for 2018 and $11.09 for 2019, we believe Apple’s stock could consistently command a fair multiple of 13.6x per share earnings, 11.2x free cash flow per share, 3.0x sales per share and 4.8x book value per share. This seems well aligned with the firm’s long-term historical valuation multiples and places its shares upward of $143, representing upside of about 40% from current levels.
In addition, the company pays a quarterly dividend of $2.18 per share annually, which gives its stock a 1.8% yield. Investors should also note that it has raised its annual dividend payment for five consecutive years, and this is only expected to continue to grow.
Conclusion
Which of these stocks should be on your 2017 buy list?
Morningstar, Coca-Cola European Partners and Apple are three of the biggest and best companies in their respective industries, and all offer reasonable dividend streams with the potential to keep growing in the future. All investors should take a close look at these companies and consider buying their shares either at today’s prices or following a further market dip.
Disclosure:Ă‚ We currently hold positions in Morningstar and Coca-Cola European Partners.
Start a free seven-day trial of Premium Membership to GuruFocus.Ă‚
