14 Stocks For 2017 And Beyond – May Update – Seeking Alpha

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In this article, I am going to list 14 investment ideas, based on different approaches and with variable investment horizons. All these stocks are currently in my portfolio and for each of them I will provide a brief explanation of why I am long.

Facebook (NASDAQ:FB) – I Buy On Every Dip

I bought Facebook in December, taking advantage of the dip that affected tech stocks after the election of Trump. My view was that a series of political events led to a shift of funds from tech to other sectors, such as Energy and Financials, which created a market inefficiency and a buy on the dip opportunity for some well-known names in the tech space, including Facebook. There was no fundamental reason for that correction to occur and I initiated a long. The stock has traded back to where it was and kept reaching new highs. I maintain my long because I think FB is still one of the most attractive GARP stocks in the market today, and the best opportunity in the social media industry. At just 30 times 2017 earnings, the stock is a relative bargain, considering what we are buying – a company with strong financials, strong growth, and a huge moat based on one of the strongest network effects we can find today. Unless the company reports a huge miss and a strong deceleration in growth, the stock price will continue to grow and move to higher multiples. I think the market is overestimating the impact of competition from Snap’s app (NYSE:SNAP) and underestimating Facebook’s leadership.

Baidu (NASDAQ:BIDU) – Showing Signs Of Life

Baidu is considered the Chinese equivalent of Google and used to trade at premium over Alphabet in the past. The company runs the leading search engine in China, wh represents its core business, but also operates a video streaming service called iQiyi and is growing fast in the Online to Offline business (Transaction services) and in AI applications for finance, healthcare and autonomous driving. After reaching a top in November 2014, the stock posted a big correction due to the slowdown in the Chinese economy and some rising concerns about the future prospects of the company’s unprofitable divisions (iQiyi and O2O services). Despite that, the core search business continues to grow, helped by the strong secular trends that support rising internet consumption in China, a market that still shows a relatively low penetration of internet among population. I still expect the non-core divisions to be a drag on profit growth, but I think losses in those divisions will gradually decline. Moreover, I think the market is underestimating the long-term prospects of the company and the effects of AI on its business. I have been long for almost a year, waiting for the market to realize the mispricing. The stock has been dead money for more than 2 years but in the last 2 months it has started to show signs of life and estimates have been revised upwards. I expect this trend to continue and the stock to break the channel in a bullish manner.

Community Health Systems (NYSE:CYH) – Still Betting On Deleveraging

CYH crashed by more than 90% as a result of rising concerns about the company’s ability to pay back the huge debt burden. The main problem has been the assimilation of Health Management Associates, acquired for $7.6 billion, which has been more difficult than anticipated. Many of the acquired hospitals had a weak performance, hurting the company’s margins. I started a long on the stock after seeing a series of divestitures that could help pay back part of the debt. The transactions that took place involved under-performing assets, but were completed at much higher valuations compared to what the stock’s multiples suggested. Therefore, I understood that the market for hospitals was more liquid than the stock price was discounting. I decided to place a bet on a successful deleveraging of the company, and the stock has already posted a nice rally since then. I expect debt to decrease and EBITDA to stabilize, pulling the stock price up.

Nike (NYSE:NKE) – The top pick in the industry

NKE started to decline in December 2015 due to a deceleration in revenue and income growth that resulted from a mix of factors – mainly the increasing popularity of Adidas (OTCQX:ADDDF) (OTCQX:ADDYY) and Under Armour (NYSE:UA) (NYSE:UAA). Recently, I’ve added to my position because I saw a good opportunity in the dip occurred in response to retailers’ earnings releases. Nike remains the world leader in the sport industry and one of the strongest apparel and footwear brands in the world. It has an obvious scale advantage over competitors and a dominant position in North America, which grants higher margins and financial strength for investments in the form of rich endorsements, sponsorships and advertising campaigns. I think the market underestimates the company’s moat and overestimates the impact of competition. I expect the company to remain the leader in its industry, which is exposed to positive secular trends. At just 21 times earnings, the stock trades at a discount to the overall market, although the company has a strong moat and is exposed to favorable industry trends. I think this situation created an attractive opportunity for a long-term bet.

Gilead Sciences (NASDAQ:GILD) – Not so sure anymore

GILD has been in a steady decline since June 2015, as a result of the decline in sales of HCV drugs, due to the shrinking market, the increasing competition and pricing pressures. First, I decided to go long because I thought the market sentiment on the stock was too negative. I still think the high margins of Gilead’s business will guarantee huge cash free flows in the next few years, even in a shrinking market, but I can’t say to be fine with management’s inactivity. The stock does look very cheap at a P/E of 6.8 and a P/FCF below 6, but I don’t think the management is doing anything to unlock the situation. The only think that can unlock the stock price in the next 2-3 years is one or more acquisitions, as the only important drugs in the pipeline (drugs for NASH) won’t see the market for at least 4-5 years, if they ever will. I decided to reduce my position to a very small fraction of my portfolio.

Allergan (NYSE:AGN) – Growing, with a rich pipeline

Unlike Gilead, Allergan didn’t seem to have problems to find attractive takeover targets. As I explained in a previous article, the company has engaged in several changes in the business model, which scared some investors. I bought because I believe in Allergan’s competitive strengths and long-term prospects. The diversified portfolio of drugs and the rich pipeline give good visibility into the company’s future sources of revenue, and I think the stock will easily continue its uptrend in the next 2-3 years. Some analysts say there are no significant short-term catalysts, but if we look at a the next 12-24 months, there is a large number of potential catalysts in the pipeline. There are some competitive pressures on Restasis and a few minor drugs, but nothing that can’t be offset by rising sales of other products. I think the market is trapped in its typical short-termism and not properly discounting the value in the pipeline.

Michael Kors Holdings (NYSE:KORS) – A contrarian play with massive upside

KORS has fallen with several other stocks in the fashion industry, such as Ralph Lauren (NYSE:RL) and is now trading at depressed multiples. At 8 times earnings and 7 times FCF, the market is pricing a scenario of perpetual decline, due to belief that the company’s success is a result of a fad, and that the excessive discounts and the brand’s excessive commercialization have permanently damaged its reputation. I don’t think Michael Kors has to do anything much different from what Coach (NYSE:COH) is doing. Coach is managing to restore its brand reputation through a series of measures that include reducing its exposure to department stores and adjusting pricing and inventory management. It is working quite well and the company delivered 4 consecutive quarters of comparable sales growth, despite the difficult environment. Michael Kors has recently started to implement a similar turnaround plan and I expect it to bring good results in the next 1-2 years. If they manage to fix a few issues related to discounts and excessive commercialization, the stock has the potential to double from the current price, taking Coach’s valuation multiples as a benchmark.

Bed Bath and Beyond (NASDAQ:BBBY) – Value play in the retail space

This retailer has experienced a deterioration in margins due to the increasing competition from online players such as Amazon (NASDAQ:AMZN) and an excessive dependence on coupons. The stock is currently trading at 7.5 times TTM earnings and 7.8 times TTM Free Cash Flow, the lowest valuation multiples of the last 10 years. I realize the market is afraid of the e-commerce threat, but I think the company will likely manage the competitive pressures. After all, it has an e-commerce business that is growing in excess of 20% and that now accounts for more than 12% of total revenue. From a financial perspective, there are many reasons to like this stock – a strong balance sheet, huge FCF and a buyback program that could lead the company to repurchase more than 30% of its own shares, at the current prices. I think BB&B can manage the e-commerce threat as good as Best Buy (NYSE:BBY) did before them.

Walt Disney (NYSE:DIS) – Short-term opportunity closed, long-term opportunity remains

I think DIS is one of those stocks you simply buy on every significant dip, if valuation is still reasonable. I bought the stock in November, trying to anticipate the success of Rogue One, which I saw as a nice catalyst. More recently, I partially closed my position on signs that the ESPN division was still in trouble. The launch of Rogue One gave me a good catalyst for a short-term trade, but the stock remains an attractive long-term play. I do believe the company has a strong moat based on a mix of copyright, brand power and investment size (related to theme parks and resorts) and I think the current valuation, at 18 times earnings, is still reasonable for a business of this quality. From a short-term perspective, I may increase my position in the next few months if the stock keeps declining before the launch of Star Wars: The Last Jedi. I will cover this topic in a specific article.

Skechers (NYSE:SKX) – So much pessimism

SKX skyrocketed in the last few years, fueled by strong revenue and income growth, but then fell by almost 65% from the top reached in August 2015, due to a slowdown in revenue and earnings growth. It seems that the market doesn’t believe in this company anymore even if it keeps reporting solid growth numbers, thanks to international expansion. The stock is trading at a ridiculous discount to its peers on almost any metric and I started to accumulate shares after seeing the heavy insider buying from the CEO in November, which I consider a further hint that the market is not properly discounting the company’s future prospects. The recent correction that occurred in response to important retailers’ earnings releases is probably another opportunity to add some shares in this underappreciated company.

Gamestop (NYSE:GME) – Ride the change and enjoy the dividend

Gamestop is a videogame, consumer electronics and wireless service retailer whose shares have crashed due to unfavorable changes in consumers’ behavior. While the company is still profitable and has a strong balance sheet, the market is expecting the core videogame business to decline as a result of the increasing share of videogames that are downloaded online. My long-term thesis remains the same – I also believe the market for physical videogames will continue to shrink, but the decline will be more than offset by growth in two relatively new divisions: tech brands and collectibles. In addition to the long-term thesis, the recent success of Nintendo Switch has unlocked the stock price in the last few weeks. I expect this positive trend to continue, helped by the launch of Microsoft’s (NASDAQ:MSFT) Xbox Project Scorpio and the possible launch of Playstation 5 by Sony (NYSE:SNE), which could happen in the next 2 years. It’s not the first time that the market offers this kind of opportunity with this stock. The same happened in 2012, right before a new cycle of consoles triggered a 250% rally (ex-dividend) in the stock price. Although I don’t expect a rally of the same magnitude, and a lot depends on whether Sony decides to launch the Playstation 5 in the next 2 years, I consider GME a real bargain at the current multiples. At 6.6 times TTM earnings, the market is discounting a very negative scenario that doesn’t take into account the increasing diversification and the help of the new console cycle. A 6.7% dividend helps the bullish case.

Starbucks (NASDAQ:SBUX) – A great stock for the long term

Starbucks basically sells coffee and a few other drinks and foods, but I can bet it would be an impossible task to replicate the company’s success. Starbucks has managed to build a very strong brand with a global reputation and a good level of customer loyalty. The company’s growth and the bullish trend that followed have lasted for decades and I think will continue for many years. The stock has posted a correction between October 2015 and November 2016, due to some temporary “problems” in the implementation of digital order and pay. The company basically had an issue that many companies would like to have – it had to manage an excessive number of orders. Besides that, the business remains solid and the company reports growth on all fronts – revenue, same-store sales, earnings, new openings, expanding margins. The stock trades at 30 times earnings, not a cheap multiple but fair if we consider the current stock market valuations and the interest rate level. I do believe the stock is an excellent growth investment for at least the next decade.

Nordstrom (NYSE:JWN) – Upscale retailer at a beaten-down price

This is another victim of the weak environment in fashion and retail. The stock is down almost 50% since the top reached in March 2015 and currently trades a 2017E P/E around 14. While declining foot traffic has had an impact on the business, the e-commerce threat is overrated for two main reasons – Nordstrom customers are not as price-sensitive as the average shopper; Nordstrom has a solid e-commerce business and already derives one quarter of its revenue from that channel. The company is solid and generates plenty of cash, the stock is relatively cheap. A 3.50% dividend helps the investment thesis. The recent correction (again a result of department stores’ earnings releases) was a totally inappropriate reaction, considering that both Nordstrom and other peers such as Macy’s and JC Penney (NYSE:JCP) confirmed a relatively positive guidance for 2017. I think there is a valuation gap that must be closed, and I expect the stock to trade above $50 by next year.

Francesca’s Holdings (NASDAQ:FRAN) – A survivor in a depressed industry

Francesca’s is a survivor in this depressed retail industry. It’s the typical case of “baby thrown out with the bathwater”. The company operates a flexible business model based on relatively small boutiques and a fast growing commerce website, and was one of the few apparel retailers to report solid growth numbers in the last 2 years. The company is able to refresh its offering quickly, managing to spark customers’ interest and curiosity. This factor has helped sustain foot traffic and sales. Growth is not expected to fade away, as the company continues to expect positive comps and keeps expanding its store base and e-commerce business. At 12 times earnings and at significant discount to peers with lower growth rates, I think the stock is an attractive long.

Conclusion

For the sake of clarity and full disclosure, I would like to stress that all these stocks are in my portfolio but not all the stocks in my portfolio are in this list. Moreover, this list doesn’t include my shorts. I hope readers can find some interesting ideas to work on, but please do your own due diligence before investing.

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Disclosure: I am/we are long AGN, BBBY, G, BIDU, FB, CYH, SBUX, FRAN, KORS, NKE, SKX, GME, JWN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.