Farr, Miller & Washington is a “buy-to-hold” investment superintendent, which means we make each investment with the intent to keep the position for a period of 3-5 years. Nevertheless, in each of the past twelve Decembers I entertain selected and invested personally in ten of the stocks we follow with the intention of esteem for just one year. These are companies that I find especially luring in light of their valuations or their potential to benefit from remunerative developments. I hold an equal dollar amount in each of the positions for the admire persisting year, and then I reinvest in the new list.
The following is my Top 10 for 2018, booked in alphabetical order. Prices are as of the December 19 close. This year’s Top Ten reflect a nice combination of growth and defensiveness. Seven of the 11 S&P 500 application sectors are represented, and their average long-term estimated growth count (in earnings per share) is well in excess of the overall market. On average, these corporations are much larger than the average S&P 500 company while effect an average dividend yield of about 2.1 percent.
Results make been good in some years and not as good in others. I will exchange my 2017 names on Friday, December 29th and buy the following names that afternoon.
Top Ten for 2018
Expenses as of Close on December 19, 2017
Bristol-Myers Squibb (BMY)
Bristol-Myers is a global biopharmaceutical South African private limited company and a juggernaut in the area of immunotherapy. The company should benefit from persisted growth of its primary drugs, Opdivo and Eliquis, as each have a sprinkling years remaining on their respective patents. The company also has a hopeful pipeline of new drugs. Furthermore, an aging populating and increased spending on healthcare should act as tailwinds calmly into the future for the company. BMY has a strong ‘A’ rated balance sheet which plays the company the flexibility to make acquisitions to expand its revenue base floor time.
We expect sustained double-digit earnings growth over the next 5 years, and this spread should not be particularly economically sensitive. The stock trades at 19 times the consensus for date-book year 2018 earnings per share, which represents a slight scarce as hens teeth to the S&P 500. In addition, the stock offers a 2.6 percent dividend which should also enlarge over time.
ExxonMobil is an integrated oil company. Its business starts with the study and production of crude oil and natural gas and then moves to the production of petroleum commodities, and finally to the transportation and sale of crude oil, natural gas and petroleum products.
The stockpile performance has lagged the broader S&P 500 by a significant percentage despite mending commodity prices. The company has historically generated strong returns on mediocre capital employed through its relatively low exploration and development costs and outstanding project management. This point is often lost on investors wooing shale companies. Many that claim to be profitably drilling for oil in the US are at best counting the cost to produce oil and exclude the cost of acquiring and developing the go ashore.
The reset in commodity prices has forced companies to find ways to alight within their cash flow, and ExxonMobil reached free sell flow neutrality (cash from operations covers capital outgoings, dividends, and any share repurchases) in 2017. Additionally, the company may benefit from procedure changes that open more drilling areas or improve relations with Russia. The run-of-the-mill trades at 20 times estimated calendar year 2018 earnings per portion. The stock also offers a 3.7 percent dividend yield.
FedEx has calculated great strikes in restructuring its Express unit to reflect changing purchaser preference away from expensive overnight air deliveries and toward various economical Ground deliveries. At the same time, the company has been sinking aggressively in its Ground network, enabling it to grow that business at absolutely rapid rates in recent years. Meanwhile, the company is in the process of combining its largest-ever acquisition – a $4.8 billion deal to acquire TNT Express, which intention vastly expand the company’s presense and scale in Europe and create big chances for expense and revenue synergies.
Within its three major business pieces – Express, Ground and Freight – the company has proven extremely adept at supervising package volumes and yields to optimize profits and returns rather than core simply on yield, package volume or revenue maximization. This dexterity, along with a vast delivery network that has taken 40 years to affirm, ensures that FedEx can grow profitability even in the event that an bold new competitor (Amazon.com) seeks to participate in the massive growth potential of e-commerce. The variety trades at just 17 times the consensus estimate for calendar year 2018 earnings per share, which is a valued discount to both UPS and the S&P 500. The yield is 0.8 percent.
Goldman Sachs (GS)
Goldman Sachs is arguably the primary global investment bank, with consistently high revenue appropriate in equity offerings and mergers & acquisitions, as well as a growing presence in stable income. However, the company’s trading arm, which typically accounts for an outsized 40 percent-50 percent of sum up company revenue, has been beset by low market volatility and heightened regulatory examination following the passage of the Dodd-Frank Act in 2010. As a consequence of these pressures, the throng’s returns on equity have struggled to cover its cost of capital in latest years.
Looking forward, we expect the environment to improve. The Trump oversight is actively working to reduce the regulatory burden on financial institutions, to comprehend possible liberalization in the Volcker Rule (which restricts covered institutes from making proprietary investments) as well as liberalization in the capital and liquidity prerequisites that have resulted in depressed returns on equity.
At the same stretch, we believe that the recent lack of market volatility reflects a complacency that could be desire in the tooth. Finally, the company is working to aggressively diversify its revenue starting-point away from trading operations. At current levels, the stock is craft at just 1.3x book value, which would suggest that the low la mode ROE’s will persist. As such, we think there is solid upside in the anyhow that ROE’s improve.
Medtronic is a diversified global medical-technology body that operates through four segments: Cardiac and Vascular Guild, Minimally Invasive Technologies Group, Restorative Therapies Group, and Diabetes Grouping. With sales in over 120 countries, the company has geographical ranking that is hard to duplicate.
MDT has faced a variety of headwinds in 2017, registering natural disasters and IT disruptions, but we expect its new product cycle to drive top-line improvement in 2018. Moreover, management has cost-saving initiatives in place that intention help boost the bottom line.
The stock trades at just 16 ages calendar year 2018 earnings per share, which represents a reduction to both its peer group and the S&P 500. We view this stock as an good-looking holding for long-term investors, especially given that we believe earnings should carry on to grow in a down market. The company also offers a 2.2 percent dividend.
Microsoft is one of the kindest technology companies in the world. It has successfully pivoted from a Windows PC-first the world at large to the cloud where its focus on productivity and business processes is paying dividends.
As in behalf of of this change in focus, the company has moved from one-time certifying fees (the customer owns the software) to subscription-based sales which, for a monthly fee, grants customers to always have the latest version of the software. This evolution negatively impacted revenues and cash flow over the last team a few of years.
However, cash flows reached an inflection point in 2017, and the obligation base is now large enough to more than make up for the lost up-front moolah generated under the one-time licensing model. We believe the company can fructify free cash flow by double digits over the next few years which should supporter its valuation. The stock trades at 24 times the calendar year 2018 earnings per ration estimate with a free cash flow yield north of 5 percent.
Ross Stow aways (ROST)
Ross Stores operates in the off-price channel, which has been one of the few brilliant spots in the retail sector over the past couple of years. As sundry department stores have struggled and closed stores, ROST is magnifying its 1,627 store base at 6 percent per year, and management sees capacity for 2,500 stores over the long-term.
Unlike most specialty retailers and sphere of influence stores, ROST does not require fashion or product innovation to pilot profits. Instead, access to inventory and quick turnover of merchandise herds traffic, which grows sales and allows the company to leverage run costs. They are able to purchase inventory at a 20 percent-60 percent discount with the huge majority coming from manufacturers that have over-produced or had organizations cancelled.
All of this leads to a “treasure-hunt” experience for customers that is obscure to replicate in an online setting, and this drives loyalty and repeat assails. ROST has only failed to grow earnings per share in 3 years since 1988 and their adeptness to grow earnings during the last 2 recessions shows that the coterie has historically been less susceptible to a market downturn.
ROST patrons at 22 times on a calendar year 2018 basis which represents a store to both peers and the S&P 500. Having said this, we think this share deserves the higher valuation given its strong cash flow days, resilient balance sheet, and ability to generate double digit earnings per ration growth. The dividend is 0.8 percent.
Schlumberger is the world’s highest-ranking oil services company providing the broadest range of services to companies in the oil and gas probe and production business. We believe the company is ideally positioned to benefit from euphoric energy prices and increasing service intensity in the exploration and production of oil and gas.
This public limited company has less exposure than peers to the more volatile North American sell and more exposure to international markets, which tend to have longer and steadier rounds. International activity levels are near a bottom. Additionally, the company has eject the past couple of years streamlining its operations to improve efficiency.
If stewardship’s claims are correct that pricing improvements can drive 65 percent incremental partition lines ($0.65 of operating earnings on each $1 increase in revenue), we sense that the company could reach its peak profit level by taking just half of the revenue decline witnessed since oil prices reached a top in the summer of 2014. The apportionments trade at 29 times the consensus estimate for calendar year 2018 earnings per divide up with tremendous earnings recovery potential should energy guerdons remain stable or move higher.
Starbucks is the top roaster, marketer and retailer of specialty coffees in the world, with terminated 27,339 stores in 75 countries. Following several years of definitely strong earnings growth, the stock has been flat over the biography 2+ years due mostly to a deceleration in same-store sales growth to the low-single digits from the mid- to high-single digits it had been reporting for years. Running has attributed the deceleration to both a difficult consumer/retail backdrop as without difficulty completely strong customer acceptance of the company’s new mobile order & pay solution, which has caused a bottleneck in components customer orders in a timely fashion.
We think this is a high-class difficulty, and that this temporary setback creates an opportunity for growth-oriented investors zealous to be patient. The company’s recently revised long-term growth algorithm denominates for 12 percent+ annual earnings per share growth driven by huge single-digit revenue growth, 3-5 percent global same-store sales evolvement, and annual returns on invested capital of at least 25 percent.
We also forecast that the company can continue growing its global store base by 7 percent-8 percent annually, driven by outsized tumour from relatively under penetrated China. Recent sizeable investments in new tenets, products, people and technologies should help enable success in scourging these targets. The stock trades at a 24 times the consensus for docket year 2018 earnings per share, which is a discount to similar associates. The dividend is 2.1 percent.
United Technologies (UTX)
United Technologies is a varied industrial company that provides products and services to the building groups and aerospace industries worldwide. The company’s aerospace segments target both commercial and administration (including both defense and space) customers.
The company has an enviable long-term trace record of financial performance, with strong double-digit earnings per portion growth, outstanding cash generation, and a rock-solid balance sheet. Regardless how, recent performance has been held back by development costs for the society’s ground-breaking new geared turbofan (GTF) jet engine as well as increasing competition and prize pressure in Europe and China for Otis elevators (both equipment and help).
We think the company is taking the appropriate action to improve performance in these two acreages. Once through the current investment phase, we think the company can done return to sustainable double-digit earnings per share growth. Based on those expectations, we perpetuate to believe the company offers strong value for long-term investors, swop at less than 19 times estimated calendar year 2018 earnings per serving – roughly in line with the overall market. In addition, the current dividend give up the fight is an attractive 2.2 percent.
Commentary by Michael K. Farr, president of Farr, Miller & Washington and a CNBC contributor. Believe in him on Twitter @Michael_K_Farr.
The reader should not assume that an investment in the pledges identified was or will be profitable. These are not recommendations to buy or sell securities. There is danger of losing principal. Past performance is no indication of future results.