2 Best of Breed Stocks for 2018


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2 Best of Breed Stocks for 2018

 

 

Expect 25%-50% Selected Gains in 2018

Heading into any new year, there is a constant drum-beating by the investment community to demand fresh strategies to catalyze portfolios when the calendar turns over to January 1. The usual suspect topics come to the fore, such as ‘Dogs of the Dow” or ‘5 New Year’s Investing Resolutions’ that tend to stray from reality as to where current capital flows are targeting.

As 2017 comes to a close, the S&P 500 will finish at or just under 2700- making for a solid year of gains of 22.2% entering the final trading day of the year. The Nasdaq has fared even better, posting a gain of 30.6% with the FAANG stocks having another banner year of performance. It should be no wonder that the month of December has seen some aggressive profit-taking in tech as fund managers perform some year-end rebalancing of portfolios to pair off winners and losers to smooth out tax efficiency.

Indeed, the major averages have put on a stellar performance for 2017. But with tax reform having passed, interest rates still at extremely attractive levels for both businesses and consumers, and stock buybacks and M&A activity remaining robust, the path of least resistance for the stock market is higher. The primary bull trend remains in tact with visibility for the next three to six months being fundamentally and technically positive for stocks.

During the month of December, the most notable developments were the bump in Treasury yields that set financials in motion for new highs and the sharp spike in the energy sector. The Fed raised short-term rates and laid out a dot plot plan for next year that includes three more rate hikes. That’s all that was needed to fuel a strong rally in financials that in my view will carry well into the first half of 2018.

WTI crude prices bumped up against $60/bbl and the energy sector got a sling-shot move off the low end of a multi-month range. We saw the major integrated oils like Chevron, Royal Dutch, BP PLC and refiners Phillips 66 and Valero vault to new 52-week highs. This trade caught most investors flatfooted, having moved from the energy patch months ago on the notion that coordinated production cuts would provide only temporary relief from what is still perceived as a glut in global crude supplies.

My current view on energy is that while the rally has been nice, the sector is overbought and due for some consolidation. I believe crude prices, while at the upper end, will stay range bound and likely to soften heading into spring save for geopolitical or accidental large-scale disruptions. Consider this week’s explosion in one of Libya’s pipelines that took 70K-100K barrels of daily production off line as an example.

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