Editors' Pick: Originally Published Wednesday, Dec. 16.
MKM Partners is cautious about 2016, but the boutique investment firm has 11 favorite stocks for next year.
"With modest growth, impending Fed tightening and an aging business cycle, our macro outlook for 2016 is a cautious one," wrote Michael Darda, Chief Economist and Chief Market Strategist at MKM Partners in a note to clients.
"The last three tightening cycles (starting in 1994, 1999 and 2004), did not occur with credit spreads as wide as they are today or inflation expectations as low as they are now. [Nominal GDP] growth was steady to accelerating, instead of slowing," he wrote. "Thus, we continue to worry that the Fed will risk tipping the business cycle over without much actual 'tightening.'"
MKM Partners investors should make sure their portfolios are "defensive, diversified, liquid and set up to handle heightened volatility in assets and sectors sensitive to the business cycle," the note said. For investors that cannot hold cash and must be invested, the firm recommends investing in utilities, muni bonds and long treasuries.
Check out MKM Partners' top stocks for 2016. The group is paired with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool, for another perspective and includes snippets of MKM analysts' investment theses on the stocks.
TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Here's the list and when you're done check out Bank of America's 10 stock picks for 10 S&P sectors in 2016.
1. ACE Limited
Industry: P&C Insurance
Year-to-date return: 0.8%
MKM Partners Rating/Price Target: Buy/$125
Potential Upside to Price Target: 10.5%
MKM Partners Said: ACE Limited
announced last July it would be acquiring Chubb Corp. for approximately $28 billion in a 50%/50% cash/stock transaction. We believe this transformative merger potentially has meaningful long term benefits for the combined entity, including the potential for significant capital management.
TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:
We rate ACE LTD as a Buy with a ratings score of A. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. Among the primary strengths of the company is its solid financial position based on a variety of debt and liquidity measures that we have evaluated. We feel its strengths outweigh the fact that the company has had sub par growth in net income.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although ACE's debt-to-equity ratio of 0.23 is very low, it is currently higher than that of the industry average.
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 15.8%. Since the same quarter one year prior, revenues slightly dropped by 6.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- ACE LTD's earnings per share declined by 30.2% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, ACE LTD reported lower earnings of $8.40 versus $10.92 in the prior year. This year, the market expects an improvement in earnings ($9.65 versus $8.40).
- After a year of stock price fluctuations, the net result is that ACE's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Insurance industry and the overall market on the basis of return on equity, ACE LTD has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
- You can view the full analysis from the report here: ACE