Nick's Picks 2017

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Includes: AAPL, AGN, AMGN, AMZN, BA, BAC, BRK.B, BUD, BX, C, CELG, CRM, CSCO, DIS, EWW, GOOG, GOOGL, GS, HBI, JNJ, JPM, LB, MDT, MRK, NKE, PFE, REGN, TRIP, UAA, XLF
by: Nicholas Ward

Summary

In this piece, I share my top picks for 2017.

My 2016 Nick's Picks produced a 2.6% alpha compared to the S&P 500's performance. I hope my 2017 picks will perform in a similar matter as well. Only time will

This portfolio will not be tinkered with throughout the year. We'll come back at the end of December and see how well I did this year.

Alright, ladies and gentlemen, welcome to the second annual edition of Nick's Picks. I recently published the results of Nick's Picks 2016 in this article and was quite pleased to see that my selections outperformed the S&P 500 (NYSEARCA:SPY) on the year by a fairly significant margin. I hope that will be the case again in 2017, though I admit I'm having a harder time spotting deep value in today's market than I did last year. Last year, I created a theoretical portfolio with a starting value of $100,001.05 comprised of 24 individual stock selections. At the end of the year, that portfolio was worth $116,499.16, hence to start 2017, I've created another portfolio using the $116,499.16 figure so that I'll be tracking returns on an annual basis as well as on a compounded annual basis moving forward into future years of Nick's Picks. In this piece, I will unveil the entire Nick's Picks 2017 portfolio and discuss my decision-making processes generally. I will analyze all of the picks in more detail over the coming days, but I wanted to get my picks out as close to the start of the year as possible so it didn't look like I was trying to cherry-pick a few percentage points here and there by using the first couple of trading days in 2017 to my advantage.

Company Ticker Shares Share Price Starting Value
Apple AAPL 86 115.85 9963.1
Disney DIS 96 104.22 10005.12
Johnson & Johnson JNJ 86 115.21 9908.06
Amgen AMGN 20 146.21 2924.2
Merck MRK 51 58.87 3002.37
Pfizer PFE 92 32.48 2988.16
Celgene CELG 22 115.75 2546.5
Regeneron REGN 7 367.09 2569.63
Boeing BA 35 155.68 5448.8
Cisco CSCO 150 30.22 4533
Blackstone BX 185 27.03 5000.55
Alphabet GOOGL 9 792.45 7132.05
Amazon AMZN 7 749.87 5249.09
Salesforce CRM 40 68.46 2738.4
Nike NKE 100 50.83 5083
Under Armor UAA 70 29.05 2033.5
Hanes Brands HBI 100 21.57 2157
L Brands LB 30 65.84 1975.2
iShares MSCI Mexico ETF EWW 80 43.97 3517.6
Bank of America BAC 135 22.1 2983.5
Goldman Sachs GS 12 239.45 2873.4
JPMorgan JPM 34 86.29 2933.86
Citigroup C 50 59.43 2971.5
Berkshire Hathaway BRK.B 30 162.98 4889.4
Medtronic MDT 42 71.23 2991.66
Anheuser-Busch InBev BUD 25 105.44 2636
TripAdvisor TRIP 54 46.37 2503.98
Allergan AGN 14 210.01 2940.14
116498.77

All prices of individual shares are based off of the December 30th closing price. The portfolio was built over the weekend between the 30th and the 3rd; though knowing that this piece was coming down the line, I've been thinking about 2017's weightings and overall construction for several weeks now.

I outlined this in the 2016 recap piece linked above, but the idea behind the Nick's Picks project is to select companies at the beginning of the year that I believe will perform the best throughout the year. I won't be trading within this portfolio during 2017; it will sit tight, and we will check back on its performance early next year. It's admittedly difficult to make selections like this, because it's not typically how I think about making purchases. When I buy shares, I'm looking out a year or more with regard to expected performance, though I'm not constrained to buy on any one day of the year. There are many market catalysts that I expect to play out during the upcoming 12 months, though I also believe the rally that the market experienced at the end of 2016 was too much, too soon in many respects, and I'm waiting for a pullback to put cash to work in my actual portfolio. However, I don't have the luxury of waiting for a pullback when making January 1st picks, so in this portfolio I've dived right in, trusting in my year-long outlook with regard to specific sectors/industries.

My financial picks are at the forefront of my mind when talking about the lack of ability to attempt to time the market here. I've kept the only two financial picks from 2016 - Berkshire Hathaway and Blackstone - in the portfolio for 2017, while adding exposure to Bank of America, Citigroup, Goldman Sachs, and JPMorgan. I had a hard time deciding which financials I wanted to own. I considered going the simple route and "selling" BX and BRK.B and buying a very large stake in the Financial Select Sector SPDR ETF (NYSEARCA:XLF), which would have given me exposure to regional banks and fin tech stocks that I'm missing out on with my 2017 picks. I don't closely follow this sector, believing that up until the recent republican sweep of the White House, Senate, and House of Representatives (which was a surprise to me), the financials weren't attractive from either a total return or an income-oriented standpoint over the short or long term. However, the recent election changed the landscape that these companies operate in (or at least, the market expects it to), and it's hard for me not to be bullish on financials moving forward. With this being said, I decided that the big banks would likely be the biggest beneficiaries of deregulation/increasing interest rates, which is why I went with them alongside personal favorites BRK.B. and BX, instead of the sector ETF, to round out my financial exposure for 2017.

I think financial stocks could potentially thrive under a Trump presidency. So much of the anti-Wall Street rhetoric we heard during his campaign appears to have been fiction. It seems like half of the new cabinet worked at Goldman Sachs at some point in time. However, as disappointing as this may be for certain voters, I think it's hard to imagine a scenario where this country's large financial institutions don't do well with so many allies how appointed to high places, and I'm sure there are many investors with wide smiles on their faces. I was woefully underweight financials in my actual portfolio during 2016. I still am. However, like I said before, I think this "Trump rally" was too much, too fast, and I'm waiting for a pullback in the big banks before buying shares. This could well prove to be a greedy move by me, though, one that I could come to regret (very similarly to me waiting for a deeper pullback in the rails early last year and ultimately missing out). This isn't quite an apples to oranges comparison, because the banks are in the midst of a massive run, and I'd much rather buy into weakness than I would like to buy into strength. But either way, when making 2017 picks, I can't imagine not having significant financial exposure, which is why this sector makes up ~14.5% of the 2017 Nick's Picks portfolio.

As you can see, when comparing this portfolio to my 2016 portfolio, there are many overlapping positions. 13, to be exact, or roughly half of the portfolio. I felt it was a little boring to do this. One would think that when picking stocks for a 12-month period, the best opportunities likely wouldn't remain the same year after year. And theoretically, they wouldn't. The stocks that rallied the most in a previous year likely wouldn't present the same value they did 12 months prior. However, in Nick's Picks, I'm not necessarily making ~25 selections and hoping to hit a home run on every pitch. Instead, I'm building what I believe to be a well-balanced, relatively conservative portfolio that has the potential to achieve alpha over the coming year. I suppose the overlap of my 2016/2017 selections just goes to show that year after year, high-quality stocks will continue to shine when thinking about what you'd want to own over the long term.

All three of my core positions - Apple, Disney, and Johnson & Johnson - remained the same. I hinted at this during the 2016 recap piece. I did trim their values back to the ~$10,000 range where they started a year ago, using their 2016 gains to help fund purchases elsewhere in the portfolio. I thought about letting them run, because without a doubt, all three companies are of the highest quality, and I expect they will be able to increase earnings in all but the direst of economic scenarios - though I realized I was a little short on funds when figuring out how to buy all of the companies that I wanted to include in this portfolio, and by trimming shares here, I was able to free up an extra $5,000.

Like in 2016, when healthcare picks made up ~32% of Nick's Picks, I'm overweight the sector again in 2017, with healthcare companies accounting for ~25.5% of this year's portfolio. However, I have made some changes in my holdings within the sector, maintaining positions in JNJ, Amgen, Celgene, Merck, Pfizer, and Regeneron, while eliminating exposure to AbbVie (NYSE:ABBV), Biogen (NASDAQ:BIIB), Geron (NASDAQ:GERN), and Gilead (NASDAQ:GILD). New for 2017, I've included positions in Allergan and Medtronic. Long term, I like healthcare. I do worry about headline risks, centered around continued pricing pressures and potential over regulation, though all in all, when looking for high-quality value and reliable yield, it's hard to beat some of the opportunities currently available in this space.

I'm also seeing relative value in the technology space, which lagged a bit towards the end of 2016 during the "Trump rally". Apple and Cisco were both solid performers for me last year, and I expect both companies to post double-digit total returns again in 2017. I don't expect CSCO to give investors another 24% dividend increase like it did last year, though I do think a 10-15% increase is in the cards and would do wonders for shares as investors chase its reliable high yield. Last year, I had other "old tech" exposure as well with companies like IBM Corp. (NYSE:IBM) and Qualcomm (NASDAQ:QCOM), which were severely undervalued coming into the year. Both of those companies posted fantastic results last year as outlooks improved and multiples expanded. While I own both of these two companies in my actual portfolio, I didn't include them in Nick's Picks 2017 due to those expanding multiples. The relative value just wasn't there anymore. Instead, I've moved those funds into newer, more exciting tech companies, Amazon and Salesforce, which should act as primary growth drivers for this 2017 collection. Both AMZN and CRM experienced weakness in 2016, though their growth continued to soar. Valuation remains an issue for both of these companies for more conservative investors, though in any portfolio I manage, I want cloud exposure, and these two companies are amongst the world's leaders in cloud.

In 2017, I also got rid of Expedia (NASDAQ:EXPE), a company I'm currently long, and rival Priceline (PCLN). I still like the online travel space and expect growth in the industry moving forward, especially if we see economies continuing to improve worldwide. Instead of these two companies, I decided to add shares of TripAdvisor to my 2017 portfolio due to its recent weakness. TRIP was the worst performer in the Nasdaq 100 in 2016, and while it is definitely facing growth headwinds as management attempts to restructure the business, I wanted a couple of contrarian value picks in this year's portfolio, and TRIP fit the bill. Overall, technology makes up my largest sector-specific weighting at ~27.5%. This is a space I really like long term, so why not be overweight headed into 2017?

Another large sector exposure for this year's picks is the consumer discretionary space. Disney headlines these holdings as a core position. It is my largest individual holding. I've been bullish for years, and continue to be so. I expect for management to continue to work through the OTT distribution issues it faces with its cable networks and for the market focus to shift back to the very successful merchandise, parks and resorts, and studio segments once this occurs. Frankly, I've put my faith in Iger's ability to navigate these waters. I'm sure he wants clarity on the issues before he steps down in a year or so. When this focus shift happens, I expect multiples to expand, and this, combined with expected earnings growth, should lead to strong, double-digit price appreciation for Disney in the near future. Besides Disney in this space, I've created a basket of apparel companies, the largest of which is Nike, which like Disney, was one of the dogs of the Dow in 2016.

Many apparel names experienced weakness in 2016, and I think 2017 could be a turnaround year for them. NKE and competitor Under Armour both have long histories of strong top line growth, and I don't expect for that to change much in 2017. I don't think the "athleisure" trend is over by any means. I think the technology that these two companies offer in terms of their fabrics is top-notch, and while some fear that Adidas (OTCQX:ADDYY) and Lululemon (NASDAQ:LULU) are taking away market share, I just don't see it. I think NKE and UAA are making strong moves in terms of sponsorships that will keep their products in the spotlight. I love the management teams at both companies. Valuation is a bit of a risk here, especially with regard to UAA, though I feel confident enough in each company to own shares in my actual portfolio as well. Valuation, however, isn't much a concern for Hanes Brands, which is trading for just 10x expected 2017 EPS. HBI's sales are highly tied to big box retail success, which is worrisome. While the company is making strides in its direct to consumer business, it isn't quite in the same league as a NKE or UAA in that regard. However, shares yield 2%, and if this company can regain a bit of investor confidence, causing the P/E multiple to climb back towards its long-term average of 13.7x, shares would give investors near-20% returns. L Brands is in the middle of the road in terms of valuation. Shares are fairly valued on a historical basis, though they've experienced recent weakness and the company pays a very high dividend yield. LB sales are closely tied to mall performance, which is worrisome, though they're expanding their solo footprint as well as focusing on direct to consumer ecommerce business. Long term, I still believe sex sells, and Victoria's Secret is an easy way to play this trend.

And finally, we come to the last three picks I've made that don't really belong to a larger basket within the portfolio. Boeing is my sole industrial pure play. I own this company and love its long-term prospects. BA was on the 2016 list and will remain on my list. It generated a decent return for me last year, and I don't necessarily believe it's undervalued at current prices, though management recently gave investors a massive dividend increase, and it's hard to find a company that reliably yields more than BA's 3.65% with similar growth prospects.

Anheuser-Busch InBev is the only consumer staple that I've included in this portfolio. BUD experienced quite a bit of weakness in the second half of 2016, and I expect for shares to bounce back sometime in the near future. I hope I get to capture that bounce during 2017, though if not, shares yield nearly 3.5%, and I'll happily collect that defensive yield either way.

And lastly, we come to the first ETF that I've included in a Nick's Picks portfolio: iShares MSCI Mexico Capped ETF. This Mexico-focused ETF has traded down significantly since the recent US election, and I can hardly blame investors - Mr. Trump has talked of trade wars and border taxes and building a wall. However, I think it's important to note that we live in a big world that is becoming more and more interconnected. Mexico likely won't have a hard time finding trade partners, should the next administration in Washington, D.C., make things difficult financially for our southern neighbor. And I could well be wrong in saying this, but I believe there's likely a lot more bark than bite coming out of Washington, and I don't think trade with Mexico will be disrupted as much as some might believe. This is a bit of a contrarian play for me, but I think the country's investment outlook has been punished too harshly, and I expect for the Mexican economy to do just fine moving forward. Sure, there may be road bumps. Maybe my timing is off and EWW won't return to growth in 2017. I've decide it's worth a shot, though only time will tell.

So, there you have it - my 2017 picks. I wish you all the best of luck making your own picks as well. Happy new year!

Disclosure: I am/we are long AAPL, DIS, JNJ, ABBV, AMGN, PFE, MRK, AMZN, BX, BA, IBM, EXPE, QCOM, UAA, NKE, LB, CSCO, AGN, BUD, CELG, BRK.B, MDT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.