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Wednesday, January 4, 2017

Opinion: Forget Buffett — Four Unsung Investment Gurus are Picking These Eight Stocks for 2017


Opinion: Forget Buffett — four unsung investment gurus are picking these eight stocks for 2017
MarketWatch

Here’s a worthy New Year’s resolution for you: Stop paying so much attention to financial-market icons.

You know who I mean. I’m talking about the likes of Warren Buffett, Carl Icahn, George Soros and Bill Ackman.

Instead, look beyond the media spotlight to a lesser-known group of successful gurus: investment-newsletter writers.

After all, these unsung market heroes regularly perform well. And they are more open about their favorite stocks.


One problem here is that you’ll have trouble identifying the best investment letter writers in the future. That’s because Mark Hulbert sadly pulled the plug on his long-standing letter-writer ranking service last year.

Fortunately, a little secret to Hulbert’s system was that a small group of letter writers consistently dominated the performance lists.

I’ve gotten to know this small group of elite performers because I’ve consulted with Hulbert over the past 15 years to tap the best letter writers for an annual New Year’s outlook and favored stock picks.

Below is their take for 2017.


These are all value investors who are normally loath to make market forecasts. But most of them were good sports about it, and went along anyway. And as money managers, they treasure the value of diversification to reduce risk. So, two stock picks is like fingernails on the chalk board for them. But that’s what I asked for, and they went along with that as well.

As a stock-letter writer myself, it’s tempting to chime in here. But I’ve never been ranked by Hulbert, so I will stay out of this, other than to mention that Seattle Genetics SGEN, +2.19% was recently a top suggestion in my own letter, Brush Up on Stocks.

Its stock was recently hit because it had to cancel some studies of one of its key cancer drugs due to patient deaths. But not all studies of the drug were halted, and Seattle Genetics has many other irons in the fire. So while the patient deaths are obviously a tragedy, the company should overcome this obstacle, which means the current weakness offers a good entry point.

Now, on to the investment-letter gurus.

Go with turnarounds


George Putnam, a money manager who pens Turnaround Letter, expects modest market gains of around 3% in 2017. “The economy is still pretty strong, and I think earnings are going to be OK. But the S&P 500 has had a great run over last several years, and it may run out of gas,” says Putnam.

Of course, the big unknown is President-elect Donald Trump. “He may be able to regenerate some optimism about business,” says Putnam. “The risk is he does something dumb that causes a real problem.”

Now, for Putnam’s picks.

Crocs CROX, +0.86% Recent price: $6.85


People either love or hate Crocs’ weird rubber shoes. There’s not much in between. Ten years ago, Crocs lovers ruled the day. The company’s stock was a high flyer, trading above $70 in 2007. Then Crocs crashed and burned. It brought in new management. But they didn’t have the right experience, so the company had to reset again in 2013, with help from Blackstone Group BX, -0.13%

This time they brought in management with experience in shoes and turnarounds. They’re now doing basic block-and-tackle work like closing unprofitable stores and revamping distribution networks. Crocs may never be a high flyer again. But Putnam is betting that as the overhaul continues, the stock will move significantly higher. “They are starting to get traction,” he says.

Oaktree Capital OAK, +0.12% Recent price: $37.50


Companies issued high-yield debt at record levels for much of 2010-2015. Now, a huge amount of it comes due over the next five years. With interest rates going up, it will be harder for many companies to refinance that debt. “Some fraction isn’t going to make it,” predicts Putnam, who follows this market closely. “It is going to have to be restructured.”

That will play right into the hands of Oaktree Capital, which specializes in helping companies refinance and restructure distressed debt. “I think this is going to be a great opportunity for all kinds of distressed security firms and for distressed debt firms like Oaktree,” says Putnam. “The climate should be good for them.”

Oaktree is well-positioned, because it has more dry powder, or funds available for this use, than it has ever had, notes Brian Frank, president of Frank Capital and manager of the Frank Value Fund FNKCX, +0.00%

Meanwhile, Oaktree pays a 6% dividend yield. So you get paid while you wait for this thesis to play out.

Speculate, but be prudent about it

John Buckingham, who manages the Al Frank Fund VALUX, -0.59% and pens the Prudent Speculator, expects 10% market gains for 2017, driven in part by an increase in business confidence under Trump. “The big thing is animal spirits,” he says. “Small business has been under a lot of additional regulation. So if we have some relief with some of those things, there will be more bounce in everybody’s step.”

Royal Caribbean Cruises RCL, +0.26% Recent price: $82


Even without robust economic growth, this cruise line would benefit from the aging of the population since older people like to go on cruises. But this pastime isn’t just for the elderly. “It’s a great way to see the world, and more people are starting to realize that. People are getting interested in cruises at a younger age,” says Buckingham.

Another favorable trend is the growth of the middle class in China.

Meanwhile, the three main cruise companies — Royal Caribbean, Carnival CCL, +0.07% and Norwegian Cruise Line NCLH, +0.32%  — have an oligopoly because they control about 90% of the market. They seem to be in a friendly standoff on pricing. And they enjoy barriers to entry, because building ships is so expensive.

Amgen AMGN, +1.31% Recent price: $146


Biotech stocks have been hammered on fears about government controls over drug pricing, worries that peaked during the election and haven’t worn off. That’s left Amgen, one of the best in the space, trading at just 13 times earnings. To Buckingham, that’s too cheap to pass up, for a quality company with a strong balance sheet.

Amgen has important drugs like Repatha, for controlling cholesterol. And it’s rolling out biosimilars like Amjevita, a copy of a blockbuster anti-inflammatory treatment called Humira made by ABBV, +0.66%

Amgen also has a boatload of cash that it’s using for stock buybacks, and to fund research that will keep the hits rolling. Buckingham also likes the 2.7% dividend yield.

Give a “fool” his due


Motley Fool Inside Value editor Richard Greifner unabashedly has no market view for 2017. “I have no special ability to call the market. I don’t know of anyone who can constantly do that, and certainly I can’t.”

He does have favorite stocks, of course. Though like many of the best investment letter editors, he feels a little queasy about a one-year time horizon. He prefers to look at stocks as “holds” for three years or more, which makes a lot of sense.

Starbucks SBUX, +1.87% Recent price: $55.50


Like its coffee, Starbucks stock has never been cheap. At least by any of the yardsticks favored by value investors. It probably never will be.

But after the December pullback that shaved about four points off its stock price, Starbucks now looks “attractively” priced, and that’s good enough for Greifner. “For a company of this caliber, if you can buy it at a good price, you should do very well over time,” he says.

Starbucks stock has been weak because third-quarter sales growth slowed to 4%, after 25 consecutive quarters of 5% growth or more. But Starbucks still has a lot of growth left, especially abroad in places like China, India and Brazil. “I think people underestimate that,” says Greifner. “It has such a strong, beloved brand worldwide. The brand is the biggest thing the company has going for it.”

Starbucks, for example, estimates it can increase its store base by almost 50% over the next five years.

Priceline PCLN, +0.60% Recent price: $1,466


The key to this investment is to look beyond the cheesy William Shatner commercials — to Europe. There, Priceline’s booking.com is the top travel website. Unlike the U.S., where the hotel business is dominated by a few chains, Europe has a lot of smaller, independent hotels. “So they are more reliant on booking.com to bring in guests,” says Greifner.

The website got into the business in Europe early. So it was the first to build up a network of hotels that is tough for competitors to replicate. This makes for a good barrier to entry. “They have a couple years head start over the competition, which turned into this insurmountable barrier,” says Greifner. Booking.com is a “tremendously profitable business” with solid growth prospects as more hotels come online, says the Motley Fool Inside Value editor.

Use this little-known trick to spot value


Near term, there could be market trouble because the Trump rally may fade, says Investment Quality Trends editor Kelley Wright. “There’s an awful lot of enthusiasm right now. I am not sure how long it will last, when the reality sets in on how hard it is to get through a legislative agenda.” Ultimately, though, greater infrastructure spending will spur jobs and wage growth, and help produce 8%-10% gains for the S&P 500 this year, says Wright.

To find stocks that might do the best, Wright looks for financially sound companies with a long history of paying dividends. Then he favors those whose stocks have been beaten down to extreme lows.

Wright doesn’t gauge this by looking for historically low stock prices on a chart. Instead, he looks for companies whose dividend yields have risen to historically high levels. As stock prices fall, dividend yields rise. Every company has a yield that has served as the peak over the decades. That’s the yield Wright looks for, to serve as a guide on when to enter a stock. Right now, companies in money management rank high by his methodology.

Franklin Resources BEN, -1.08% Recent price: $40


Take Franklin Resources, for example. Historically, it looks cheap whenever its stock has fallen so much that its dividend yield approaches 1%. But now it’s at 2%. “From a pure valuation standpoint, this is a layup the market is handing it to you. You have to go take it,” says Wright.

Franklin Resources’ stock has traded down in part because it runs a lot of bond funds, which have been hurt by the selloff of bonds on worries about interest-rate increases. But money could flow back into bonds as rates rise, Wright says.

Franklin Resources has also been hit by the recent investor preference for exchange traded funds (ETFs) over managed funds. But since Franklin Resources owns the prestigious Franklin Templeton family of funds, it should benefit nicely if this trend reverses.

Eaton Vance EV, -1.72% Recent price: $42


The repetitive high dividend yield for Eaton Vance over time has been 3%. It’s pretty close, with a current yield of 2.87%. Eaton Vance is plagued by the same problems Franklin Resources faces. Bond funds have recently performed badly, and investors favor ETFs over managed funds.

But Eaton Vance recently bought Calvert Investments, a pillar in so-called sustainable investing. So, like Franklin, it is well-positioned if managed funds return to favor among investors.

Will that happen? No one really knows for sure. But market trends tend to move in cycles. So if indices stall after years of steady, seemingly “easy” gains, stock pickers and managed funds could once again have their day in the sun.

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