For all its swings this year, the stock market ended 2015 close to where it started. And 2016 won’t be any better. At least that’s the view of the market's Rodney Dangerfields, the nickname I like to give to stock newsletter writers with great records who I like to check in with for an annual forecast.
Like Dangerfield, these letter writers don't get no respect. They're rarely celebrated in the media like, say, hedge fund managers. But they deserve more attention. That's because, like the best hedge fund managers, many of these letter writers have excellent long-term records.
"I am not that bullish about the market," says Gray Cardiff, editor of Sound Advice. "I think the market is going to have a tough time."
He's not alone in this view among the top letter writers.
Still, several sectors and stocks are so beaten down right now they represent good bargains for potential outperformance next year, these market experts say. Think energy, dividend yield plays and companies facing specific challenges like damage from the strong dollar or "cord cutting."
Here's a look at the 2016 outlook, and some favorite stocks, of four of the best stock letter writers, chosen based on their long-term performance as reported in the Hulbert Financial Digest’s annual Honor Roll, published in the first week of December.
Style: Editor Gray Cardiff favors stocks that have been battered for reasons that appear temporary. He also likes names that will benefit from big-picture trends like changes in Fed policy.
Performance: 9.8 percent annualized gains since 2000, compared to 4.5 percent for the Wilshire 5000 Total Market Index, according to Hulbert Financial Digest, with better performance in down markets than most letters.
Market outlook: Cardiff thinks stocks overall could finish lower next year, in part because of rising interest rates. "I think it's a time to be very defensive and careful," he says.
Favorite positions: Given this view, it's no surprise he's suggesting the ProShares UltraShort S&P 500 exchange traded fund (SDS), designed to move up twice as much as the market falls.
He also considers ETFs that benefit from rising interest rates to be "no-brainers." He suggests Direxion Daily 20 Plus Year Bear 3x Shares (TMV), Proshares UltraShort Lehman 20 Plus Year Treasury
(TBT) and Proshares Short 20 Plus Year Treasury (TBF).
Cardiff isn't negative on everything. As a contrarian, he likes energy. "Energy has already been slaughtered," he says. Cardiff admits it's tough to call oil prices in the short term. But he thinks production declines at fracked wells in the U.S. will alleviate the oil glut at some point next year. "You have to keep drilling these fields to get them to keep producing. But we know that is not happening because rigs are off 50 percent in the past year. U.S. production is already falling, but it is just getting started."
Cardiff's favorite position in energy is the U.S. refiner Valero Energy (VLO), which he thinks is cheap, with forward price-earnings ratio of 9.4. Despite all the upheaval in the energy space, Valero has been increasing its dividend, and it delivers a 3 percent yield. He also likes Chesapeake Energy (CHK), a riskier name that he believes offers more potential upside. Chesapeake has lots of debt, but Cardiff thinks the company has enough cash flow to survive: "If oil stays at $37 a barrel for two years, they might have a hard time making it, but if not, you will have one heck of a profit."
Cardiff also likes Hersha Hospitality Trust (HT), a real estate investment trust, or REIT, that owns and operates hotels. He says Hersha Hospitality will benefit as hotels under renovation reopen.
Style: Research Director Sheraz Mian offers a focus list of 50 stocks selected in part because they have "strong buy" ratings at Zacks, which prefers names with favorable upward revisions in earnings estimates by Wall Street analysts. Mian also considers sector trends when selecting stocks.
Performance: 7 percent annualized returns since March 2000.
Market outlook: Citing issues like flagging earnings growth, Fed rate hikes and sluggish global growth, Mian expects a flat or down market in 2016. "We are at the end of the bull run," he says. "The bulk of the gains that this market had to make are behind us."
Favorite stocks: Mian likes energy names because he believes declining U.S. oil production will soon balance supply and demand, pushing oil up into the $50-$60 a barrel range by the end of 2016. "I don't think this excessive pessimism about the energy sector is warranted," says Mian.
He doubts higher prices will simply bring back supply and push prices down again. That's because the number of drilled but uncompleted wells — the kind that can be brought back online cheaply — is dwindling. Beyond those wells, producers have to drill new ones to ramp up production. That calls for financing. But given the carnage in the space now, funding will be harder to get than it was in the past decade. Main favors Chevron (CVX) in part because it has the financial strength to survive low oil prices — without cutting its dividend, which now delivers a yield of nearly 5 percent.
Outside of energy, Mian likes Hanesbrands (HBI), an apparel maker that he says does a good job of buying brands and squeezing more profits out of them. It's also expanding into more retail channels and internationally.
Style: Editor Matthew Coffina likes to suggest high-quality companies with wide economic moats that are trading below their intrinsic value.
Performance: 9.7 percent annualized returns since March 2000.
Market outlook: Coffina eschews market forecasts. But he notes the stock market appears fully valued. That doesn't leave much room for error, especially considering the headwinds from the strong dollar and weak oil prices to Fed rate hikes. "I don't see much margin of safety in stock prices," he says.
Favorite stocks: While the market overall may be fully valued, plenty of individual stocks look cheap because they have been beaten down by sector concerns, or company-specific issues. REITs offer one example. They've been weak because investors fear the Fed’s rate hikes will hurt companies offering decent dividend yields. Coffina thinks this negativity is overdone. That's one reason he likes Ventas (VTR), a REIT in housing for seniors with solid growth prospects.
Next, Coffina likes Priceline (PCLN), a global online travel agency whose growth potential is hidden by the strong dollar. Priceline does about 90 percent of its business abroad. Due to the strong greenback, foreign profits get translated back into fewer dollars, which makes its business look weaker than it actually is. Big picture, only a small portion of global travel bookings have moved online, so Priceline will continue to take market share. "Once currency headwinds abate we will see the true growth potential for Priceline," says Coffina. He expects double digit earnings growth for several years. Priceline shares have also been hit by concerns about the impact of terror strikes on travel. But, hopefully at least, this setback will only be temporary.
Coffina also likes Time Warner (TWX), which has been hurt by worries about "cord cutting," or cable customers jumping ship in favor of streaming services like Netflix (NFLX) or Amazon.com’s (AMZN) Prime. Coffina thinks worries about cord cutting are overdone, since a lot of TV viewers like sports and news, which aren't readily available on streaming services. Meanwhile, Time Warner will play a big role in any streamlined cable bundles because it has popular channels like CNN, TNT, TBS, the Cartoon Network and Adult Swim, a cartoon channel for adults. Time Warner's popular HBO channel is already available as a streaming service, via HBO NOW, so the migration of TV viewers online isn't a risk there.
Motley Fool Inside Value
Style: Editor Richard Greifner likes to buy well-run companies with some sustainable competitive advantage when they are trading at a discount to his estimate of fair value.
Performance: This letter ranks No. 2 for five-year gains adjusted for volatility, with 19.4 percent annualized returns compared to 14 percent for the Wilshire 5000 Total Market Index.
Market outlook: Motley Fool analysts don't believe it's possible to make market calls. "We believe the market will head higher over the long run, but how it performs in any single year is anyone's guess," says Greifner.
Favorite stocks: Greifner likes Copa Holdings (CPA), a regional airline serving Latin America, which has been hammered in part on concerns about economic growth in the region, particularly Venezuela. "Copa shares are trading at a steep discount to its peers and our estimate of fair value," says Greifner.
Yet Copa Holdings is one of the best-managed airlines in the world, and it has a strong balance sheet. This should help it stick around long enough to enjoy "a multi-decade tailwind as demand for air travel in Latin America increases," says Greifner. Copa has sustainable advantages because of its dominant position in Panama, which helps keep competitors away from its routes.
Greifner also suggests Berkshire Hathaway (BRK.B) because it's fallen to 1.3 times book value, just a little above the 1.2 times book value where Warren Buffett has suggested he'd repurchase shares. "With Berkshire trading slightly above that mark, shares present a very compelling combination of downside protection and appreciation potential," says Greifner.
Michael Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested CVX and BRK.B in his stock newsletter Brush Up on Stocks.