Let's put this out there: A year can be a long time. When choosing stocks for a new year, I have picked some real winners, such as Lam Research ( LRCX) for 2017. I've also chosen stocks that returned mixed results, such as KLA-Tencor, now KLA Corp. ( KLAC) for 2018 that was up nicely at several points throughout that year, but closed lower with the broader market. Then there was last year's pick, Zuora ( ZUO) , which was a good one, if you sold the shares by late March. If not, then, like me, you ended up exercising your skills in risk management for most of the year. I still like that concept, by the way. I still have a long position.
So, what shall I go with for 2020?
Before I go on, know that I will be long the name I choose, and I will update that choice as time passes. Why? Because when I write something, I mean it, and because I am not a shrinking coward of a man. At least I hope I'm not. Whatever we decide, by the time we finish this piece, remember this: Money is but money. Money can buy you a standard of living. Money can provide for loved ones. These are good things. But more importantly, honor clean is free of charge, but comes with a personal cost. No soul walking this planet can take your honor away, but you can easily lose it. Then there will not be enough money in the world to buy it back. So, be that shining beacon of purity that your children see, because that is who they see when they look at you. Now, we proceed.
Here's your mission. It's simple: Excel in the environment provided. That is all. To excel, you will need to adapt to overcome. To adapt, you will have to understand real time situations to identify targets of opportunity, as well as avenues of approach and escape. You will have to anticipate as much, if not more, than react. We will succeed. When we do not, we will adjust until we do. Failure is for those who admit defeat. For us, there is only what we have figured out, and what we are figuring out. There is no third choice.
What We've Got: Stretched Value Metrics, Low Rates, Equity Scarcity
Equity markets are obviously humming along at the top of the charts. This makes the job more difficult. We embrace the challenge. Perhaps the most difficult obstacle for traders at a time like this is maintaining a certain level of discipline around trading targets. I do not necessarily sell everything at target. In fact, I rarely do, but I do something. A shame it would be if a trader's homework were to be correct, but due to a lapse in discipline, that trader fails to realize any benefit. Targets can be changed, but only after acknowledgement.
We know that valuation metrics seem stretched. In my opinion, this has been warranted because of both an era of low interest rates and a true scarcity of available equity relative to demand in such an environment. We also know that the Federal Open Market Committee has nailed short-term rates in place, but has only promised to do so through March in accordance with its stated balance sheet expansion program. This leaves the long end of the Treasury curve free to dangle in the winds of the forces of the free market, guided by perceived potential for economic growth or consumer level inflation or both.
March is when the idea of tapering the Fed's purchases of Treasury bills to relieve overnight liquidity concerns becomes a negative factor for the marketplace.
In addition, this is an election year. I find it hard to believe that the FOMC would target a higher Fed Funds rate that close to the election, unless its hand were forced by a spate of unexpected, yet aggressive, inflation at some point mid-year. In addition, fiscal policy remains ultra-loose, requiring a large issuance at the long end of the curve. This should soften the dollar. one would think, possibly creating the possibility of markets having to start pricing in 2021 rate hikes later in 2020, regardless of what the Fed transmits to the public.
Considering the election, I think it's obvious that should the U.S. electorate take a sharp turn to the left, that the rally in equities will then come to an end, as higher taxes and increased regulation will be priced back out of equity valuation. At that point, I think this article would need to be rewritten.
Here's What I like
The information technology sector is the runaway winner for 2019. In fact, go back three years, five years, 10 years, and you'll find tech simply rules. Abandon the tech sector at your own risk. I'm not. I would think that as reduced trade tensions between the U.S. and China prevail, that demand for semiconductors should at least normalize to some degree. I would also expect business spending to resume more aggressively for software names. My top picks there remain Adobe ( ADBE) and Microsoft ( MSFT) .
I also think that a financial sector trading at little more than 13-times forward looking earnings continues to do well in an environment possibly conducive to net interest margin expansion. Citigroup ( C) is my value pick among banks -- and is also good for international exposure -- and there's no doubt that JPMorgan ( JPM) remains best in class. But my favorite name among financials is Mastercard ( MA) , and that view has only been bolstered by the recent explosion in e-commerce related retail sales.
It will be difficult to ignore the health care sector moving forward. Despite the obvious potential for political pressure, which will cause volatility throughout the electoral season, I will be adding to my favorites, such as AbbVie ( ABBV) , Amgen ( AMGN) and Merck ( MRK) on those dips. Across managed care, I find CVS Health ( CVS) more affordable at these prices than UnitedHealth Group ( UNH) .
Trivia question: What sector is the only one still broadly trading at a discount to its own historical valuations metrics? Energy. Think China will need more oil, more natural gas? With U.S. supplies suddenly showing minor signs of contraction, I am going to maintain exposure, but only where there is cash flow that can result in continued size-able dividend payments. Currently, for me, that means BP Plc. ( BP) , and Royal Dutch Shell ( RDS.A) .
My Pick for 2020
Bear in mind that I tried to make this pick one that a retail investor could get involved with. That means that I made an effort not to pick something that every Jane or Joe couldn't at least grab a few shares of. So, my pick for 2020 is ViacomCBS ( VIAC) . Surprised? Just wait until you hear my reasoning. Now that Viacom and CBS have merged, and acquired 49% of Miramax, this firm commands the largest domestic television audience, and comes with decades and decades of content. Does this put ViacomCBS in an advantageous position as the many competitive streaming services pay up for existing programs? I think so, even as the firm markets their own "CBS All Access" service. At seven-times forward looking earnings, it becomes difficult for me not to see this a risk/reward proposition that does not favor the long investor.
Then there's a stronger post-merger balance sheet, as well as international exposure through the production side. Lastly, and this is conjecture, I have fancied that perhaps a streaming service that might be owned and operated by a much larger firm might just look at this $26 billion "content prince" like it were a piece of fresh meat -- even with $10 billion worth of total debt on the balance sheet. Yeah, I'm long the stock. Yeah, I'm thinking of Apple ( AAPL) . Crazy? Maybe.
Even without my fanciful thoughts, I think ViacomCBS is a serious candidate for aggressive multiple expansion. Can we get 15% to 20% out of this one in 2020? It's in my portfolio.
(LRX, MSFT, AAPL, VIAC, C, JPM, MA, ABBV, CVS, UNH and BP are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells them? Learn more now.)
