This commentary originally appeared on Real Money Pro at 09:00 a.m. on Nov. 30, 2016. Click here to learn about this dynamic market information service for active traders.
In my last few columns, I have covered some challenges investors will have to navigate in 2016, which included the continuing impact from the collapse in energy and commodity prices. As I pen this, iron ore futures have dipped below $40 a ton, as inventories in Chinese ports are at their highest levels since May. We also discussed the anemic level of global growth, as well as the impacts of the strong dollar. Both have been themes in 2015 and will continue to be, in all likelihood, in the New Year as well.
2015 will go down as the first year since 2009 when the world was emerging from the financial crisis that profits from the S&P 500 will actually have declined year-over-year. We may get some improvement in 2016, as the energy sector should have easier earnings comps than it had this year. However, it is hard to see earnings moving up more than at a mid-single digit rate in 2016.
I also doubt we will get the same performance from the leaders this year in the market, like Amazon.com (AMZN) and Netflix (NFLX), given they trade at sky-high multiples based on earnings or cash flow. Solid equity bargains are hard to find in this market, but I will try to offer up some value stocks that should do fine in 2016, despite a very challenging global backdrop.
I continue to believe both General Motors (GM) and Ford (F) are very cheap here. Both manufacturing icons are benefiting from a very strong domestic market and high-margin trucks & SUVs making up more of the overall sales mix thanks to low gasoline prices. Both of their European operations should do better in 2016 as vehicle sales in the eurozone continue their slow climb off of recessionary levels. South America will continue to be a mess, but the recent weakness in China could ebb, as authorities expand their stimulus efforts. Both companies should see healthy earnings increases in 2016, pay a dividend of over 4% and have stocks that go for less than half the overall market multiple based on forward earnings.
I don't like Apple (AAPL) nearly as much as I did in the summer of 2013, when the company supposedly had lost its "mojo" when it was dirt cheap, or even the beginning of this year in front of the rollout of the iPhone 6. However, the company should still achieve earnings growth of 10% or better in 2016 on a mid-digit increase in revenues. Of course, the company has the biggest cash hoard on the planet, and will spend a huge amount of its massive free cash flow on stock buybacks and probably another dividend increase in 2016 as well. The stock pays an almost 2% yield now and goes for 11x forward earnings.
In the biotech/pharma space, one has to like AbbVie (ABBV) here. Not only will the drug maker increase earnings 15% to 20% in 2016, it also pays an almost 4% dividend yield. The company recently laid out a five-year plan to increase revenues 10% on average annually, while improving margins over that timeframe from a current 36% to 50%. The stock is too cheap at 12x forward earnings.
Although I am not sanguine on what the New Year will bring to the overall market, I think these selections should do just fine in navigating difficult conditions.