With just a few days to go before the new year, I’d like to give you my 10 top value stocksfor 2017. But first, let’s look back at 2016.
The 2016 Year in Review
One name says it all: TRUMP. The November 8 election of Donald Trump to become President of the United States has sent stocks in the U.S. soaring. The rally has been fueled by investors moving money out of bonds and emerging markets and reducing their positions in large cap growth stocks.
The initial surge in stock prices in November was concentrated in financial, industrial and energy stocks. Investors have chosen these sectors of the economy based on comments from President-elect Trump during his political campaign and from Tweets and comments since the election.
Looking Ahead–The Trump Effect
Mr. Trump’s tentative proposals include cutting tax rates for corporations and individuals, spending heavily on infrastructure and defense, and easing government regulations to enhance economic growth. How this gets paid for is a mystery, but the impact on many U.S. companies could be substantial.
Companies that have been left far behind in the economic recovery could become the largest beneficiaries. These are companies in the financial, industrial and energy sectors, which have experienced no growth during the past several years and have been abandoned by investors—until now. These unloved companies have become way undervalued, and if growth returns, these stocks could continue to rise substantially in 2017, despite hefty gains during the past six weeks.
Top Value Stocks for 2017
Here are five of my 10 top value stocks for 2017. They’re from the financial, industrial and energy sectors: EQT Midstream Partners, Greenhill & Co., Intercontinental Exchange, Chicago Bridge & Iron and Johnson Controls International.
I’ll include the remaining five choices in my next Wall Street’s Best Daily article, which you can find by clicking here.
All of my top value stocks are selling at bargain prices, and all have the potential to easily beat the stock market indexes in 2017! The current stock prices below are the closing prices on December 22.
Top Value Stock #1: Chicago Bridge & Iron (CBI: Current Price 35.03) provides specialty engineering, procurement, and construction services to customers in the energy infrastructure markets throughout the world. The company was founded in 1889 and is headquartered in The Hague, Netherlands.
Chicago Bridge & Iron is increasing market share in the high-growth energy infrastructure business, developing new LNG (liquefied natural gas) and export facilities, expanding existing import terminals and enhancing refining and processing capacity of energy companies.
Chicago Bridge has built a strong backlog of projects, which will provide decent sales growth in future years despite low oil prices. Sales will likely decline 16% in 2016, reflecting the sale of CBI’s nuclear construction business. Sales will then be flat in the first half of 2017, but solid growth could return before the end of 2017 if President-elect Trump’s infrastructure spending program is enacted. EPS dropped 13% in 2016, but will probably fall less than 5% in 2017.
At only 7.0 times current 12-month $5.05 EPS and with a small dividend yield of 0.8%, CBI shares are clearly undervalued. The company maintains a solid balance sheet. Chicago Bridge & Iron shares will likely climb 61% to my Min Sell Price of 56.30 during the next two years. I recommend buying CBI at the current price.
Top Value Stock #2: EQT Midstream Partners (EQM: Current Price 74.53) owns, operates, acquires and develops midstream assets in the Appalachian Basin. Midstream assets include the processing, storing, transporting and marketing of oil, natural gas and natural gas liquids. The company was founded in January 2012 and is headquartered in Pittsburgh, Pennsylvania.
EQT Midstream’s operations are primarily focused in southwestern Pennsylvania and northern West Virginia, a strategic location in the core of the natural gas shale areas known as the Marcellus and Utica Shales. This same region is also the primary operating area of EQT Corp., EQM’s general partner and largest customer. EQT Corp. accounts for 73% of EQM’s revenue.
EQT Midstream is expanding access to existing and adjacent markets. Sales will likely advance 16% and EPS will rise 8% to 5.65 in 2017. With a price to earnings ratio (P/E) of 14.1 times current EPS and a dividend yield of 4.8%, EQM shares are clearly undervalued.
EQT Midstream has increased its quarterly dividend 15 times during the past four years. President-elect Trump will likely ease regulations allowing companies to build additional pipelines in the U.S. I expect EQM shares to rise 42% and reach my Min Sell Price of 106.09 within two years. Buy EQM at the current price.
Top Value Stock #3: Greenhill & Co. (GHL: Current Price 28.85) provides investment banking services, including financial advice on mergers, acquisitions, restructuring, financing and capital raising to corporations, partnerships, institutions and governments. Greenhill & Co. was founded by Robert F. Greenhill, the former president of Morgan Stanley, and former chairman and chief executive of Smith Barney. Mr. Greenhill now serves as chairman of Greenhill & Co. The company’s managing directors and their affiliates own 65% of the company, including 21% owned by Robert Greenhill and his family.
Greenhill generates most of its advisory revenue from merger and acquisition fees. Although the company’s underwriting and investment banking fees fell in each of the last four years, 2016 and 2017 results will be stronger based on announced transactions and the addition of new business.
Revenue will likely rise 11% and EPS will surge 23% in 2017 after increasing 21% and 83% in 2016. At 19.2 times current earnings, GHL is clearly undervalued. Greenhill provides a 6.2% dividend yield, which is very attractive. Revenue will receive a boost if financial regulations are eased by the Trump administration. GHL will likely rise 47% to my Min Sell Price of 42.37 within two years. Buy at the current price.
Top Value Stock #4: IntercontinentalExchange (ICE: Current Price 57.28) owns and operates the leading worldwide electronic marketplace for trading futures and over-the-counter (OTC) commodities. In addition, the company’s portfolio of exchanges includes the New York Stock Exchange and Euronext. The purchase of NYSE Euronext three years ago nearly tripled ICE’s revenues and added significant earnings. Cost reductions from the purchase are ongoing, and should continue to lift earnings during the foreseeable future.
IntercontinentalExchange purchased Interactive Data in December 2015. Interactive offers market data and analytics (business planning software) to mega-data users such as financial institutions. The purchase will add noticeable revenue and EPS in 2017.
Management will continue to seek acquisitions in 2017. Revenue will likely rise 8% and EPS will advance 12% to 3.07 in 2017. IntercontinentalExchange’s network of exchanges and clearing houses will profit if President-elect Trump eases regulatory guidelines. At 20.8 times 2016 EPS, ICE shares are a tad high, but I expect the company to announce another favorable acquisition in 2017.
The company’s balance sheet is very strong with low debt and lots of cash available to fund future needs. I expect ICE shares to advance 31% to my Min Sell Price of 74.81 within 12 to 18 months. Buy at the current price.
Top Value Stock #5: Johnson Controls International plc (JCI: Current Price 42.61), established in 1885, operates in three business segments. The Building Efficiency segment designs, produces and installs heating, ventilating and air conditioning (HVAC) systems. Johnson also provides building security, energy management consulting, and property management for entire real estate portfolios.
The company’s Automotive business provides door and interior systems for the major automobile manufacturers. Johnson recently split off its automotive seating business into a new company called Adient. The Power Solutions business supplies advanced lead-acid automotive batteries for passenger cars, light trucks, and utility vehicles. The company also makes lithium-ion batteries to power hybrid and electric vehicles.
Johnson Controls and Tyco International merged on September 2 in a deal valued at $37 billion. Johnson moved its headquarters to Cork, Ireland, Tyco’s base, to take advantage of lower corporate taxes in Ireland. The merger is expected to save the combined company $150 million per year in taxes. Tyco specializes in fire protection systems. Johnson and Tyco expect to develop smart, connected products to take advantage of the rapidly growing “Internet of Things” trend.
Management is cutting costs, divesting slower growing businesses, and improving efficiency in the “new” Johnson Controls. Record battery sales in China, the Johnson Controls-Hitachi building efficiency joint venture, and the merger with Tyco are producing better than expected results.
At 10.9 times current EPS and with a dividend yield of 2.7%, JCI sells at a bargain price. I expect shares to advance 40% to my Min Sell Price of 59.59 within 12 to 18 months. Buy at the current price.
And here is the link to the second part of this article, my remaining five top value stocks for 2017.