1100 13th Street, NW, Suite 1000Washington, DC 20005202.887.6400Toll-free: 800.544.0155
All Contents © 2020The Kiplinger Washington Editors
By Charles Sizemore
| November 26, 2016
There’s still a good six weeks left in 2016, and what a year it has been for investors. It started with one of the nastiest January starts in history, followed by one of the biggest geopolitical shockers in 30 years in the Brexit vote and finally one of the greatest election upsets in history with the rise of Donald Trump. And we still have another six weeks to go. So a lot can happen between now and New Year’s Eve.
But it’s never too early to start planning your portfolio moves for the next year. And 2017 in particular promises to be a year of transitions. With Republicans in control of the presidency and both houses of Congress, we’re likely going to see significant changes in tax and regulatory policy as well as spending priorities.
We’re a lot less likely to see political interference in pipeline construction, for example, or in pharmaceutical pricing. We’re also likely to see a major shakeup in the health insurance industry, and possibly defense.
But at the same time, we’ll be entering 2017 with stocks priced exceptionally high by historical standards and with the Federal Reserve looking to step up its tightening cycle. We also have the potential for more political turmoil as several European countries have upcoming elections that could, ultimately, put the EU at risk of finally busting apart.
While 2017 promises to have its share of excitement (and indigestion), these are 10 solid growth stocks that you won’t have to worry about.
2017 Earnings Growth Rate: 89.3%
With the Christmas shopping season around the corner, I’ll start with retail powerhouse Amazon.com, Inc. (AMZN). Amazon continued to expand its empire in 2016, announcing plans to add physical stores to its booming internet retail presence and by following the Netflix.com, Inc. (NFLX) model by expanding its presence in streaming video with original content.
But the biggest news with Amazon is the rapid growth in its Amazon Web Services business. Just as Amazon shook up the retail industry 20 years ago, it’s doing the same to the likes of traditional service providers like International Business Machines Corp. (IBM).
If you value Amazon stock like a retailer, it’s absurdly priced, fetching 2.7 times sales. To put that in perspective, Wal-Mart Stores, Inc. (WMT) and Target Corporation (TGT) trade for 0.5 times sales and 0.6 times sales, respectively.
But if you price Amazon as a technology services provider, it starts looking a lot more reasonable. Microsoft Corporation (MSFT), for example, trades for 5.4 times sales. Compared to that, Amazon looks downright cheap!
2017 Earnings Growth Rate: 27.4%
Social media powerhouse Facebook Inc. (FB) has had a rough month, as the company’s latest earnings release left investors wondering if Facebook’s best days of growth were behind it.
Well, frankly, that should be obvious. Facebook’s best days of growth are long behind it. Already, it counts the majority of the world’s internet-connected people as monthly active users. The consumers it picks up from here will tend to be poorer and thus less valuable from a marketing perspective.
Guess what? Even with decelerating growth, Facebook remains one of the fastest-growing companies in America, and it is the only social media stock that has proven to actually make money on a consistent basis.
What’s more, Facebook CEO Mark Zuckerberg has proven to be the kind of executive that isn’t afraid to blow up his own business in the pursuit of new growth opportunities. So even if Facebook isn’t adding new users at the speed it used to, I’d argue that the company is only just starting to realize its potential. And I expect 2017 to be another solid year.
Carl Wyckoff via Wikipedia
2017 Earnings Growth Rate: 31%
It’s debatable whether pipeline operator Energy Transfer Equity LP (ETE) is a “growth stock” or a “value stock.” I’d argue it’s actually both. As the general partner of a pipeline empire, Energy Transfer is by definition a levered growth vehicle, as ETE takes a disproportionately high share of the growth from its underlying pipeline subsidiaries.
But as a stock currently yielding nearly 7% and trading for barely half the price it did 18 months ago, it’s also a very attractively priced value stock. And the stock has a near-term catalyst that should send it a lot higher.
The biggest risk to ETE right now isn’t the price of oil or gas … it’s politics. Its Dakota Access pipeline, which is one of its most important growth initiatives, is being held up by protests from environmental and Native American groups. The incoming Trump administration, however, should be a lot more friendly to Energy Transfer’s cause than the outgoing administration.
So expect 2017 to be a great year for ETE stock.
Roy Luck via Flickr
2017 Earnings Growth Rate: 15.6%
I could make very similar arguments for fellow pipeline juggernaut Kinder Morgan Inc. (KMI). Kinder Morgan hasn’t had the best of luck in recent years. In addition to the same regulatory resistance that all pipeline operators have dealt with, Kinder went on a debt-fueled building spree just as the prices of oil and gas were starting to weaken. This caused the credit markets to reevaluate Kinder, and the company was forced to cut its dividend by 75% in the crunch that followed.
Well, that was a year ago. In the time that has passed since, KMI has focused on reducing its debt load and on prioritizing the projects in its backlog that promise to have the most potential. While the company has not put a firm date on a dividend hike, I think one is likely by this time next year. Kinder Morgan may never be the aggressive dividend-growth monster that it used to be. After getting burned in 2015, I see the company being much more conservative — permanently.
That said, a lowered debt profile does turn Kinder back into a bona fide growth machine again, and I expect that investors will sit up and take notice in 2017.
Nicholas Henderson via Flickr
2017 Earnings Growth Rate: 8.2%
I’ll toss in one last pipeline operator for good measure, Oklahoma-based natural gas mover Oneok, Inc. (OKE). Oneok controls the general partner of Oneok Partners LP (OKS) and is highly dependent on this underlying master limited partnership for growth.
For much of the past two years, that was a major concern, as OKS — like most midstream MLPs — had some growth issues of its own stemming from the energy price slump. There was serious concern that Onoek Partners might have to reduce its distribution, which would have meant a distribution cut for Oneok, Inc. as well.
But as 2016 progressed, OKS managed to complete several solid growth projects, and the stock now covers its distribution by a healthy margin of 1.1. That’s good news for OKE, as it assures that its current income from Oneok Partners is safe.
At current prices, OKE yields a healthy 5%. And while dividend growth has been non-existent for the past year, I expect that to change in 2017. And a friendlier political climate doesn’t hurt either.
2017 Earnings Growth Rate: 11.4%
Most American stocks have done phenomenally well since Donald Trump won the election. One noteworthy exception is smartphone powerhouse Apple Inc. (AAPL). It’s no secret that Donald Trump is no fan of outsourced manufacturing, and he has singled out Apple in particular for assembling its iPhones and other electronic gadgets overseas.
I wouldn’t get too worked up about it. While I expect Trump to squash the Trans Pacific Partnership and any other potential new deals, I don’t see him moving too aggressively to upset the status quo. Sure, he’ll have to make a few token moves to save face, and he might incentivize companies to move their production back to American shores … but I don’t see him blowing up the entire global trading system his first year in office.
Furthermore, Trump has proposed allowing U.S. companies with large cash hoards overseas to repatriate that cash at a low tax rate of just 10%. That would be an incredible boon to Apple and would give the company a massive warchest for additional dividends and share buybacks. Expect this to get a lot more press in 2017.
2017 Earnings Growth Rate: 6.3%
Next up is banking powerhouse JPMorgan Chase & Co. (JPM). Banks have been the cheapest sector of the S&P 500 for most of the past eight years. The 2008 meltdown blew apart the balance sheets of the too-big-to-fail banks, and the zero-interest-rate environment that we’ve had ever since has been a major drag on bank profitability.
Well, that’s very likely to change. To start, the Fed will almost certainly raise rates by at least a quarter point next month. Whether they raise more than that remains to be seen, but suffice it to say that short-term rates have seen their low for now. That’s good for banks like JPMorgan, as it means that they’ll earn a decent bit more interest on their massive reserves.
For what it’s worth, a Republican-controlled government will also likely be a little more lenient on the banks and will be more likely to give them the green light to raise their dividends. I expect the entire sector to do well, and I expect JPM to lead the pack.
2017 Earnings Growth Rate: 19%
As the internet and new media continue to mature, there are a handful of very clear winners. Alphabet Inc. (GOOG, GOOGL), formerly Google, is one of them. Alphabet obviously dominates internet search and the advertising dollars that come with it via its Google search engine. But Alphabet is also the owner of the word’s largest smartphone and tablet operating system in Android, is a leader in driverless car technology and is emerging as a media power via YouTube.
Alphabet has been a popular growth stock for a long time, and it is represented in “FANG” stocks (“G” is for Google). So it’s really not novel to include Alphabet on a list of leading growth stocks. But frankly, I can’t think of too many companies better positioned to grow in 2017 and beyond.
At current prices, Alphabet trades for 28 times earnings. That’s not cheap by any stretch. But for a piece of one of the premier growth names of our generation, I wouldn’t say it’s unreasonable.
2017 Earnings Growth Rate: 9.1%
Earlier I mentioned Amazon as a growth dynamo primarily for its cloud services platform, AWS. Well, I’m going to recommend tech titan Microsoft Corporation for essentially the same reason.
The products that Microsoft is most often associated with — Windows for PC and its Office suite — are mature businesses with limited growth potential. With the PC effectively replaced by the smartphone as the dominant consumer platform, Windows stopped being a growth business a long time ago. And even while Microsoft has done an excellent job of selling its profitable Office suite on Apple’s iOS and Google’s Android platforms, Office will never be the growth engine it was 20 or even 10 years ago.
Yet, Microsoft’s future is still exceptionally bright due to the company’s recent focus on cloud services. Microsoft goes head-to-head with Amazon’s AWS and is a solid number two in the space. Microsoft may or may not ever catch up with Amazon. Only time will tell.
But unlike Amazon, Microsoft has decades of enterprise relationships in place that it can leverage. So as we enter 2017, expect to hear a lot more this budding rivalry. May the best cloud provider win!
Courtesy Lockheed Martin
2017 Earnings Growth Rate: 4.4%
Finally, I would be remiss if I didn’t mention at least one defense stock. After all, Republican administrations are associated with higher defense spending, and Mr. Trump will have a Republican congress behind him.
I expect the windfall to be a little smaller this time around, as Trump is a different type of Republican. While he uses bellicose words, he’s also made it clear that he prefers to avoid expensive foreign wars. Still, I’d be shocked if military spending didn’t rise at least a little, and that should benefit major defense contractors like Lockheed Martin Corporation (LMT). Whether it’s sea, land or air we’re talking about, Lockheed has a dominant presence.
At current prices, Lockheed trades for 15 times earnings and yields 2.8%. While that’s not dirt cheap, it’s certainly not expensive, particularly for a company in an industry that’s about to have very favorable political tailwinds.
This article is from Charles Sizemore of InvestorPlace.
More From InvestorPlace
The Best Investments for 2017
The 7 Best Tech Stocks in the World
7 Buys for 7 Donald Trump Fears That Won’t Come True