We ended 2018 on a sour note in the markets, but the calendar allows for a fresh start and a chance to reconsider things. We have shared 11 Roundtables featuring over 90 of our Marketplace authors talking about how they're considering 2019. You can find the full list at the bottom of this article.
We wrap up that review and preview with the compilation of our author's best ideas for 2019. In 2018, of the 68 ideas shared, the top idea was from EnerTuition, who picked long AMD (AMD), which turned in a 80% profit. What will be a good idea for your portfolio this year? As always, you need to do your own due diligence - the site motto is Read. Decide. Invest after all - but we hope these ideas give you a place to start your research. Let's do it:
SA: What is one of your best ideas for 2019, and what is the story?
Darren McCammon, author of Cash Flow Kingdom: Archrock (AROC) is a company that leases natural gas compressors to energy production and pipeline firms in North America. These compressors are the backbone of natural gas transport. North American natural gas volumes being transported continues to rise as worldwide demand for this relatively clean burning energy source undergoes a multi-decade increase. Archrock benefits from this. Archrock also benefits from having a lower cost of capital than its two primary competitors USA Compression (USAC) and CSI Compressco (CCLP). Despite these attractive attributes, investors can get a cheaper price (based on EV/EBITDA multiple), and a higher implied growth rate on AROC than its competition. The primary reason for this is AROC pays out a lower dividend, instead keeping more of its cash flow to internally fund future growth and or pay down debt. So, you can get a double-digit dividend from USAC and CCLP (14% and 17.6%, respectively), or a more modest dividend (5.3% as of this writing) from AROC albeit with a higher implied growth rate and meaningfully less cash flow risk. The choice is up to the individual investors needs and goals. All three benefit from the underlying secular growth in North American natural gas transportation volumes.
Joshua Hall, author of Industrial Minefinder: Australian-based OZ Minerals (OTCPK:OZMLF) is a low-cost copper producer with an exceptional growth pipeline, all in safer jurisdictions. Its 3rd mine, Carrapateena will come online in 2019 and be fully ramped up in 2021. Carrapateena sits at the bottom of the cost curve with C1 cash costs of around $.50 per lb. (translation - more free cash flow). A little further out (e.g., 2022-23) OZ is poised to bring West Musgrave into production. West Musgrave holds the largest undeveloped nickel sulfide mine in Australia, and possibly the highest grade open-pitable nickel sulfide mine in the world on a nickel equivalent basis. The electric vehicle market needs class 1 nickel for battery cathodes and sulfide deposits are the primary and best type for it. Higher grade (i.e., generally lower cost) sulfide deposits are also more rare. At the same time, nickel is poised for a severe structural deficit next decade. My long-term target price for nickel is a more conservative $7.25, but ultimately, we are either going to see nickel rise to $9 to $12 per lb. for at least a few years, or there will not be an EV revolution in its current format. There is plenty of class 1 nickel supply available at $10 per lb. OZ has no debt. They generate enough cash internally to fund their growth pipeline and pay a quality dividend (~3%). The stock is trading for only 4.7 times my 2020 earnings estimate and only 3.1 times my 2021 earnings estimate at my target long-term copper price of $3.17. OZ has huge upside as this base metals bull cycle regains its footing.
Michael Boyd, author of Industrial Insights: So many to choose from. Taking one fresh on my mind, Front Yard Residential (RESI). The firm trades at a massive discount to net asset value ("NAV"), and management has been doing an excellent job in solving the problems that have led to that disconnect (lack of scale, external management, reducing costs). They are in the process of digesting a major acquisition, and management has been extremely happy with the process and outlook into 2019. In my opinion, they've got a great path forward on sequential comps (funds from operations ("FFO")) and are positioned well as far as their real estate. I think given time, management will drive the share price higher. But major shareholders, frustrated on the pace of the business, are likely to push for either a buyback (which management does not want to do) or an outright sale or merger. And I think there are a lot of potential buyers out there: Conrex, Amherst, Tricon, Progress Homes, and any other PE buyer that wants an "in". I wouldn't be surprised to see a proxy battle to replace many on the Board of Directors.
Dining Stocks Online, author of DSO Restaurant Analysis: Del Frisco's Restaurant Group (DFRG) at $6 and change per share. The stock has lost more than half its value in 2018 after management overpaid for the Bartaco acquisition ($325 million for fewer than 20 locations) and issued a bunch of stock at $8 after announcing the Bartaco deal when the stock was at $15-$16. Activist hedge fund Engaged Capital has since acquired a 10% stake at prices between $6 and $7 and will help halt the horrid capital allocation practices at DFRG. The stock could easily rebound to $10-$12 per share is management focused on operational excellence and improves capital allocation strategies. A buyer for the business could always be lurking as well.
Ruerd Heeg, author of Global Deep Value Stocks: A great idea, but not a small cap, is still the Genzyme Contingent Value Right (GCVRZ). This is a litigation play, but not a class action. The GCVRZ trustee is suing Sanofi (NYSE:SNY) on behalf of investors. I think there are very good chances on a huge pay out in a couple of years.
Donovan Jones, author of IPO Edge: Since I focus on IPOs, my general recommendation will be for interested investors to avoid getting caught up in the 'hype cycle' for particular IPOs, especially Uber (UBER). Many will have a 'fear of missing out', or FOMO, response as the media cranks up the pros and cons for well-known companies like Uber. In 2018, the big media 'hype cycle' occurred with the Spotify (SPOT) IPO. The stock has since performed poorly post-IPO and is trading well below its IPO price, so it is important for IPO investors to be disciplined and avoid overpaying for company stock offerings, no matter how much media attention it gets.
Terrier Investing, author of Outsourced Analyst: My largest position is Franklin Covey (FC) - a corporate training company that has successfully transitioned from a discrete-sales model to a recurring-revenue SaaS model over the last few years. The company's new product, All Access Pass, delivers incredible customer value, which has led to 90%+ revenue retention and strong new customer additions as well as population expansions at existing customers. The company is on track to deliver high single to low double digit annual revenue growth for a very long time, with operating leverage leading to teens to twenties EBITDA growth.
Examining the long-term history of peers like Gartner (IT) with similar business models, Franklin Covey is clearly a compounder, yet it's trading at a "value" multiple of ~10x this year's true Adjusted EBITDA (adding back deferred revenue less associated costs) and ~1.3x revenue. This is a nonsensical multiple for a high-growth, high-margin, recurring-revenue business; the stock trades in the low $20s today, but I believe it's worth $46. This is based on intrinsic valuation, but transaction and peer comps are also supportive of my valuation work.
Safety in Value, author of Microcap Review: My best idea for 2019 is Horizon Group Properties (OTCPK:HGPI). The company owns interests in 8 outlet malls, which have been much more resilient than regular shopping malls - no exposure to failing department stores, and much lower operating costs. Even though outlets are doing much better than standard malls, HGPI is trading below 3X P/FFO, and about 20% of book value. The company is a dark microcap that doesn't pay a dividend, so there isn't much to attract regular REIT investors, but the valuation here is so compelling that I think small cap investors looking for a capital gain opportunity should be looking at it. The shares are down 35% in the last 6 months, which I believe is an exceptional buying opportunity, and I have been adding to my position.
Inefficient Market, author of Undiscovered Opportunities: My best performing idea in 2018 was a payments company called 3Pea International (TPNL), which was up over 600% at one point. So, in keeping with that theme, I'm going to go with another payments company for 2019, Payment Data Systems (PYDS). I had owned this company several years ago, and it performed well for me, but then they started reporting lackluster results and I lost interest. But now a few years later, they are starting to grow organically again, and have brought some high quality new hires on board. They should be back to EBITDA profitability in the current quarter, and there are some exciting growth prospects in the pipeline. Add in the fact that it only trades for 1x revenue in an industry that averages multiples of around 4x revenue (for much lower growth rates), and I think this could be a big winner again.
If I had to pick one stock that I think is just really cheap and deserves to be much higher given the results that have already been reported, it would be Perion (PERI). This is a company that is trading for about 2x cash flow and 2x Adjusted EBITDA. The fourth quarter is by far their strongest of the year, so there could be an immediate catalyst in the early part of 2019.
The Investment Doctor, author of European Small-Cap Ideas: Seeing how the share price of BW Offshore (OTCPK:BGSWF) got slaughtered the past few months (down more than 50%), I am convinced the company will do well in 2019 as the market will start to realize the oil production business is only a small part of the business model. The majority of the revenue and EBITDA is generated through the FPSO division; BW Offshore provides vessels for offshore oil & gas production, and the deployment of the ships is usually backed by multi-year contracts. The real money-maker is the BW Catcher, which has been leased to Premier Oil (OTCPK:PMOIF) (OTCPK:PMOIY) for its Catcher field. The agreement has been fixed for an initial term of 7 years, but can be extended by an additional 18 years. Considering BW Offshore and Premier Oil have been talking about BW Offshore also delivering an FPSO for Premier's next offshore oil project, both parties get along very well, and I'm very confident the agreement will be extended after the initial contract term.
BW Offshore will have to take care of its unemployed vessels. As of right now, 4 vessels were unemployed, and one of them will be scrapped (resulting in a $20M cash inflow). There are some contracts expiring in 2019, so I think the market has been waiting to see some official contract extensions which will provide a better earnings visibility. BW Offshore has been hinting at a contract extension and a redeployment for two FPSO's on Petrobras (PBR) contracts. Should both deals indeed materialize, BW Offshore will be able to reduce its perceived risk associated with some of the shorter-term contracts. Let's also not forget 2019-2022 will be a busy three years for new FPSO tenders. Petrobras is planning to develop several new oilfields, and I expect BW Offshore to secure at least 1 and maybe 2 new FPSO contracts.
The FPSO activities as well as the own oil production offshore Gabon should push the FY 2019 EBITDA to $500M. BW Offshore's current market capitalization is approximately $680M, and the enterprise value is approximately $1.8B. Unless they need to build a new FPSO in 2019, a large part of the EBITDA will be converted into free cash flow.
Kirk Spano, author of Margin of Safety Investing: Clearly, oil and oil stocks in H1 of 2019 are the play I am overweight in for the reasons discussed above. But another important story is the "smart everything world" I wrote about a few months ago. Folks need to buy the profitable beaten up tech names like Apple (AAPL), Amazon (AMZN), Alphabet/Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and PayPal (PYPL), which are 4 of my top 10 holdings, and hold a long time. These companies are vastly undervalued now for their current and future cash flows. Apple is converting to a services company from a product company, and they could see a huge surge in revenues as the "smart everything world" takes hold with their access to 15% of global households from the iPhone penetration. Amazon is a juggernaut, don't discount the Whole Foods purchase, and they will eventually spin off Amazon Web Services creating two massive S&P 500 companies in the process. Googlebet, which I call them, is a cash flow machine that won't get hit the way Facebook (FB) will on the regulation narrative. Folks need to buy that stock because soon enough, there will be "baby Googles," probably six or seven within a decade, and most will be S&P 500 sized companies day one. PayPal is already worldwide and about to make huge forays into cash transfers, not only peer to peer, but bank to bank. Their blockchain technology makes them the perfect partner for the banking system to facilitate much faster, as in seconds, wire transfers. I can see PayPal being bigger than Visa (V) sometime in the 2020s.
FluidsDoc, author of The Daily Drilling Report: I think service companies have been punished far out of proportion by the market. Halliburton (HAL) for example is selling for less than it did when oil was $25.00 a barrel. It makes no sense. So I think as oil prices stabilize and improve as the supply cuts work through the market, these companies will rebound to at least levels seen in late September of this year. For Halliburton that would be about a 30% pop. Other companies like Schlumberger (SLB), and Baker(BHGE) also have the same potential. One area of the service business that should really shine is anything associated with natural gas. Companies like Energy Transfer, Golar, and Cheniere (LNG) should really do well as an example. They are being paid fees for services, and that business is forecast to grow. I like the LNG story and am invested in it.
Daniel Jones, author of Crude Value Insights: I think my best idea for 2019 is Legacy Reserves (LGCY). Simply put, and as I have illustrated in prior articles, LGCY is cheap. Yes, they have leverage, but they are comfortably within their covenants, have a massive quasi-activist firm owning nearly a fifth of their stock, and even with oil at $50, the business generates significant operating cash flow and EBITDA. With oil prices near $50, markets have punished shareholders by pushing the stock south of $2, but I believe the chances of a permanent loss of value (so long as energy stays where it is or moves higher) is incredibly small. The true value of the firm will likely be known once management introduces 2019 guidance (probably during fourth quarter results). If it even comes close to what Baines Creek Capital has suggested, shares will probably climb to $10 or higher. Even a forecast that's lower but still suggests substantial operating cash flow and EBITDA growth will easily reward shareholders.
Laura Starks, author of Econ-Based Energy Investing: While I keep my preferences on upstream companies mainly for discussion and review with my EBEI subscribers, over the last year, I've remained fond of refiners and become fonder of utilities, and that continues into 2019. NextEra (NEE) is a utility hit with investors for its focus on renewables, and I really like refiner Marathon Petroleum Corp (MPC) for its good operational ethic and now its new, larger position resulting from the Andeavor acquisition. Valero (VLO), too, continues to perform well in the refining space. Refining requires continuous adaptation to changes in supply, demand, and product, safety, and environmental specifications.
Long Player, author of Oil & Gas Value-Added Research: Current outcast Cenovus Energy (CVE) has been hated since the day it bought the partnership interest in the thermal production from ConocoPhillips (COP). Yet the company has produced decent cash flow ever since the acquisition and paid down more debt than management ever promised. Yet the market focuses on the thermal spot pricing that management has relatively well insulated the company from. There was a quarter of unusual volatility that did hurt company results (combined with the usual turnaround maintenance for a quarter). But the quarters before and after that had decent cash flow. The expiration of hedges almost assures an excellent cash flow year for 2019.
Robert Boslego, author of Boslego Risk Services: I will be trading oil, both long and short. However, I would be more comfortable looking for short trades since they seem to pay off more quickly and I believe supplies will be abundant. However, there will come a point where low prices will impact oil supplies and I would want to be on the long side then.
Laurentian Research, author of The Natural Resources Hub: The 4Q2018 oil crash has created a lot of deep value companies in the energy sector, from which a truly contrarian investor would love to pick stocks. However, one may want to stick with quality now that he is inundated with cheap stocks. GeoPark Ltd. (GPRK), the king of Latin American independent oil companies, saw its share price was cut by half in the recent oil price downturn. The company boasts a highly visible runway of profitable production growth at around 20% per year, which is backed by low-cost conventional assets managed by one of the most talented management team who owns over 1/4 of the shares outstanding. Valuation suggests the stock has the prospect to be a double in 2019 yet the associated risk is rather low, considering that it has a stellar balance sheet and that 85% of its production is operational cash flow positive at a $25-30/bo oil price. In addition to a slew of near-term catalysts, the company just started a 10% stock buyback program.
Hans Hauge, author of Crypto Blue Chips: I think Bitcoin (BTC-USD) will be the best performing asset in 2019. Since 2010, we've seen the hash rate double 30 times, the number of transactions double 11 times, and the price double 16 times. Each time we see the price hit a new factor of ten (which has happened five times already), there's a pull back and a "crypto winter." During this crypto winter, the technology continues to be upgraded, improved - it evolves. Right now, the exact same thing is happening. Bitcoin's average fee at this activity level was $10-$20 earlier this year, now it's less than $0.40. A majority of the arguments against Bitcoin are based on two things (1) people don't understand what it means, so they just can't process what success would look like or (2) they don't know what drives the value and they just aren't educated on the topic. However, if you really dig in, you'll see why some very smart people have dedicated their careers to the cryptoasset space. Blockchain technology is changing the world, and Bitcoin is the gold standard of the blockchain universe.
Tom Lloyd, author of Daily Index Beaters: I expect the market to be down in 2019 and 2020. Therefore, I am very interested in stocks that are already beaten down to their bottoms, have very little downside risk and will bounce back. We will add Facebook, Apple, Nvidia and Netflix to our model portfolio as they bounce up from their bottoms. Micron is not one I am interested in bottom fishing. I think Amazon and Google will beat the Index, but I don't think they will be in our model portfolio. We let our computer Buy/Hold/Sell Signals tell us on a daily basis.
Elazar Advisors, LLC, author of Nail Tech Earnings: I have to tell you there are not so many good ideas out there right now. You have to respect slowing fundamentals. If you do, then you don't want to own much of anything. There are a few great ones though and we've managed to catch big earnings performers in this market downdraft. Twitter (TWTR) is starting to see a big earnings inflection. There was that Citron call that Twitter's going to get hit because of trolls harassing people but Twitter's been on to that already. There was no new news in that call. Twitter's priority throughout '18 was "health" removing bad actors. The recent report that Citron cited I think changes nothing in Twitter's already proactive process. In the meantime, more importantly, we saw Twitter with a big Q3, and Q4 is seasonally stronger than Q3. They are making gradual changes to their network that are benefiting usage and advertiser ROI (Return On Investment). They might have an opening with Facebook and Google woes as well. Based on blow-out earnings potential, we see the stock can approach the high-50s which is like 100%+ upside potential.
Damon Verial, author of Exposing Earnings: As previously stated, I believe 2019 will see both the peak of the bull market and the beginning of a bear market. Thus, my thesis for 2019 is not single-fold but two-fold. The market should represent an inverse parabola in this year, so my best idea for Q1-2 2019 will be bullish, while my best idea for Q3-4 2019 will be bearish. As Q3-4 is too early to call, I will simply answer that my best pick for this recent correction and the bounce back is Arista Networks (ANET), a fundamentally solid company still in a growth phase unfairly devalued by the recent selloff and one on which I have recently discussed in my newsletter.
Michael Wiggins De Oliveira, author of Deep Value Returns: Every single large tech company is laser focused on content: either scripted or unscripted. Netflix accomplished the unthinkable and very quickly. It has added 130 million subscribers to its platforms by focusing in on large quantities of scripted content.
Furthermore, Netflix's platform has carved out strong time share in consumers' viewing time. It has indeed been so successful that well financed companies are now all trying to play this same game. Accordingly, 2019 will see Apple enter the foray as well as Disney+. Alphabet's YouTube has also spoken about its plans to increase viewers' time on YouTube as an educational tool. Additionally, Facebook Watch has also shown determination to aggressively increase the amount of time its users spend watching and interacting with Watch's content. Obviously, we also have Amazon Video playing this game too.
However, a meaningfully less discussed company which I believe might succeed in surprising many investors in 2019 is Discovery (DISCK), of which I'm a shareholder. Discovery's business model is different from that of Apple's, Amazon Video or Netflix, in that Discovery's content is unscripted and very inexpensive to produce. In fact, not only is Discovery's business model is very cost-effective but Discovery has the IP on all of its content. For viewers of specific genre, be it sports, such as golf on the brand new Golf Tv platform, or Olympics through Eurosports, Discovery leads. Also, among women Discovery has a particularly strong market share. And while the self-propelled myth of cord-cutting appears to be engulfing Wall Street, this has left Discovery trading irrationally cheap. For FY 2019 Discovery is roughly guiding for $3 billion of free cash flow. Which means that currently, Discovery is trading for less than 7 times free cash flow. Compare that with Netflix, which will not have free cash flow for many years, and in the best case scenario, by my own estimates not likely to generate more than $2 billion of free cash flow once it tapers off its elevated content investment - leaving it trading at 50 times future free cash flow multiples. While at same time, its top line is already slowing down to below 30% year-over-year.
The Freedonia Cooperative, author of Coin Agora: Anyone following my posts and/or is part of The Coin Agora knows I love Vechain (VET-USD), a logistics blockchain company out of China. Right now, its coin is super discounted (in my opinion) and gives investors a chance to lock up a significant amount of coins before its platform really gets started. In the coming year((s)), Vechain will host DNV GL's food shipping blockchain and BYD's electronic car aspect of the carbon credit system-just to name two of many partnerships. It's my favorite bet in crypto and it has nothing to do with disrupting the worldwide financial system
Joe Albano, author of Tech Cache: The best idea for 2019 is to have cash at the ready. We're in a downtrend in tech and there's no reason to rush in yet. That being said, I like Broadcom (AVGO). It's a standout in the tech space - an outlook that is robust and bullish - while the rest of the sector is not on a firm foundation. Raising the dividend 51% was the "put your money where your mouth is" moment and management is putting forth all the right signals. I'm a buyer on technical support tests.
App Economy Insights, author of App Economy Portfolio: In a market that is likely to be volatile and possibly with depressed valuation and the prospect of the r-word (recession), I am looking forward to strengthening positions in Enterprise Software. Indeed, Enterprise Software is likely to shine in a slowing economy - while consumer goods may suffer, enterprise software will remain relatively constant. Thus, there will be no shortage of demand for the best-in-class tools that empower the data science, finance, sales and marketing or engineering teams to achieve greatness.
B&B Market, author of Corporate China: I focus on Chinese ADRs, that is my specialty. The idea that has been on the forefront of my mind lately is Momo (MOMO). The stock reached all-time highs (near-$60) earlier in 2018, but is now back down into the low-$20s. Both top-line and bottom-line are growing at strong double-digit rates, MAUs are increasing every quarter, and the company has recently acquired Tantan, which is also growing in popularity. All of Momo and Tantan are internet platforms that are not impacted directly by tariffs from the trade tensions. However, because of a recent guidance cut (still growing at 40+%), institutional analysts have cut the PT from $60 down to $31. I may have missed the class that states short-term issues warrant a 50% reduction in valuation in the long-term. I am very bullish on this stock and believe that a majority of the Chinese ADRs are undervalued as a result of market overreaction from the trade war.
Matt Bohlsen, author of Trend Investing: My best idea is to use the current tech and semiconductor downturn to start to accumulate positions at cheaper prices ready for the next upcycle. For example, I would be accumulating the following:
- 5G - Qualcomm (QCOM)
- Autonomous Vehicles - Alphabet (Waymo) (GOOG) (GOOGL)
- Artificial Intelligence - Nvidia
- The Internet of Things - Skyworks Solutions (SWKS)
- Data Storage and the Cloud - Amazon
Others that have broad exposure to the above themes are also worth considering such as Samsung Electronics (OTC:SSNLF), Baidu (BIDU), Intel, and Microsoft. Cashed up giants Apple, Facebook, and Microsoft are also good tech names to accumulate at yearly lows.
Billy Duberstein, author of Fat Pitch Expedition: I rode Micron (MU) all the way up in the first half of 2018 with terrific gains and then unfortunately rode it all the way back down. It currently trades just over tangible book and the company has $3 billion net cash. The stock just sold off on what *could* be a trough quarter guidance that missed expectations but really doesn't look so bad relative to the current valuation of the company if it is the low point (or close to it) in the cycle. $2 billion net income and ~$1 billion FCF for the next quarter on a $35 billion market cap ain't so bad, especially if it's a trough. Last year the company made $14 billion and ~$10 billion in FCF. The DRAM oligopoly seems to be working to control supply (Micron just announced capex cuts) and the long-term demand outlook for memory should be strong and diverse, even if we are currently in a demand "air pocket" (fueled by the boom-bust phenomenon I discussed above). Micron is also structurally a much, much more profitable company than it was just three years ago relative to its Korean competitors, so it should be able to stay profitable in a downturn while also buying back a significant amount of stock at the same time, which it didn't have the means to do in 2016. If the downturn turns out to be milder than feared, this historically low-multiple stock could re-rate higher coming out the other side. You may need to wait a couple quarters and have a strong stomach, but there's multi-bagger potential here, barring a global recession or trade war escalation.
Mark Hibben, author of Rethink Technology: I think Nvidia (NVDA) is by far the most undervalued stock in my portfolio. It's fundamentally a new paradigm semiconductor company being priced as if it were an old paradigm company with no future. Of all the tech companies in my portfolio, I consider Nvidia to have the greatest growth potential in relative terms. Nvidia is pioneering in many fields, including AI, autonomous machines and high performance computing. Nvidia's Turing architecture GPUs are available for professionals and gamers, and provide real time photorealistic rendering that would have been considered impossible a year ago. Nvidia has no competition in this new category of graphics visualization (called ray-tracing), and has ensured continued leadership for many years due to its ray-tracing patents. I doubt that there's market for three major GPU suppliers (Nvidia, AMD, and Intel), and I believe that AMD will be forced to spin off or sell its Radeon GPU business since it won't be able to compete in ray-tracing. Intel is the most likely buyer.
Juan Carlos Zuleta, author of Lithium Investing: Tesla (TSLA) is certainly my best bet for 2019 because despite all the problems it faced throughout the year, it demonstrated its shareholders its strength to preserve the value of the company. In this connection, we have to be vigilant as to how and when it proceeds to start assembling EVs in China and launching its long-awaited more affordable Model 3 in the U.S. and elsewhere.
Jeffrey Himelson, author of Invest With A Stacked Deck: I see Fitbit (FIT) receiving FDA clearance, entering into numerous new partnerships and generating returning revenue streams, which will propel the stock in 2019.
Early Retiree, author of Stability & Opportunity: Besides several great non-biotech ideas we are covering in Stability & Opportunity, there is one no-brainer in biotech that comes to my mind. Protagonist (PTGX) is trading for $160 million with net cash of about $130 million, so, first of all, we are getting its pipeline almost for free. This includes three drugs, and two of these are phase-2-ready: A phase 2 drug in ß-thalassemia with a $1-2B total addressable market, a phase 1, oral, gut-selective α4ß7-integrin antagonist in UC with blockbuster potential, plus a development partnership with Janssen (which is also a major shareholder) potentially worth $1B of "biobucks" for another potential blockbuster in Crohn's disease, which has just successfully completed phase 1. Few investors know that prior to its IPO Protagonist had actually received partnership bids for the α4ß7-integrin antagonist program, where the upfront payment was higher than its current market cap. This is due to the fact that α4ß7-integrin blockers are considered the safest approach in IBD. There is only one injectable drug (Entyvio, a blockbuster) and no competition for Protagonist's potential oral drug. However, given the highly attractive prospects of this program, the company decided to enter only the Janssen partnership and develop the α4ß7-integrin antagonist on its own. The story is obviously much more complicated, but this short overview already gives you an idea of how unjustifiably cheap the company is, when the market attributes close to zero value to its pipeline. Perceptive Advisors and BVF have recently acquired large stakes.
Avisol Capital Partners, author of The Total Pharma Tracker: Amarin (AMRN). The story is REDUCE-IT data, the immense potential of Vascepa in the CV market. I have discussed this at length. The risk is the question raised around the trial design, specifically the use of mineral oil and its effect on the results. If this risk is mitigated - as I am hoping it will - then, once Vascepa gets approved for the expanded label sometime in 2019, I think we should see a fairly decent spike from these subdued levels.
Jérôme Verony, author of Second-Level Investing: I'll stick with a carry-over from last year's roundtable: ganaxolone, a synthetic neurosteroid developed by Marinus Pharmaceuticals (MRNS), is a seriously undervalued CNS asset. The company just posted positive data from a placebo-controlled dose escalation study in post-partum depression, a 400k patient/year opportunity. Additionally, the company is evaluating the molecule in 2 orphan drug indications: a PhIII trial is ongoing in children with CDKL5 deficiency disorder and a PhII trial is ongoing in refractory status epilepticus. The company also appears poised to move forward with a PhIII trial in children who suffer from epilepsy due to PCDH19 mutations. In 2019, we will have preliminary results from the ongoing PhII trial in RSE as well as definite dosing for the IV to oral switch in PPD. I also expect partnership activity around one of these programs, or an outright acquisition of the company, to materialize in the coming year.
BioSci Capital Partners, author of Integrated BioSci Investing: Our best idea for 2019 is Regenxbio (NASDAQ:RGNX). The company is powering by the next generation AAV gene delivery technology coined NAV. The aforementioned vector leverages on the previous setback of AVV to deliver what has been excellent clinical outcomes. It's quite promising that over 12 different companies are employing NAV to innovate gene therapies for +20 different indications. We believe that many of these trials will procure excellent results. As more positive data rolls in, companies that are using NAV will be excellent acquisition targets. A prime example is AveXis that was bought out by Novartis (NYSE:NVS) for $8.4B back on April 2018.
Wall Street Titan, author of Stem Cell News and Analysis: As SA readers know, I have covered Athersys (NASDAQ:ATHX) for a number of years and still awaiting for a big pay day. I'm still excited by its MultiStem cell therapy program for stroke and would refer readers to the many articles I have written about the company. More recently, I added an early stage biotech to my holdings called AgeX Therapeutics (AGE). AgeX is a recent spinoff from BioTime (BTX) with cutting-edge biotech technologies called PureStem® and induced Tissue Regeneration (iTR™). The company hopes to use these platforms to develop innovative medicines designed to address some of the largest unsolved problems in aging. Prior to the November 28th spinoff, AgeX received an independent validation of its technology through the purchase of 14.4 million shares at $3.00 per by Juvenescence Limited, a life science and biotech company developing therapies to increase healthy human longevity. These shares were sold by BioTime in a private transaction. With AGE shares dropping below this $3.00 arm's length valuation benchmark due to the market selloff, I believe it represents an interesting opportunity. AgeX is a very early stage company, but I think it could become a story stock, at some point, with all the aging baby boomer investors out there as a prime audience. Of the 35,830,000 shares outstanding, 45.8% and 4.8% are owned by Juvenescence Limited and BioTime, respectively, so the low float could make this an interesting play with the right set of circumstances. As with any early-stage preclinical biotech, it is risky. I would refer interested readers to page 82 of this AgeX information statement for a deep dive into the science of aging, a topic that should be very interesting to all.
Clover Biotech Research, author of The Formula: Minerva Neurosciences (NERV) will have a few readouts in 2019 that are worth paying close attention to. Such indications include insomnia, depression, and schizophrenia. The latter is the most interesting to me because there are no FDA-approved treatments for the negative symptoms associated with schizophrenia. Minerva's under-the-radar drug is in a position to change the treatment landscape for schizophrenia with a phase 3 readout pegged for later next year. Robust phase 2 data and a phase 3 trial designed to repeat the former's success should bode well for Minerva's valuation.
Terry Chrisomalis, author of Biotech Analysis Central: My best idea for 2019 is CytoDyn (OTCQB:CYDY), because it is gearing up for an important 2019. First, it expects to file a BLA for approval of its Pro-140 combination HIV therapy in Q1 of 2019. From there, it expects to expand its label to use Pro-140 as a monotherapy. This biotech has even started to expand to other diseases using Pro-140, which is a monoclonal antibody. Other target indications include: Graft-versus-host-disease, prostate cancer, triple-negative breast cancer, and many others. In essence I like this biotech because Pro-140 is adaptable and can be used to target many diseases. I like the story because the drug works in treating HIV both as a combination therapy and monotherapy which are large markets. Like many biotech stocks there are many risks here. The first is that it trades on the OTC stock market, that means the stock is highly volatile. In addition, if CytoDyn eventually chooses to uplist to the NASDAQ or NYSE, there will likely have to be a reverse split. The final risk involves whether or not the entire BLA package can be submitted on time in Q1 of 2019. The company is low on cash, and it may need to seek a partner to get things funded. However, there is one thing that can't be disputed much. Pro-140 actually has proven itself in a phase 3 study in treating HIV patients. If it does obtain BLA approval, patients will be able to treat themselves once a week at home with a subcutaneous injection of Pro-140. The combination treatment of Pro-140 is $1.2 billion, with the monotherapy expansion label of Pro-140 bringing the market potential to $3.8 billion.
ONeil Trader, author of Growth Stock Forum: I have quite a few stocks I like for 2019, but am singling out what I believe to be the safest of them and with catalysts - Supernus (SUPN). The stock is trading at depressed levels despite the company not making bad moves or reporting negative clinical trial results. The company's two products, Trokendi and Oxtellar, have delivered solid sales growth. Oxtellar's label was recently expanded to include epilepsy monotherapy (it was only approved as adjunct therapy until early December), which should expand its market considerably and the company reported positive phase 3 results of SPN-812 in children and adolescents with ADHD (though the market was disappointed with the lack of upside on the efficacy side to an already marketed competing product). At current levels (the stock is trading in the low 30s as I write this), I believe the stock is undervalued based on its approved product portfolio alone. SPN-812 only adds to the stock's upside potential at these levels, and so does SPN-810 and the company has a robust balance sheet, and it is likely to use it to expand its pipeline in the following quarters. SPN-810 itself could be a major catalyst for the stock in 2019 - phase 3 trial results in impulsive aggression in ADHD are due in mid-2019. And the beauty of this catalyst, at least for me, is that Supernus will be fine and still have more than decent upside if SPN-810 fails, and the upside is considerable if the trial is a success. So, it's essentially a binary event for SPN-810, but I firmly believe not a single dollar is assigned to the success of this asset. There is more to the story than this, but these are the most important things to focus on in 2019.
Gold, Metals, And Miners
Geoffrey Caveney, author of Stock & Gold Market Report: Pan American Silver Corp. (PAAS) is extremely undervalued, and it is a good way to play a recovery in silver and precious metals in 2019. Pan American acquired troubled Tahoe Resources (TAHO) and its assets in mid-November in an absolute steal of a deal. The market misjudged this acquisition, as it often does, and the PAAS stock price initially declined on the news. This is the kind of situation that generates an extremely attractive value proposition for stock buyers. For even higher potential rewards and triple-digit upside, one has to look to the junior gold exploration and discovery stocks on the Canadian TSX Venture Exchange (and the U.S. Over The Counter OTC Exchanges), as I wrote above.
The Critical Investor, author of Mining For Alpha: I am a big fan of several Peru base metal plays, and I would like to highlight two of those: Tinka Resources (TK.V) (OTCPK:TKRFF) and Regulus Resources (REG.V). Tinka has the 55Mt ZnEq Ayawilca zinc deposit with additional tin credits and is working on a PEA. This study is scheduled for Q2 2019, and promises to be excellent. Regulus is delineating the 295Mt Antakori copper/gold deposit, and they are looking to do a resource update early in 2019. Both companies are well financed and have straightforward and very capable management.
Simple Digressions, author of Unorthodox Mining Investing: The copper sector (for example, Amerigo Resources (OTCQX:ARREF)). As for the precious metals segment, I like Sandstorm Gold (SAND), a medium-sized streaming/royalty company. In my opinion, Sandstorm is run by one of the best managers in the entire industry. In Q1 2019 the company will get a boost from a silver stream on Cerro Moro, a mine owned by Yamana. Additionally, I expect the positive news on the Hod Maden gold project in Turkey plus…a number of other developments (as, for example, a share buy-back program or new acquisitions).
Itinerant, author of Itinerant Musings: Integra Resources (OTCQX:IRRZF) and Pure Gold Mining (OTCPK:LRTNF) are both gold development stories on solid projects, driven by the right teams and with sufficient access to funding. I have great expectations for both in 2019.
jsIRA, author of Momentum Play: The stock market is in a clear downtrend now and may go much lower in 2019. But this will create many future 10-fold/20-fold stocks once the storm is over. Becoming a Millionaire will not be a dream if one can survive this round of market downturn and then invest into the future multi-baggers.
Survival Kits - Investment Strategy in 2019:
- Holding cash
- Play defensive
- Using 3xbear ETF to hedge
- Identify fundamentally strong and short-term oversold stocks to trade for profit which is what I did during a 2008-2009 market crash.
Eric Basmajian, author of EPB Macro Research: Investors should continue to position defensively relative to their asset allocation strategy. The best idea is long-term Treasury bonds. Long-term interest rates follow the trending direction in growth and inflation, and with economic trends moving lower, long-term bonds will gain. Don't let bonds fool you. There can be massive capital appreciation with bonds too. As a reminder in 2014, long-term bonds, expressed through ETF (EDV), rose 45%.
Topdown Charts, author of Weekly Best Idea: The stars are aligning for emerging market equities, particularly relative to developed markets. Valuation, sentiment, technicals, and cycle indicators are all coming together to create a potential stellar year or even couple of years for emerging markets. Though they have taken a lot of pain this year, that's actually been a key part of the setup. I also like commodities and China A-shares for similar reasons.
Rick Pendergraft, author of The Hedged Alpha Strategy: Because I think most investors are still primarily long and because I am concerned about the market dropping further in 2019, I think the best idea I can give right now is to be prepared to buy an inverse ETF on the overall market. Personally I like the ProShares UltraShort S&P 500 ETF (SDS) because it provides leveraged inverse exposure. I wouldn't necessarily jump in right now, but I would suggest waiting for the next bounce.
Andres Cardenal, CFA, author of The Data Driven Investor: On the long side, I think Alphabet (GOOG) (GOOGL) is one of the best businesses in the world. The company now has 8 different platforms with over 1 billion monthly users each and tremendous potential for growth in segments such as YouTube, Cloud, and Artificial Intelligence. Valuation is still reasonable for a company that is growing revenue at over 20% and generating an operating profit margin of more than 25%.
On the short side, the credit market could be under a lot of pain in 2019. If the economy slows down, credit spreads increase, the yield curve flattens, and credit quality deteriorates, regional banks could really suffer. I'm betting on this idea through the triple inverse leveraged regional banks ETF: Direxion Daily Regional Banks Bear 3x Shares ETF (WDRW)
ANG Traders, author of Away From The Herd: Quarterhill (QTRH) is a holding company focused on the disciplined acquisition, management and growth of companies in dedicated technology areas. WiLAN is Quarterhill's subsidiary which manages and licenses a substantial patent portfolio. Earlier in 2018, WiLAN was award $145m by a jury in a patent suit against Apple. Even though Apple always appeals in these situations, we think there is a better than 50% chance that WiLAN's jury-win will be upheld on appeal and that Quarterhill's stock price could triple from the current price of $0.94.
Victor Dergunov, author of Albright Investment Group: Tesla (TSLA), you know the story, Model 3 continuing to dominate, China factory may begin production sometime late next year, future products are in the pipeline, comparable competition still likely years away, profitability could become a constant phenomenon, etc. If there is a high-profile company capable of delivering several fold returns over the next few years (3-5), it's Tesla. Yes, I am a Tesla bull, and I stand by my story.
Stephen Castellano, author of Fundamental Momentum: My favorite idea for 2019 is Merck (MRK). It seems to be benefiting from strong growth of its cancer drug, Keytruda. The company is very attractive on a fundamental basis, and the stock is much more attractive on a technical basis relative to many other stocks. I think this is one of the safest and most attractive stocks you could own in 2019.
Ranjit Thomas, CFA, author of Stock Scanner: I like a long position in LyondellBasell (NYSE:LYB). The company is well-run, pays a good dividend, buys back stock, and trades at 7x EPS. I see 40% upside in the stock if they can continue executing and generating the current level of operating earnings.
Robert Honeywill, author of Analysts' Corner: General Electric (NYSE:GE) shares traded above $14 as recently as July. A turn around in Power could see a return to those levels, representing around 100% upside from current share price levels. I believe a large part of the problems, for both conventional and renewables power segments, stems from politicization of the war on CO2. This is a matter of continuing discussion in Analysts' Corner's think tank, "Saving General Electric". And yes, it is a play on "Saving Private Ryan", and it is a matter of great importance to the US and the rest of the world. A turnaround in Power is not assured, but it is worth keeping a close watching brief, given the potential upside.
General Expert, author of Core Value Portfolio: Last year I talked about Roku (NASDAQ:ROKU), and the stock has had an extremely volatile year. The story remains very much the same as before. Streaming is being rapidly adopted in the US and around the world. The latter half of 2018 saw increased competition from Amazon as the company aggressively marketed its Fire TV platform, which may have spooked investors. However, we also saw Facebook folding its OTT ad platform and Google Chromecast falling by the wayside. I believe that currently it's currently a two-way race between Roku and Amazon. As I've mentioned in my previous articles on Roku, the bull case for Roku does not depend on it totally taking over the US, much less the world. If Roku can just maintain its current market share of ~37% in ten years in the US alone, I believe that the stock should be worth well over $100 today.
Value Digger, author of Value Investor's Stock Club: Prairie Provident (OTC:PRPRF) trades on the Toronto board under the ticker PPR. Proforma the recent deal with Marquee Energy, Prairie Provident is an oil-weighted energy producer of 7,700 boepd that currently trades at just 30% its NAV of CAD$0.65 per share on a PDP basis. This is PDP (proved developed producing), this is not 1P or 2P reserves. Additionally, Prairie has a strong catalyst that can be out at any time now. Specifically, PPR's subsidiary Lone Pine Resources, which owns acreage in Quebec, had filed a NAFTA lawsuit against the government of Canada alleging about US$188 million in damages from an inability to develop the acreage. Although it may not get the full amount Mackie Research reckons damages of between US$25 million and US$60 million "would certainly be in the realm of possibility". This cash compensation can definitely move the stock a lot because PPR's current enterprise value is approximately CAD$140 million.
On top of this, PPR's Quebec acreage (Utica shale) has no value in the current enterprise valuation although it could be worth a fortune. PPR's large acreage in Quebec had been shelved because the Quebec government basically shut down a lot of oil and gas activities. The sad part is that this is an area that badly needed natural gas. However, the Energy Minister Pierre Moreau recently assured that Quebec will exploit its oil and gas assets. Of course, a government change in Quebec can change everything for the better. After all, we believe that PPR at CAD$0.22 per share (Toronto) is a gift for bargain hunters. (Editors' Note: the idea Value Digger shared in the value roundtable announced in late December that they would be bought out, so this is a different idea).
Paulo Santos, author of Idea Generator: There are so many. For instance, Gazprom (OTCPK:OGZPY) goes into 2019 extremely cheap, yet it will be concluding several large investment projects during 2019 which will provide added growth from 2020. RusHydro (OTCQX:RSHYY, HYDR.LSE) goes into 2019 extremely cheap, yet the current improvement could lead to a surprise increase in its dividend.
Chris Lau, author of DIY Value Investing: Last year I picked Qualcomm (NASDAQ:QCOM), which did peak, only to give up much of its gains. In 2019, I will revisit boring 2018 picks that turned out well. Those include Walgreens (NASDAQ:WBA) and Dominion Energy (NYSE:D).
J Mintzmyer, author of Value Investor's Edge: I really like both of the Golar firms - Golar LNG (NASDAQ:GLNG) and Golar LNG Partners (NASDAQ:GMLP). The first one offers significant growth potential via the exposure to the surging global LNG markets, especially via floating LNG development projects and potential power import facilities. As I'm writing this, $GLNG is in the $23s, but I believe she is worth at least $35/sh. The LP was forced to cut their distribution, but still yields over 14% ($11.25) and has coverage. I expect that GMLP will trade closer to a 10% yield once market sanity returns ($15+).
As a 'bonus' for those who wish to speculate a bit more, I recently opened a position in Tellurian (NASDAQ:TELL) in the $6s. They are behind the Driftwood LNG export project, which tentatively could receive a FID in 1H-19. If it does, I believe the stock is worth about $20 by next summer and could trade as high as $60-$80 by the mid-2020s as the project comes online.
David Trainer, author of Value Investing 2.0: Cummins Inc. (NYSE:CMI). This company benefits from an unprecedented surge in freight demand, an economic story that has received relatively little attention due to the focus on the tax cuts, and tariffs headlines that dominated 2018. Understated reported earnings and a recent change to executive compensation plans also make this company a better value than most investors realize. CMI's accounting earnings don't reflect the improving economics of the business. Reported earnings per share are down 21% year over year for the trailing twelve-month (TTM) period. In contrast, after-tax operating profit (NOPAT), which removes accounting distortions, has grown 34% TTM. Best of all, the expectations baked into CMI's stock price remain overly pessimistic. At its current price, CMI has a PEBV of 0.9. This ratio means the market expects CMI's NOPAT to permanently decline by 10%. This expectation seems too low given that CMI has grown NOPAT by 8% compounded annually over the past decade and 10% compounded annually since 1998. Such pessimistic expectations create large upside potential. If CMI can grow NOPAT by just 5% compounded annually over the next decade, the stock is worth $186/share today - a 28% upside from the current price.
James Brumley, author of The Well Rounded Investor: It's not a value stock, ironically enough, but right now I like Intercept Pharmaceuticals (ICPT) here. The company isn't yet profitable, but revenue is growing rapidly and the losses are shrinking fast as its liver disease drug Ocaliva gains traction. It's still in the very early innings for the therapy, but the potential is significant just because there's so little head-to-head competition. It's neither growth nor value, which should keep it out of the value-vs.-growth duel and let it do its own non-cyclical thing.
Olsny Freitas, author of Alpha Generating Society: I've got a couple that I like. I'd say iPic Entertainment (IPIC) or LiveXLive Media (LIVX) are high conviction shorts. These companies will most likely not exist within 16 months or will do so in severely diminished value (-50% -80%). On the long side, I have Transglobe Energy Corp. (TGA), the stock was up over 160% since I recommended it and has now drifted down to slightly above its starting position. Since I had taken some profits in the 100% range, I think this is a great idea to recycle as the fundamentals have only improved and significantly so. I expect TGA to deliver a 100% return in 2019 as well.
Mark Bern, CFA and Mycroft Friedrich, author of Friedrich Global Research: We think that Apple (AAPL) offers great upside potential from the current price. Tremendous free cash flow generation, a few more years of the current upgrade cycle in iPhones and strong, double digit revenue growth from its services (with high margins) are just some of the reasons we like the stock for 2019.
Apple has more flexibility than probably any other company due to its incredible free cash flow generation. The company is committed to returning profits to its shareholders by increasing its dividend and buying back shares.
The company also has the wherewithal to spend heavily on R&D. Naysayers quibble about no new big products coming out but are missing the point. Products, like the iPhone, are not necessary to continue growth in revenues and cash generation. The next phase of growth will be led by Apple's services as it reaches critical mass. The iPhone isn't dead but, rather, it will be the cash cow that funds growth in other areas.
Gregory Vousvounis, author of Cautiously Greedy Investor: My best idea is somewhat unconventional. It is a new company with a little more than a year of life. RumbleON (RMBL) is an online marketplace where consumers can sell their used motorcycle or car either by accepting the company's cash offer or by listing it to be bought be other consumers.
The vehicles that are bought by RumbleON are sold either to dealers or to other consumers through the internet. RumbleON is one of its kind as it is the only national online marketplace for used vehicles. The company is currently expanding to cars and they plan to sell every type of vehicle that has a VIN.
The company is building a moat based on scale as it is aggregating the used vehicles supply and is doing it by gaining consumer trust and offering good prices. It has found product-market fit as its revenues have exploded within its first year of operation and through its recent acquisition has become cash flow positive. I thing that RumbleON is a low risk play with multi-bagger potential.
Labutes IR, author of The Financial Alpha Portfolio: One of my best ideas right now for 2019 is Danske Bank (OTCPK:DNSKF) (OTCPK:DNSKY), a quality bank in the Nordics countries that has been heavily punished by investors due to a unit of its business being used for money laundering a few years ago. This has spooked investors about potential litigation costs, leading to mispricing considering the bank's strong fundamentals. If the bank (as I expect) is able to settle this for a manageable amount, its shares have a lot of upside as litigation risk would disappear and investors could value the bank again based on its earnings power.
The first idea is playing Southwestern Energy (SWN). Look, oil prices fell, but natural gas prices have moved higher at out month contract pricing remains solid. While it is the long-term view on natural gas that is the reason a lot of these names trade at discount, we see so much value in this name at $3.50 a share again (the price at the time of this response). In just over a month and a half, nearly 45% of the stock's value has been wiped out. The basic story here is that natural gas prices, while likely to fall back to $3 or so, have been up. The oil price decline is temporary, it will come back, as always. Only a fraction of SWN's revenues are oil related, some are liquids, and the rest is nat gas. The company was thriving at sub-$3 gas, and will continue to do so. It has sold off assets, is repurchasing shares, and is delevering to improve its balance sheet and is shifting its focus a bit. It's trading at less than 4X 2019 EPS projections now. Talk about value.
The second name we think its time for every value investor to consider is AT&T (T). The debt is being tackled. The dividend continues to be raised as cash flows are growing. The purchase of Time Warner has made this a bit of a global entertainment and communications play. We think at $29 here, the stock is offering compelling value. While EPS growth is probably the biggest concern following the debt, cash flows continue to expand. It's a value play with a dividend growth and income aspect. We think shares will see support as investors shift to defense.
Finally, we think Philip Morris (PM) is offering a compelling entry point at 6.6% yield based on its current price of under $69 a share. While we know traditional cigarette sales are declining, heated tobacco products are making up for volumes and driving revenues and EPS higher. We expect the stock to rebound in 2019 as value investors and dividend growth investors seek this bargain price. Of course, should the market roll over further, all stocks will come down, but we think this name is a great defensive play and one that should be held for the long-term.
Long Hill Road Capital, author of Bargain-Priced Compounders: Amazon is one of the world's best businesses, it is run by the best CEO in the world, according to Warren Buffett, and its stock is very cheap right now at $1,474 per share. The growth of global e-commerce and the growth of the public cloud market are inevitable long-term trends, and Amazon is leading the way in both. Amazon is just getting started in its high-margin ad business, and will likely create big new businesses from scratch in global logistics, health care, and several other ventures we don't know much about yet. The culture is relentlessly focused on pleasing the customer, and you can see the benefits of that in its incredible customer loyalty. That gives Amazon "permission" from the customer to enter almost any category. I like to do a lot of scenario analysis with very explicit long-term assumptions. My Bear, Base, and Bull case per-share valuations for AMZN are $1,597, $2,113, and $2,985. So at $1,474 per share today, the market is discounting a scenario that is more pessimistic than my Bear case. I think the market underestimates Amazon's long-term margin profile because it underestimates how much reinvestment spending is occurring and depressing margins. I'll also point out none of my scenarios include any value for any big new business Amazon may build in the future. If you look at the company's history and culture, that is a very conservative assumption.
KCI Research Ltd., author of The Contrarian: My ninth best idea right now on a potential appreciation potential basis, with a more than 200% potential return to my calculated intrinsic fair value is U.S. Steel (X). Earning estimates more than doubled for U.S. Steel for 2018, and 2019, from the start of 2018, yet the stock is down almost 50% as of the writing. Normally, increases in earnings estimates are highly correlated with an increasing stock price. Not this year. For U.S. Steel, they are very cheap on traditional valuation rations, with a forward price-to-earnings ratio below 5, and debt has come down materially since 2015, so much so that their balance sheet is actually pretty strong. Ideas that rank above U.S. Steel in my proprietary rankings generally have to do with the energy sector.
Dividends & Alternative Income
Richard Lejeune, author of Panick High Yield Report: KTP and the other J.C. Penney (JCP) 2097 bond trusts including HJV, PFH, JBN and JBR are tremendously oversold. Some are now trading for less than 25 cents on the dollar. They are trading at a very large discount to the JCP 2097 bonds held by the trusts. JCP and the retail sector are currently despised by investors. Despite all its well publicized problems, JCP remains cash flow positive. It has excellent liquidity and has no major debt maturities for a few years. The new CEO has a chance to turn things around. A strong economy with low gasoline prices and the recent demise of some of its competitors such as Sears (OTCPK:SHLDQ) should help.
Joseph L. Shaefer, author of The Investor's Edge: OK, here's one I just started buying. The Höegh LNG Partners L.P. 8.75% Cumulative Redeemable preferreds (HMLP.PA) were issued at a $25 per unit par value on Sept. 28, 2017. I believe the switch from oil to natural gas is a force that is only beginning to sweep the world. Natural gas is a cleaner-burning fuel, we are finding it in ever-greater commercial quantities via horizontal fracturing and ever-better 4D exploration technology, and we now have the technology to liquify this gas in order to make shipping it across the oceans and around the world technologically and environmentally feasible and economically quite profitable. Höegh LNG (NYSE:HMLP) owns 2 LNG carriers and 8 (soon to be 9) Floating Storage Regasification Units (FSRUs.) Since the volume of natural gas in its liquid state is about 600 times smaller than its volume in its gaseous state, it makes sense to transport it in this manner. (After all, it takes energy to move the ship, as well). I think Höegh's expertise in FSRUs will appeal to many nations or utility giants who would find it more cost-effective to lease a regasification unit from a firm like Höegh LNG than to incur the expense and long learning curve of building their own regasification unit. This preferred has sold off to where its yield is now 9% per annum. Could the price decline further? Of course! In which case I will likely buy more, so long as I analyze that the issuing company looks like it will continue to increase its revenue and earnings enough to continue meeting all its debt obligations.
Double Dividend Stocks, author of Hidden Dividend Stocks Plus: The Columbia Seligman Premium Technology Fund (STK) holds big cap Tech names, such as Apple, Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Broadcom (NASDAQ:AVGO), and many others. Tech stocks are stingy with their dividends, but STK uses a covered call strategy to enhance the yields. After this past week's pullback, it's selling at 52-week lows, and it yields over 11%.
Rida Morwa, author of High Dividend Opportunities: For income investors, the year 2019 is the year to start getting defensive with higher-quality stocks. Some of our best ideas come in the Preferred Stock space. While preferred stocks seldom go on sale, market volatility has created some unique buying opportunities. Preferred stocks have not recovered despite the fact that the Fed stated that there will be less interest rate hikes going forward and despite the pullback in Treasury yields from 3.2% to 2.76%. For income investors, the preferred stock space is one of the most defensive and conservative way to get exposure to high-yield stocks. Because all the dividends on preferred shares have to be paid before any dividends can be paid to common shareholders, the dividend payment is also safer on preferred shares. Furthermore, preferred stocks carry substantially less price volatility than common shares, and thus can be more suitable for conservative investors and retirees.
Our best picks include a preferred share closed-end fund, Flaherty&Crumrine/Claymore Preferred Securities Income (FFC), yielding 8.2%. FFC is a solid closed-end fund that invests in high-quality preferred shares. It has a proven track record, a history of outperformance, and a very juicy yield relative to the safety and the quality of the fund. We recently wrote about FFC here. With a large discount to NAV and a projected yield of 8%, investors are getting a notably higher dividend yield compared to historic averages. It is opportunities like this one that we seek and are currently recommending to our investors.
Donald van Deventer, author of Corporate Bond Investor: Our default probabilities and our statistically implied credit ratings (which mimic rating agency decisions but without the long time lag before changes) showed General Electric (NYSE:GE) was far from an AAA-rated company even in the early 1990s, while the actual rating wasn't downgraded until 2009. We've received a very large number of thank yous from investors in that regard.
The Fortune Teller, author of The Wheel of FORTUNE: Preferred shares have been beaten severely during the third quarter of 2018. Some have lost more value than their related common stocks, which is absurd.
It's important to remember that not all preferred shares are born equal, and there are many lousy ones. If we have to pick one that combine both income and safety, we will point out at ETP.PD. This is a BB-rated series that was originally issued by Energy Transfer Partners, LP, now Energy Transfer LP (NYSE:ET), pays a fixed-rate of 7.625%, with a call date on 8/15/2023. At a price of $22 the current yield is 8.66%. An ETP 6.25% BB perpetual bond is trading with a YTM of 7.2%. Getting an extra 1.5% yield on a debt with a 1.375% higher coupon makes sense to us, since i) insolvency is a non-issue here, and ii) if the company decide to call something for early redemption - the 7.625% preferred share is likely to come ahead of the 6.25% bond.
ET is a very strong energy name, and we like the common stock even better than the preferred, as we see a great potential here for both income (current yield 9.5%) and price appreciation potential.
Downtown Investment Advisory, author of High Yield Bond Investor: The dislocation in the markets at the end of 2018 has created many buying opportunities. I think there are great bargains in the higher quality end of the high yield spectrum, with bonds maturing in less than five years. Yields have become very attractive and buying opportunities like this only come around every few years.
Jussi Askola, author of High Yield Landlord: Brookfield Property Partners (NYSE:BPY) is one of our largest positions going into 2019 because: (1) It is a blue chip company with exceptional track record and yet it trades at a 50% discount to NAV and a mere 7.6x FFO. (2) It combines a hefty 8.2% yield with high anticipated growth of 5-8% per year and a safe ~65% payout ratio. (3) The management is already the largest shareholder and it is today making aggressive additions to its already sizable position. (4) With high yield, high growth, insider buys, and large upside potential, we expect the shares of BPY to significantly outperform in 2019.
Alpha Gen Capital, author of Yield Hunting: Alt Inc Opps: We think non-agency MBS is the best positioned sector from a risk-return standpoint going into 2019. It contains the subprime loans from the housing bubble pre-2008 and after 10 years, these mostly non-investment grades (read junk) are being priced as high yield bonds when they are in fact much safer than the typical high-yield bond. We think of it this way. If a homeowner who was previously underwater with their mortgage coming out of the recession has continued to pay the mortgage for the subsequent 10 years, then the likelihood of them paying going forward, especially with 3.7% unemployment and rising wages, is high. In addition, these borrowers have been paying these mortgages for over 10 years while home prices have risen significantly in most geographic areas. So where as previously these mortgages were greater than what the homes were worth - today, they are around 65% of the value. In other words, you now have a significant margin of safety on these loans. Given the dislocation in the market today, discounts are extremely wide on closed-end funds. That is especially the case on the taxable bond side.
We have several opportunities in the non-agency MBS space including one we've been high on for some time: PIMCO Dynamic Credit and Mortgage (PCI). The fund is primarily non-agency MBS that PIMCO purchased at a substantial discount to par shortly after the Financial Crisis. These securities are slowly migrating towards par as mortgages within the pool get refinanced. Each time that happens, the price of the underlying non-agency security increases as the refinancing happens at par. We have recently identified two other solid funds in this area that we recently relayed to our members. We will be sharing that on the public site in a few weeks/months once we've established our position and have allowed all our members to accumulate.
Dave Dierking, author of ETF Focus: I'm still bullish on emerging markets. A study from WisdomTree recently showed that when the spread between the P/E ratio of emerging markets and the U.S. market is as large as it is right now (roughly 40%), emerging markets have outperformed the U.S. market by 10-15% annually over the subsequent five-year period. The current downswing looks like it still has further to go, so this may not necessarily be a pick for 2019. But if you're willing to hold for a few years, emerging markets equities look attractive. You could consider using the iShares Core MSCI Emerging Markets ETF (IEMG) or the Schwab Fundamental Emerging Markets Large Company ETF (FNDE) if you want a more conservative option.
Colorado Wealth Management, author of The REIT Forum: We'll provide two of them: Orchid Island Capital (ORC) is trading around an 18% discount to our estimated current book value as of 12/21/2018. Shares are $5.98. ORC is a high-risk play designed for traders. The enormous discount to net asset value is in sharp contrast to AGNC Investment Corp. (AGNC) which trades at a premium to our estimated tangible book value. The two mortgage REITs have similar portfolios, but so far ORC's hedges should be holding up better. We expect ORC to see a significant rally in the share price to bring it back in line with the sector. ORC will almost certainly post a fourth-quarter book value loss, but so will its peers. The story has a good chance to turn positive in 2019 as it should see book value rising when spreads between agency RMBS and Treasuries tighten. The 16% dividend yield isn't remotely safe, but the company is already priced as if a cut was a certainty. We're looking at this as a trading position rather than a long-term position. Despite the high yield, we're expecting to earn most of our return off an increase in the share price. We are, clearly, long ORC. We purchased the shares very recently as the plunge in the price created the opportunity.
For investors hunting for a long-term buy-and-hold position, we would suggest Taubman Centers (TCO). It is also suffering from a dramatic decline in the share price due to enormous fear surrounding mall REITs. TCO has the highest quality portfolio of any mall REIT. Its properties deliver the highest level of sales per square foot, and the REIT's dividend yield of 5.82% is covered. Its tenants are agreeing to pay higher rental rates quarter after quarter because sales per square foot keeps moving higher. Growth for TCO is a combination of development projects and increasing NOI (net operating income). The growth in NOI is driven from the higher rents its tenants are paying. While many mall REITs may struggle with anchor replacements, TCO has very little exposure to the weakest anchors. Further, the higher sales in TCO's properties are driving stronger leasing demand, which makes it easier to replace department stores. We are also long TCO.
That's the full list. We hope those lead to some interesting ideas or at least help you in your thinking about the market this year.
If you want to catch up on a fuller picture of the theories behind these ideas, check out our full year-end series:
- Small Caps: The Small-Cap Bear Is Here - What Next?
- Energy: The Next Energy Leg
- Tech: Tech's Twists
- Biotech: Keeping Focused Amidst The Biotech Bear
- Gold, Metals, & Miners: Gold: Not Quite Time
- Macro: The Cycle's Last Stand
- Alternative Strategies: Turning The Quant Sails
- Value Pt. 1: Cheap Can Always Get Cheaper
- Value Pt. 2: Value Tough To Pin Down
- Dividends: Market Volatility May Pay Dividends, Eventually
- Alternative Income: A Preferred Time To Go Yield Shopping
What's your favorite idea for 2019? Let us know in the comments below. Wishing you luck in your investing and a successful 2019 from Seeking Alpha and the Marketplace!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Please see individual roundtables linked at the bottom of the article for relevant disclosures.