[Note: The 2017 top value stocks can be found here.]
On December 17, Roy Ward, Chief Analyst of Cabot Benjamin Graham Value Investor ran a column called “Top Ten Stocks for the New Year” where he mentioned his top 10 value stocks for 2016. In his Wealth Advisory he named 5 stocks and asked the readers to respond to his email to receive the remaining 5 stocks. The response was tremendous, with hundreds of readers requesting the other five stocks in Roy’s Top Ten list. If you missed Roy’s picks, I’m featuring them in today’s Wealth Advisory.
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Roy’s Top Ten Value Stocks for the New Year
In Part 1 of Roy’s Top Ten Stocks for the New Year, Roy recommended BJ’s Restaurants, Dollar General, General Motors, Prudential Financial and Whirlpool as the first five of his Top Ten stocks for 2016. (Click here to view the original column.)
Here’s the second part which provides the remaining five stocks: Cognizant Technology, CVS Health, Gilead Sciences, McKesson, and Skyworks Solutions. Here’s Roy’s analysis of the stocks.
Cognizant Technology (CTSH: Current Price 62.42) offers complete start-to-finish solutions for designing, testing and integrating complex software systems for corporations whose objectives are to cut costs and become more efficient.
Sales to healthcare clients jumped 39% in the most recent quarter, bolstered by new business derived from the Affordable Care Act. Cognizant is gaining significant market share by helping its clients improve their performance and beat their competition.
Recent digital technology changes, global economic pressures and more constraining regulatory requirements will also provide CTSH with plenty of opportunities to gain new business well into the future. Cognizant’s expansion overseas and advancement into the telecomm, media and entertainment sectors offer outstanding opportunities for future growth. The company is already the outsourcing leader in the financial services and healthcare industries.
Roy expects sales to increase another 15% in 2016. Earnings will likely rise 13% to $3.00. CTSH is reasonably valued at 23.5 times current earnings per share. Cognizant has no debt and lots of cash to fund future expansion and new endeavors. I expect CTSH to increase 36% to my Min Sell Price of 84.97 within one year. Buy at the current price.
CVS Health (CVS: Current Price 97.56) is the leading pharmacy and drug management services chain in the U.S. During the past several years, the company has made several major acquisitions that have enhanced CVS’s growth beyond expectations. The company’s latest purchase of pharmacy services manager Omnicare is producing better than expected sales and earnings results. CVS will likely continue its aggressive acquisition strategy in future years.
Roy expects sales to advance 15% and EPS to climb 19% to $5.95 in 2016. New drugs from drug makers and the wider use of generic drugs will keep earnings growing rapidly well into the future. Recent acquisitions will add noticeable sales and earnings in 2016.
CVS shares are undervalued at 19.5 times latest EPS. Additional acquisitions could push sales and earnings higher than expected. The dividend yield of 1.4% is modest but growing, The company’s balance sheet is strong, and my risk rating for CVS is very low risk. CVS’s stock price will very likely climb 31% in 2016 and reach my 127.56 sell target. Buy CVS at the current price.
Gilead Sciences (GILD: Current Price 103.34) is a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need. Its primary areas of focus include human immunodeficiency virus/AIDS, liver diseases such as hepatitis B virus and hepatitis C virus, and serious cardiovascular/metabolic and respiratory conditions.
Gilead’s Sovaldi, for the treatment of Hepatitis C, became one of 2014’s biggest selling drugs in the world. In October 2014, the FDA approved Harvoni which offers slight improvements to Sovaldi in treating the hepatitis C virus. AbbVie’s new hepatitis C drug has developed safety concerns, which could help Gilead take market share. However, Merck is applying for FDA approval for its new hepatitis C drug, which could compete effectively with Gilead’s drugs. Concern continues to swirl around Gilead’s high prices, but no action has been taken by the U.S. Congress. Buy at the current price.
In addition to Sovaldi and Harvoni, Gilead has developed another important drug, called Zydelig, aimed at treating certain types of leukemia and lymphoma. Zydelig will provide Gilead with an additional drug to add to its growing portfolio of successful products. The company has many more drugs in various stages of development which will bolster sales and earnings for many years to come.
Roy forecasts sales and EPS will increase 15% in 2016. GILD shares sell at 9.0 times current EPS. Gilead initiated a quarterly dividend of $0.43 which provides a decent 1.7% yield. Cash flow is $16.8 billion per year, and the balance sheet is strong with only $11.9 billion of total debt. The company’s PEG ratio is 0.51, which is very low. I expect GILD to advance 28% and reach my sell target of 132.09 before the end of 2016. The stock is clearly undervalued. Buy at the current price.
McKesson (MCK: Current Price 190.72) distributes proprietary drugs, biologics and other pharmaceuticals; surgical supplies; and health and beauty products to the healthcare industry throughout North America. McKesson has become more aggressive in pursuing acquisitions to boost sales and earnings growth. In February 2014, McKesson acquired Celesio, a German drug distributor, for $5.4 billion. Celesio provides services in the pharmaceutical and health care sector with operations in 14 countries. The deal will allow McKesson to significantly expand in Europe.
McKesson’s sales and earnings sparkled in the third quarter, which caused analysts to raise sales and earnings forecasts for the remainder of 2015 and for next year. I expect sales to rise 6% and EPS to climb 9% to $12.50 in 2016. My estimates could be too conservative if Celesio delivers better than expected results, or if McKesson purchases another company at an advantageous price.
McKesson’s stock price has declined 20% during the past six months, despite reporting impressive sales and EPS increases of 10% and 22% respectively for the six months ended 9/30/15. At 15.3 times latest 12-month EPS, and with earnings expected to grow at a 14% pace during the next five years, the company stands out in the healthcare sector. The 0.6% dividend yield is low, but hefty dividend increases are expected. I am confident that MCK will advance 28% to my Min Sell Price of 245.89 within one year. Buy at the current price.
Skyworks Solutions (SWKS: Current Price 78.97), based in Woburn, Massachusetts, is engaged in the design, production and marketing of high-performance mixed signal and analog microchips. The chips enable connectivity among electronic devices. Analog chips were invented long ago, but are required for broadband signals used in the processing of data. Newer mixed signal chips combine analog and digital circuitry used in microprocessors found in computers, smartphones and electronic devices. Skyworks’ products are used in automotive, global positioning systems (GPS), industrial, medical, wireless networking, smartphone and tablet applications.
Demand for mobile Internet applications is surging with the broad proliferation of smartphones, net books, notebooks, tablets and other forms of connected wireless devices. Skyworks continues to gain market share despite intense competition, due to the company’s higher quality and environmentally friendly products. The company is expanding sales to customers in the automotive, medical and industrial sectors, where profits are higher, product life cycles are longer and competition is less intense.
Skyworks is well-positioned to capitalize on the rapidly rising Internet of Things, which allows objects such as appliances, lights, alarms, and cars to be controlled remotely. Skyworks is investing heavily in research and development to increase its market share of the Internet of Things, which is likely to exceed the growth of other connected devices, even smartphones, over the next five years. A new joint venture with Panasonic will greatly enhance Skyworks’ capabilities in the Internet of Things sector and add significant profits in future quarters and beyond.
Roy expects sales to rise 14% and EPS to jump 25% to $5.65 in 2016. Skyworks’ 17.6 price to earnings ratio, based on latest 12-month EPS, is low compared to the company’s projected five-year EPS growth rate of 22.1%. The quarterly dividend was recently doubled and now yields 1.3% annually. Skyworks’ balance sheet is pristine with no debt and $1.0 billion in cash. Buy SWKS at the current price and sell when the stock price climbs 55% to reach my sell target of 122.58.
To receive additional stocks and updates from Roy, consider taking a risk-free trial subscription to Cabot Benjamin Graham Value Investor. Roy does an extensive research and analyzes stock fundamentals to find outstanding companies selling at reasonable prices. In every issue you’ll also find Roy’s Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.
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