Through the first nine months of 2018, it looked like another year of double-digit percentage gains for U.S. stocks, but October and November were brutal months. By early December, nearly half of the stocks in the S&P 500 Index had slipped into bear market territory with declines of 20% or more from their peaks.
In the end, the Dow was down 5.6% for the year, its worst performance since 2008. The broader S&P 500 index lost 6.2%. The Nasdaq performed the best of the three, but still dropped 3.9%. Now there is serious doubt whether the current bull market lives to see its tenth birthday on March 9.
Picking stocks for your portfolio during times like these is a bit more difficult than when the market produces gains week after week with little turbulence along the way, but in an environment of elevated volatility, there is also the opportunity to pick up outstanding bargains.
From solid dividend-payers to fundamentally sound growth stocks, seven of Forbes’ top investment newsletter editors identify some of those opportunities for you below.
Richard Lehmann, Forbes/Lehmann Income Securities Investor
Based in Tulsa, OK, Oneok (OKE) is a diversified energy company and one of the largest midstream service providers in the U.S. It is also the general partner and 41.2% owner of Oneok Partners, LP (OKS), one of the largest MLPs. OKE owns and operates a premier natural gas liquids (NGLs) system and is a leader in the gathering, processing, storage and transportation of natural gas. OKE’s operations include a 38,000-mile integrated network of NGL and natural gas pipelines, processing plants, fractionators and storage facilities in the Mid-Continent, Williston, Permian and Rocky Mountain regions.
The company’s ratings recognize expected strong earnings momentum in 2018-2020, helped by rising volumes and added capacity. Expected solid earnings growth over the next two years comes with higher leverage through 2019, as Oneok constructs two multibillion-dollar pipeline and fractionator projects. Third-quarter 2018 financial results were ahead of analysts’ expectations. Operating income jumped 40% from a year earlier to $495.5 million. Net income was $313.3, topping consensus estimates. Dividend coverage is a strong 1.39x, with distributions typically qualified and taxed at the 15%-20% rate. Buy up to $72.00 for a 4.75% annualized yield.
Kraft Heinz Company (KHC), which was created from the July 2015 merger of Kraft Foods Group and H.J. Heinz Co., ranks as the fifth largest food and beverage company in the world. Among KHC’s brands are Kraft, Heinz, Jell-O, Kool-Aid, Maxwell House, Oscar Mayer and Weight Watchers. The company’s investment grade ratings have remained intact with a stable outlook since 2015.
KHC has been on the lookout for an acquisition, having launched a $143 billion bid for Unilever in February 2017 that was rejected by Unilever’s board. Despite its failed bid, KHC has made little secret of its desire to initiate a deal. It has sufficient equity financing from its largest backers, Berkshire Hathaway, which owns roughly 26.5% of the company, and 3G Capital, with 22% ownership.
KHC reported third-quarter 2018 net income of $630.0 million or $0 .51 per share on net sales of $6.39 billion. Adjusted net income for impairment charges and other items was $0.78 per share, 3 cents short of analysts’ estimates. While KHC stock has been under pressure this year, cash flow and dividend coverage remain solid. Distributions are generally qualified and taxed at the 15%-20% rate. Buy up to $60.00 for a current annualized yield of 4.17%.
Taesik Yoon, Forbes Investor; Forbes Special Situation Survey
While there can be some negative consequences to taking on too much business, it’s usually worth the trouble—especially in the long run. I think that’ll prove to be the case with leading global composite wind blade producer TPI Composites (TPIC).
Thanks to the exceptionally strong order activity it enjoyed in 2018, driven by the ongoing shift towards cleaner energy sources and the steady but significant reduction in the cost to produce wind energy, the company ended its most recent quarter (third-quarter 2018) with a potential value under its long-term supply agreements of $6.3 billion through 2023. This is 43% higher than what it ended 2017 with and more than six times greater than the sales it will likely achieve in 2018.
And while the consequence of this substantial influx in new orders—as well as from customers moving to larger blade sizes at a faster pace than planned—will be higher-than-expected line startup and transition costs over the next two years, TPIC’s adjusted EBITDA is forecasted to nearly double in 2019 to $125 million and then jump another 36%-52% to $170-$190 million in 2020 while earnings are expected to more than triple to $1.24-$1.35 per share this year even with this pressure. As this begins to play out, I think it’ll send TPIC’s stock meaningfully higher.
Shareholders don’t like it when a company raises funds through any means that can potentially dilute the value of their holdings. So perhaps it’s not surprising to see shares of leading pawn loan provider EZCorp(EZPW) still down about 48% since announcing and then issuing enough convertible debt back in May to potentially increase total shares outstanding by 20%.
But I think this selloff is far too harsh given that the embedded conversion price of $15.90 indicates the stock would need to climb roughly 80% from current levels before any dilution would occur. Furthermore, I believe these notes will be used to substantially pay off existing convertible debt with a similar conversion price and interest rate maturing in 2019. Thus, EZPW’s dilutive and cost profile probably isn’t much different now than it was prior to the issuance.
More importantly, with the company planning to continue funneling the strong cash generated from its domestic operations back into opening and acquiring additional stores in its more promising Latin America Pawn business, which was largely responsible for the 27% rise in earnings in fiscal 2018 (which ended in September), EZPW is primed for another year of top- and bottom-line growth that should be strong enough in my view to spark a sizable rebound in its stock from here.
Bryan Rich, Forbes Billionaire’s Portfolio
Global Blood Therapeutics (GBT) is pursuing an “accelerated approval” with the FDA for its drug Voxelotor, which is a treatment for the life-threatening disorder, Sickle Cell Disease (SCD). There is no event more powerful to reprice a stock than an FDA approval. On that note, the accelerated application to the FDA is a big deal, because the bar for approval is significantly lowered for serious rare diseases that have little-to-no treatment options. SCD fits the bill. The company is on path to formally submit the new drug application next year, which could mean an approval by the end of the year.
GBT is the third largest position in the $5 billion portfolio o f the best specialty biotech investor in the world, Joseph Edelman. He has publicly said he thinks the company will be worth more than double its current value on an FDA approval. And in the longer run, he thinks it could be worth four times its current value.
John Dobosz, Forbes Dividend Investor; Forbes Premium Income Report
Denver, Colo.-based Molson Coors Brewing (TAP) was formed in the 2005 merger of Coors Brewing Co. and Canada’s Molson. It also owns the Miller Brewing company through its wholly-owned MillerCoors subsidiary, the second-largest seller of beer in North America, trailing only Anheuser-Busch Inbev (BUD).
Analysts expect 2018 revenue of $10.97 billion, down 0.3% from 2017. Molson Coors has grown EBITDA 26.8% annually over the past five years, while the company trades at discounts to five-year average valuations on nearly every metric you can measure. Molson Coors and its predecessor organizations have been paying dividends for more than 30 years. Annual dividends of $1.64 (good for a current yield of 2.9%) are not a stretch. Molson Coors produced free cash flow per share of $8.07 over the past 12 months.
Parsippany, N.J.-based B&G Foods (BGS) makes, sells and distributes shelf-stable and frozen foods in the U.S., Canada and Puerto Rico, taking its moniker from Joseph Bloch and Julius Guggenheimer, two pickle merchants in New York City from the early twentieth century. B&G’s modern incarnation as a food conglomerate dates back to 1996. It owns more than 50 brands, including Cream of Wheat, Green Giant, Le Sueur, Ortega and SnackWell’s.
Earnings before interest, taxes, depreciation and amortization has been on the rise for the past three quarters, and the company generated EBITDA of $3.91 per share over the past year to support $1.90 in annual dividends (current yield of 6.1%). Meanwhile, shares of BGS continue to trade at substantially lower valuations relative to the past five years.
Brad Thomas, Forbes Real Estate Investor
Founded in 1949, Alberta-based Enbridge is North America’s largest midstream company, with the biggest energy infrastructure network on the continent. It transports, generates and distributes energy, including crude oil, natural gas. Its midstream network transports 28% and 20% of the continents oil and natural gas, respectively. Ninety-six percent of its cash flow is under long-term, volume-committed contracts with 100% investment grade counterparties.
Enbridge has delivered 23 consecutive years of double-digit payout growth and management expects 10% dividend growth through 2020, thanks to a strong growth backlog that includes $17 billion in projects to be complete by 2020. ENB has a current dividend yield of 7.3%. It also is planning up to $27 billion in new projects for 2021-2025. ENB has a strong balance sheet, and a BBB+ credit rating, tied for the highest in the industry.
W.P. Carey (WPC) is one of the largest owners of net lease properties and among the top 25 real estate investment trusts (REITs) in the MSCI U.S. REIT Index. As of the third quarter, it owned 1,186 properties. Almost all the buildings Carey acquires have contractual rent escalators and its weighted average lease term is 10.5 years. Carey generates attractive risk-adjusted returns by selecting mission-critical buildings in the U.S. and Northern and Western Europe. About 63% of the portfolio is comprised of assets from North America (62% in the U.S.) and 35% in Europe (and 1.2% in Australia and Japan). WPC has little exposure to U.S. retail, a sector that has been struggling, and most rent checks come from industrial and office tenants.
Third-quarter adjusted funds from operations per share were $1.48, up 8% from the prior-year period. Real estate net revenues were $173.4 million, up 1.3% from $171.2 million for the 2017 third quarter. Its occupancy rate was 98.3% in the third quarter. Shares were up about 2% in 2018 and I think there’s a lot more upside to come.
George Putnam, The Turnaround Letter
Two years after its 2010 bankruptcy, Japan Airlines (JAPSY) merged with a clean balance sheet and a determined focus on profitability, thanks to an impressive turnaround led by Kazuo Inamori, founder of Japan’s Kyocera Corp., who came out of retirement to do so.
Newer, more efficient jets replaced the dated fleet, cargo operations were folded into the passenger fleet, and the company changed its marketing and pricing to attract more profitable customers and improve its image. Inamori stepped aside in 2013, but Japan Airlines continues to focus on controlling expenses while expanding its global reach through alliances.
Healthy economic growth is also boosting passenger volumes and pricing. While profits have averaged more than $1 billion, the stock remains weak. Trading at only four times Ebitda, Japan Airlines shares could be ready to take off.
In business since the 1950s, KB Homes (KBH) has a presence in Florida, Texas and California. The company offers an attractive build-to-order program that allows a degree of customization yet captures the benefits of volume and standardization.
In recent quarters, KB Homes has produced steadily rising margins and profits per unit. While the company has debt due in each of the upcoming years, it has plenty of liquidity plus a recently upgraded BB- credit rating, which should allow the debt to be refinanced at reasonable terms. The homebuilder is well-positioned for investors looking to take a contrarian stance.
John Buckingham, The Prudent Speculator
Walt Disney (DIS) operates one of the largest diversified media companies in the U.S. and is a global leader in producing branded family entertainment. Shares were flat last year, as the company acquired and is integrating 21st Century Fox, gained a majority stake in Hulu and launched Disney+, a direct-to-consumer (DTC) streaming service. Disney has been a “monetization machine” (as coined by an analyst) under the leadership of Bob Iger and I see little sign of that waning.
The company continues to add subscribers to its DTC ESPN+ sports service and seems to be surviving the cord cutting wave, which saw more than 1.1 million cable TV subscriber losses in the third quarter across the country. I’m pleased Disney won the battle for the Fox assets and think the acquisition strengthens an already best-in class content portfolio.
Disney should enjoy increased production and marketing scale, and the Disney+ subscription should be a content delivery method with significant potential. In addition, the Disney film studios have been able to churn out plenty of winners that have dwarfed the inevitable losers, while the theme parks/resorts remain major money makers.