Imagine having a crystal ball to be able to see what will happen in the future! Talk about an incredible advantage as an investor. Certainly anyone who used such a device would soon be wealthier than Warren Buffett!
Unfortunately, crystal balls don’t exist so we, as stock market investors, can only look at the past for clues about what may happen in the future.
With this said, 2016 is shaping up to be a very interesting year in the stock market. First, it is a Presidential election year. Secondly, 2015 saw a variety of factors throw shares in both bullish and bearish directions. Some of these factors will continue into 2016, others will be forever matched with 2015.
We have identified 5 stocks that are poised to outperform in 2016.
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First, let’s take a look at what to expect in 2016 based on what we do know now.
The bull market in stocks is presently 81 months old. This is the third longest stock market bull since the Great Depression. The S&P 500 is higher by 200% since the March 2009 lows.
On average, stock market bulls gains are 138%, so this means that the current bull market is historically overextended in both duration and magnitude.
Does this mean to expect a bear market in 2016. Absolutely not! Remember, markets often do the opposite of what is expected.
Analysts at UBS explained to Forbes Magazine,
“Though skeptics could point to the extent of gains, as well as the length of the rally since 2009, as sufficient rationale to believe a bear market is ‘due,’ we highlight that although the current rally is extended in both time and price, it is only the third longest and fifth largest rally since the Great Depression,” UBS wrote.
“That said, no bull market since before the 1970s has ended without a recession and both our U.S. economics team and our U.S. credit strategy team do not forecast a near-term recession.”
UBS added: “Simply put, barring an unforeseen external shock or a recession, if earnings continue to improve, 2016 should be a positive year for U.S. equities. Regardless, we continue to expect further volatility – which, in essence, means higher risk, both upside, and downside.”
UBS went on to support anti-bear case by adding.
“The bull market has room to run as there are no signs of excessive valuations, irrational exuberance or signs of a recession, typically seen at peaks,” UBS wrote.
Respected rating agency Morningstar confirmed that valuations are considered neither cheap nor expensive.
The agency told Forbes, “The S&P 500 ETF (SPY) is trading at a forward price-to-earnings ratio of 18.5. It’s yielding nearly as much as benchmark 10-year Treasuries. The SPDR Dow Jones Industrial Average ETF (DIA) is trading at 17 times forward earnings.”
At the same time, Forbes reported that Credit Suisse’s P/E model places the S&P 500’s fair value P/E ratio at 17. Its P/E model is based on long-term earnings growth, economic indicators, 10-year Treasury Inflation Protected Securities (TIPS) yield and policy uncertainty.
Now that we have established that a bear market is unlikely during the 2016 year, does the fact that it’s a Presidential election year make a difference as to what to expect?
While the market generally becomes more volatile during hotly contested election years, the S&P 500 has fallen only 3 times since 1928 during an election year.
2008 is a case in point when the S&P 500 collapsed over 30%. However, history supports a higher stock market during election years. History also shows that the volatility leading up to the election is due to the unknown factor about the election, not due to what political party is in the lead. Stocks hate uncertainty, even if it`s over something that doesn’t matter in the long run. The uncertainty is what causes Presidential election year volatility.
Perhaps most interesting about Presidential elections is that the stock market really doesn’t care what party wins the election.
Common sense would seem to indicate that the stock market should perform better under a Republican President than a Democratic one. This is due to the lower taxes, pro business rhetoric of the Republicans and the supposed anti-business, high tax stance of the Democrats.
However, like most `common sense` things about the stock market, it simply isn`t true.
The truth is that stocks have performed better, on average, during Democratic administrations than Republicans ones. While this flies in the face of conventional wisdom, the statistics don`t lie.
The average annualized returns for Bush 1, Eisenhower, Bush2, Reagan, Ford, Hoover and Nixon is 0.4%. Take out the 30% decline under Hoover as an outlier and the average return is 4.7%.
On the other hand, the average annualized return under the Democratic administrations of Clinton, Truman, Johnson, Roosevelt, Carter and Kennedy was 8.9%.
So, what stocks make the most sense to profit from the likely scenario in 2016? Here are our favorites right now
- Roadrunner Transportation Systems (NYSE:RRTS)
This Cudahy, Wisconsin Transportation and truckload logistics provider has been knocked lower this year. The share price is off by over 50% year to date, in part due to weak earnings, the deeply discounted share price creates a compelling long-term buy for 2016.
As the U.S. economy continues to improve it creates a very bullish environment for transportaton companies and Roadrunner is is priced right to pass along the success to shareholders
- Everi Holdings (NYSE:EVRI)
This company produces slot machines and other electronic high def video based gambling games like “Yardbirds and Antony & Cleopatra.”
It also is in the business of making the kiosks that provide cash to gamblers on the casino floor. As legalized gambling continues to roll out across the United States, Everi is perfectly poised to take advantage of the trend.
Right now, the shares are trading for just five times projected earnings creating an ideal buy opportunity.
- Deckers Outdoor (NYSE:DECK)
Deckers Outdoor is a treasure trove of strong casual footwear brands including UGG, Teva and Sanuk.
The stock is off 36% year to date but it’s critical to note that it boasts a debt free balance sheet, superb management and the fact that shares are prices at less than 10 times analyst’s estimates for 2016 earnings.
- Seagate Technologies (Nasdaq:STX)
This deep value play for 2016 throws off a 6.5% dividend yield and its share price has been knocked down 40% this year alone. The company points at a temporary lull in PC sales as the primary culprit.
Seagate specializes in storage for both PC’s and mobile devices which have shown little signs of slowing down. The company boasts a solid balance sheet and we expect it to thrive during 2016.
The discounted price should attract big money players in the space sending the shares higher once again in the next year.
- Omega Health Care (NYSE:OHI)
We like this health care REIT as a way to diversify the portfolio and collect a very nice 6.9% annual yield.
The company focuses on nursing homes and assisted living facilities making it an ideal candidate to capitalize on the aging population.
Omega currently has 900 facilities across 41 states making it a dominant force in the industry.
Add in the fact that the shares are down by 6% this year and it creates a compelling picture for 2016.
The Final Word
While we can expect further volatility and even perhaps several systematic shocks to the economy in 2016, overall the fundamentals remain bullish in the upcoming election year. Savvy investors should be snapping up bargain stocks as long term holds into the next year.