Ever since 2010, investors could pretty much bet that whatever industries lagged the previous year would be the market’s best performers in the year that followed. While it is hard to know whether the same will apply when 2017 rolls around here in about a month, we can rest easy knowing that several of the market’s biggest current laggards will be next year’s best stocks to buy.
That is because there are many well-run large-cap companies that are far off their respective highs, mostly thanks to negative investor sentiment.
However, as we head into 2017, many of these stocks already are starting to turn the corner, and several others have major catalysts that the market seems to be ignoring in the near-term.
When it is all said and done, I count 10 stocks to buy with 2017 in mind — they might be awful now, but they could make big moves over the next 16 months.
2017’s Best Stocks to Buy: Qualcomm (QCOM)
Qualcomm, Inc. (NASDAQ:QCOM) moved 11% higher last week after strong earnings topped expectations. QCOM rightfully deserved those gains, but ironically, it also deserved big losses earlier this year and in 2015 when it seemingly abandoned a growth strategy in favor of cost cuts.
However, Qualcomm’s most recent quarter showcased something investors have not seen in a long time: growth! Sure, the growth came in comparison to big losses last year, but still, QCOM’s valuation reflected a struggling company.
What Qualcomm showed is that it is improving faster than the market expects, and that it is now well-positioned to exploit those low expectations.
After two dismal years, Qualcomm now finds itself with favorable comps and two catalysts with the Internet of Things and 5G that are close to reality. This improved performance coupled with new growth opportunities, big stock buybacks, a 3.4% yield and a cheap valuation all add to the many reasons why Qualcomm stock is going higher — much higher!
2017’s Best Stocks to Buy: Netflix (NFLX)
Netflix, Inc. (NASDAQ:NFLX) crashed after earnings, and rightfully so. The company’s net adds of 160,000 and 1.53 million in the U.S. and internationally, respectively, was well below the guidance Netflix had given just three months prior. Therefore, to miss expectations by roughly 800,000 subs collectively, investors are wise to worry given how NFLX stock is directly tied to subscriber growth.
Ironically, the same reason that Netflix stock crashed after earnings is the same reason it will be a top performer next year.
Fact is, the market is significantly discounting the implications of a Walt Disney Co (NYSE:DIS) and Netflix partnership for the latter’s stock price. Up until now, Netflix has been overreaching and overpaying for just about any content it can get its hands on. However, once that Disney partnership starts in a few months, Netflix will be in a unique situation where 30% of the box office and all the big films are going straight to Netflix month-after-month.
In other words, Netflix’s content is about to receive a boost unlike any time before, and who knows, the company might even use the Disney bump to raise prices and accelerate growth. Regardless, the increased demand created by Disney content is sure to improve shareholder sentiment, boost subscribers and send NFLX stock back to new highs.
2017’s Best Stocks to Buy: Chipotle (CMG)
Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is down 40% over the last year, and believe it or not, CMG is about 12% off its 52-week low.
It has been a rough year for Chipotle. The backlash from its E coli breakout has not only been bad press, but has cost CMG billions of dollars in annual sales when you consider how fast it was growing before the breakout and the 10% loss it will achieve this year.
However, Chipotle has learned from this event, and has since launched a loyalty program that has been very effective in its infancy. Furthermore, CMG is going to have favorable comps come next year.
As previously reported, Chipotle’s declined margins and EPS will be overlooked in favor of an undervalued multiple to sales once revenue begins to grow again. For this reason, CMG stock has a good shot to soar in 2017 as revenue growth returns.
2017’s Best Stocks to Buy: Apple (AAPL)
Much like Chipotle, Apple (NASDAQ:AAPL) looks very attractive for 2017 because it had such a bad year in 2016.
AAPL is down 15% over the past year, and by the time this fiscal year is over, Apple’s revenues will have fallen by about 8%. Expectations for the second quarter were so low that an earnings decline of 27% was enough to beat Wall Street’s bar.
However, 2016 was an “S” year, which means there will be more demand with the iPhone 7 models, and favorable comps for Apple to produce double-digit growth.
With AAPL trading at 7.5 times next year’s earnings minus net cash, it is the cheapest big tech company in the market. This sets the perfect stage for Apple stock to soar next year.
2017’s Best Stocks to Buy: Restoration Hardware (RH)
After three consecutive years of double-digit comparable-store sales growth, and expectations for that growth to continue year-after-year, Restoration Hardware Holdings Inc (NYSE:RH) has fallen 65% as that dream fell apart. Now, analysts expect growth of just 3% this year, down from the 20% that management guided for at the end of 2015.
Simply put, the company made some bad concept bets, but the good news is that RH seems to be moving in the right direction by launching standalone concepts that are performing well.
At 13 times forward earnings, RH stock is cheap, and its growth is expected to accelerate as it gets inventory and orders under control.
2017’s Best Stocks to Buy: XPO Logistics (XPO)
XPO Logistics Inc (NYSE:XPO) has fallen 33% over the past year, a reflection of lost patience among investors. Investors have watched XPO grow from a small $200 million truck brokerage firm to a massive multi-dimensional logistics company with expected revenue of $15 billion this year.
What’s impressive is that XPO achieved this growth in just five years, and to do so it had to complete massive mergers and acquisitions. Those acquisitions take time to integrate, and XPO has not been without growing pains.
However, Scott Malat recently explained that the days of negative earnings are gone. XPO will be profitable this quarter, next quarter and the one after that. This turn to profitability with have a big effect on XPO stock, which currently trades at just 3 times FY2016 EBITDA.
In retrospect, XPO could double and still be cheap. I expect much of that value to be realized in the year ahead.
2017’s Best Stocks to Buy: Sketchers (SKX)
Those problems revolve around margins, and what appears to be price pressure for SKX products. After a three-year run of double-digit growth and margin expansion, peak margins are not the end of the world.
At the end of the day, SKX is expected to have double-digit growth in the foreseeable future, and trades at a very attractive multiple of 11 times FY2017 earnings per share. Yes, sentiment is sour right now, but sooner or later the value and growth will gain respect.
2017’s Best Stocks to Buy: Disney (DIS)
Walt Disney Co (NYSE:DIS) has been one of the top-performing blue-chip stocks post-recession. However, it took a step back the past year, off 20%.
However, most of Disney’s actual business is doing just fine. Its theme park segment continues to grow as demand stays robust and prices go higher. Its film business is historically great, having the twice its market share in 2015 with 30% through 2016.
That success in film drives everything else forward. It creates strong merchandise and content demand, and it sets the stage for future movie installments, TV spinoffs and new theme park concepts. As a result, Disney’s film success in 2016 will be felt well beyond 2016, and sets the company up for a great 2017.
In other words, DIS stock took a breather, but at 16 times forward earnings, it won’t last.
2017’s Best Stocks to Buy: Regeneron (REGN)
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) has been taken down with the rest of the biotech space, down 25% over the past year. While REGN does not present the same degree of value as other stocks mentioned, it is oversold with a boatload of catalysts that should push it much higher over the next year.
Back in April, Regeneron surprised investors with a successful Phase 3 trial for dupilumab. REGN will submit the drug for approval this quarter, and if (when) approved, analysts think it could create $2.5 billion to $4 billion in peak annual sales. When this news was announced, REGN stock jumped 12%. But the news came during heavy selling pressure among biotechs, and the gains have since been lost. Thus, that’s a catalyst the street has forgotten.
Furthermore, Regeneron should enjoy further catalysts related to its rheumatoid arthritis and cholesterol-lowering drugs that involve late-stage data. This is data that should weigh in REGN stock’s favor, and push it higher over the next year.
2017’s Best Stocks to Buy: Celgene (CELG)
Much like REGN, Celgene Corporation’s (NASDAQ:CELG) 7% loss this year has less to do with the company and more about the biotechnology industry itself. Yes, biotechnology as an industry was overvalued, but there were still many companies and securities within that space appropriately valued despite having big multiyear gains.
CELG was one of those stocks.
Celgene trades at just 16 times forward earnings. This is a similar multiple to many of the largest companies in biotech and big pharma, many of which lack any growth whatsoever. But Celgene is a fast-growing company.
During its second quarter, net product sales increased 22% year-over-year to $2.74 billion. Its cancer drug Revlimid continues to be a big part of the CELG stock story, but with sales of $1.7 billion, newer drugs are starting to become a higher mix of overall revenue.
Ultimately, investors want diversity, not an over-reliance on Revlimid. While Celgene has patent protection on Revlimid for nearly another decade, it will be the development of its pipeline that takes total sales from $11 billion this year to more than $20 billion by 2020. Notably, the $20 billion forecast does not include the revenue it will create from the Receptos acquisition and its Juno Therapeutics partnership.
So while CELG stock has been one of the best performing biotechs post-recession, it still is too cheap. I fully expect CELG stock to start realizing its underlying value, and to be one of the best-performing healthcare stocks next year, the year after and the year after that.
As of this writing, Brian Nichols was long AAPL, CELG, DIS, QCOM and XPO.