Was 2015 the final nail in the coffin for buy-and-hold investing? Not necessarily. Buy these seven names and hold for 2016, then, for max returns, let them go before ringing in 2017…
The carnage of the 2015 market spared few, and was particularly brutal for the buy-and-hold crowd. Any position held for more than a few months was absolutely crushed.
This reduction in holding period was a real eye opener, even for those that already disavowed a buy-and-hold strategy.
Regardless, one year of difficulty shouldn’t sway those that are averse to long-term investing, yet understand that some amount of time is necessary to reap the reward of your risk taking in the equity market.
Fact: the market rarely repeats the past.
If it did, investors would always look to history for guidance in their investment decisions.
What will 2016 bring to investors? Wall Street decidedly believes more of the same, or history repeating. I agree with that assessment, but how we get there will be entirely different.
This year’s losses were so bad that it’s hard to see the bears continuing to feast on these beaten-down names.
The major market averages may be flat in 2016, but there will be select winners.
As always, those winners will likely have one commonality: shares that are cheap relative to expected profit growth.
We call that the PE Gap, and PE Gap stocks will be our guide to the winners for 2016.
Here are the top seven to buy and hold—for one year only…
There were many reasons for the decimation in large swaths of the market in 2015.
In particular, the strong dollar versus the rest of the globe negatively impacted multinational companies like Whirlpool (WHR).
The impact of currency conversion in 2016 will be much less.
Whirlpool is a great name to own as a play on the strengthening global economy next year. Shares trade for only 12 times 2015 expected earnings, while analysts look for nearly 20% profit growth next year.
Shares are depressed, making this a great time to buy Whirlpool shares to power your portfolio higher in 2016.
Century Communities (CCS)
2015 was a tough year for homebuilders.
The whole year was spent fretting over rising interest rates.
The threat of the Federal Reserve lifting rates for the wrong reasons resulted in speculation of a morose economy in the United States thereafter.
Higher rates can be bad for homebuilders, but what if the long term of the yield curve holds steady or even declines? That would be a good thing, right?
Century Communities (CCS) is a small builder with a $368 million market cap that was sold hard in 2015.
The selling has shares decidedly below book value, which is historically a profitable time to buy homebuilders.
Usually when shares are below book value, losses are expected in the near term, but that’s not the case here; quite the opposite, really.
Century Communities is profitable, and in 2016, those profits are poised to explode by 38% (according to analyst estimates).
Shares trade for nine times 2015 estimated earnings today.
This is a no-brainer pick for one of the best stocks of 2016.
Jazz Pharmaceuticals (JAZZ)
Picking stocks that outperform the market is all about exploiting inefficiency.
Since Wall Street is far from efficient, there are constant opportunities to buy stocks at discounted prices.
In 2015, the pharmaceutical industry took it on the chin as questions about drug pricing took center stage.
The issue will likely hang over the market in 2016 as well, due to the forthcoming presidential election.
Still, buying now makes sense based on valuation purposes alone.
Jazz Pharmaceuticals (JAZZ) is one of my favorite names.
The stock trades for only 15 times 2015 estimated earnings, while analysts expect the company to grow profits by 20% in 2016.
This one is expected to be a volatile trade during the next 12 months, but if you buy in January and sell at the end of the year, you’ll likely be well ahead of the market returns.
Goodyear Tire (GT)
The market is notorious for guessing when the music stops.
Almost 100 percent of the time the market is wrong.
When times are good for too long, it’s human nature to wonder when things will end. It’s the yin and yang of the world. Bad always follows good.
The auto sector had a banner year in 2015, surprising most of the pundits.
Because of pessimism about the future, many stocks in the sector trade for cheap valuations relative to expected profit growth.
Goodyear Tire (GT) is one of those names.
Analysts expect the company to grow profits by 20% in 2016, yet shares trade for only 10 times 2015 estimated earnings.
If auto sales surprise the market, it will be a good year for owners of Goodyear shares.
Delta Airlines (DAL)
Another sector star in the economy is the airline space, but we can’t say as much for investors in airline stocks.
2015 was a disappointing year, despite record profits for the industry.
Once again, Wall Street expects the good times to end. Once again, Wall Street is wrong.
Airlines are extremely profitable and much better managed when it comes to resisting the temptation to add capacity.
The focus is printing profits with fees, surcharges and higher ticket prices. They can accomplish all because planes are full.
About the only risk (and it is a real risk) is government interference. Absent that, 2016 will be a great year for airline stocks.
While profit growth for some players did stall in 2015, they did not for Delta (DAL). Next year looks even better, with analysts expecting profits to jump by 37% in 2016.
With shares trading for only 11 times 2015 estimated earnings, Delta is poised to outperform the market in the coming year.
Roadrunner Transportation (RRTS)
Whenever compiling a list of stocks to buy, I like to target those stocks that have been beaten down.
That’s not hard to do for 2016, as the landscape of decimation is chock full of candidates. Transportation stocks were hit hard in 2015.
Low oil prices keep costs down and improve margins.
Clearly the market was anticipating a recession last year, but it never came.
Trucking stock Roadrunner (RRTS) is a great candidate to outperform in 2016. Analysts expect the company to grow profits by 11% in 2016, with shares trading for a single-digit multiple of 2015 expected earnings.
Given the crushing blow to the stock in 2015, I suspect estimates are far too low for the coming year.
In addition, Roadrunner is a great acquisition candidate.
My bet is that the company is bought out for a much higher price at some point next year, making it an even better fit for our list of the best stocks of 2016.
Kate Spade (KATE)
Every year, one or two names make my top stocks list for a second straight year for one of two reasons: Either the stock is generating significant profit growth, or share performance in the year prior was disappointing.
Put Kate Spade (KATE) in the disappointing category.
Certain segments of retail were hit hard in 2015, including Kate Spade. Look for a rebound next year.
Analysts expect profit growth of more than 50% in 2016. With shares trading for only 36 times current fiscal year estimates, we get to buy that growth at a discounted price.
Wages are increasing and commodity deflation should boost consumer spending next year.
Will this finally be the year for retail? It’s quite possible.
This post originally appeared in mainstreetinvestor.com.