Sadly, the stock newsletter industry is still rife with shady characters, marginal analysts and overly aggressive marketing.
But below are three newsletters whose views are worth considering (aside from my own stock letter of course, but then I have a bias). All have good long-term records, and I like to check in with them near the start of each new year for a 12-month outlook and their favorite stock ideas. I’m featuring all value investors, a contrarian call since value is so out of favor. Don’t worry. It will come back.
John Buckingham, ‘The Prudent Speculator’
Like me, Buckingham watches investor and media sentiment for a contrarian read on where the markets are headed. In the reverse thinking of contrarianism, lots bullishness means limited upside, and vice versa.
He currently sees enough fear to suggest more gains from here, and I concur. His thinks we could see 10% gains in the S&P 500 index SPX, +0.45% in 2020. Inflation seems like a potential risk because it could have the Federal Reserve raising interest rates, which can hurt stocks. But rising prices aren’t all bad for stocks. Inflation hits bond funds. This would drive money into stocks. Inflation is usually caused by a strong economy — also good for stocks.
His preferred sectors are consumer discretionary and financials. They haven’t performed as well, so that’s where you’ll find bargains.
• Foot Locker: This athletic footwear and apparel chain FL, -0.65% has been hammered. It is trading near 52-week lows on concerns it will get “amazoned” by Amazon.com AMZN, +0.46%. Investors also worry that Nike NKE, +0.58% and Addidas ADS, +0.54% ADDYY, -0.31% will more aggressively sell direct to consumers.
But Footlocker has upped its website game to compete with Amazon.com. However, the reality is people like to try on shoes before buying, so Amazon.com might not really be such a threat. “We still think there is a place in the world for Footlocker,” says Buckingham.
The company has a strong balance sheet with $5 a share in net cash, solid cash flow backing a 4% dividend yield, and a low forward price/earnings multiple of 8.
• Prudential Financial
As with banks, insurance stocks have been suppressed by concerns about low returns on investments because of low interest rates. Prudential Financial PRU, -1.08% trades at eight times forward earnings compared with a historical average of 11.
But this negative dynamic will change — and put a bid under these names. “Interest rates are likely to tick a little higher, and that will be a catalyst to get folks interested in the insurance space,” says Buckingham.
Prudential is also expanding its reach via a recent acquisition. It is boosting margins by improving productivity and pricing. The stock pays a 4% dividend yield.
Kelley Wright, ‘Investment Quality Trends’
Wright sees further gains for stocks in 2020 thanks to decent economic growth, low rates, and the apparent resolution of geopolitical risks like Brexit and trade disputes. However, he expects a lull after the first quarter as investors weigh election outcomes.
Wright likes out-of-favor groups, and right now that means financials. His stock letter runs a “Timely Ten” list of particularly cheap names. Now it’s mainly financials. Wright uses dividend yield as a valuation metric. He tracks the repetitive high yield, or the dividend yield peak that historically signals a bottom in a name. As stocks fall, dividend yields rise. So a peak yield suggests a maximum stock drawdown.
• 5 timely stocks
These lenders have solid balance sheets and decent returns on invested capital (ROIC), two other metrics he likes to use. Citing ROICs in the low double-digit range, Wright doesn’t get why these names are being held back. “They are making money without a steep yield curve,” he says. “If the yield curve does start to steepen, they are just going to make more money. They are in really good shape.”
Wright also likes the real estate investment trust Simon Property Group SPG, +0.69%, which is figuring out ways to bring people back into malls again, and Omnicom Group OMC, +0.48%, an advertising conglomerate held back by unfounded concerns about recession.
Bruce Kaser, ‘The Turnaround Letter’
Kaser sees modest economic growth and no recession on the horizon, so he expects more stock market gains in 2020. With the S&P 500 “pretty fully valued” at 17.8 times next year’s earnings, multiple expansion won’t provide gains. But he does foresee 5%-6% growth in earnings. Throw in a 2% dividend yield, and you get a possible 7%-8% total return gains next year.
• Signet Jewelers
This mass-market jewelry chain SIG, -0.95%, whose brands include Zales, Kay Jewelers and Jared, was riding high during 2013-15, powering growth with debt-fueled store openings and acquisitions. It also subsidized sales by generously lending to customers. The easy credit supported rapid sales growth — until it didn’t. Repayment issues arose. Sales growth turned negative. Signet had to retrench by closing the lending arm and halting the acquisitions and new-store growth.
The stock tumbled to the $20 range, where it trades now, from a high near $150 four years ago. Down here, the stock looks cheap, especially because the chain is under new management that is repairing the damage.
It’s getting back to the basic block and tackle of retail – like making stores more presentable, refreshing the product line up, closing less-productive stores, cutting costs and tuning up the website. “They are starting to make some good progress,” says Kaser.
Signet pays a 7.5% dividend yield, which Kaser thinks will hold because the chain generates enough cash to cover it.
• Peabody Energy
Here’s how to spot true contrarians these days: They invest in coal. Long the power source of industrial development, coal is out of favor and decidedly politically incorrect because of its perceived role in carbon emissions and climate change.
As long as you are betting on the dark horse source of energy, you might as well go all in — with the world’s largest publicly traded producer, or Peabody Energy. BTU, -5.80%
“Being contrarians, we like stocks that are out of favor, and Peabody is the poster child for out of favor,” says Kaser. Aside from the carbon taint and switch to natural gas by utilities, Peabody is the antithesis of popular FAANG names in that it is decidedly low-tech. It also has a history of bankruptcy. “Everything you would not want to buy in a stock, this has all of that,” says Kaser.
But Kaser points out that despite all the bad press, coal demand for use in electricity production and steel making remains steady, globally. Peabody also produces lots of cash and it has a healthy balance sheet, two other qualities value investors love.
“Given all these traits, the potential upside is quite strong if things just go less wrong than expected,” he says.
Plus one of my own
My pick to throw in the mix here? I’ll go with one from the out-of-favor energy sector. Betting on commodity prices is always risky. But I think oil will rise as recession fears ease, the negative effects of ongoing underinvestment by the majors starts to clip supply growth, and attacks on energy infrastructure in the Middle East continue.
In this group, I’ll suggest one with the lowest cost assets, which would be Continental Resources. CLR, -0.76% This leaves room for nice margin growth as energy prices rise. It’s a plus for me that founder Harold Hamm has been a big buyer of his own stock, even though he and his family already have a lot of exposure.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested WFC and CLR in his stock newsletter Brush Up on Stocks.