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All Contents © 2020The Kiplinger Washington Editors
By James K. Glassman, Contributing Columnist
Ellen Chang, Contributing Writer
Charles Lewis Sizemore, CFA, Contributing Writer
| December 11, 2019
It's difficult to lock down the absolute best stocks to buy for any year – but 2020 could be particularly challenging.
For one, 2019's run-up has lifted stocks to sky-high prices only seen a handful of times in history. Also, the global economy is starting the year at a potential inflection point – growth has been weakening for months, but signals of a turnaround are starting to pop up. And the 2020 presidential cycle is almost certain to cause headaches for a number of politics-sensitive sectors.
The year ahead could be every bit as volatile as 2019, if not moreso. Thus, the best stocks for 2020 will need to have not just decent-to-robust growth prospects, but a little durability too. That's quite the needle to thread … but several companies do fit that bill.
Here are the 20 best stocks to buy for 2020, rain or shine. A few of these possess typical defensive characteristics such as recession-resistant businesses and/or high dividend yields. A few possess qualities that could protect them from 2020-specific dangers, such as trade turbulence or the upcoming presidential elections. But all of them merit a place in most stock portfolios in the coming year.
Data is as of Dec. 10. Stocks listed in alphabetical order. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $125.9 billion
Dividend yield: 2.9%
AstraZeneca (AZN, $47.98) is a U.K.-based biopharmaceutical giant with treatments in oncology, cardiovascular, renal, respiratory and several other fields. It boasts a few dozen approved drugs, as well as a deep pipeline of 164 trial-stage treatments, including nine new molecular entities in late-stage trials.
Among its premier products are several cancer treatments, including Tagrisso (non-small cell lung), Imfinzi (bladder) and Lynparza (ovarian, breast and prostate). Tagrisso, which is approved in 87 countries, is AstraZeneca's best-selling drug, racking up $2.3 billion in sales across the first nine months of 2019 – that represents 82% year-over-year growth, and 13% of the company's year-to-date revenues. Better still, in the third quarter, Tagrisso and several other drugs had positive readouts in late-stage trials.
Despite all this success, Cowen analyst Steve Scala writes that the company's product momentum isn't being properly recognized. In December, he reiterated his Outperform rating (equivalent of Buy) and raised his price target to $55 per share from $48 previously, or roughly 15% upside potential. He also thinks that low U.S. exposure should insulate the stock from the upcoming presidential election cycle – a feature that makes AZN stand out among the best stocks to buy for 2020.
One more thing to like: Strong growth in China. The company's $3.7 billion in revenues through 2019's first nine months was 30% better than the same period in 2018. AstraZeneca's position in China and other emerging markets should serve it well in the year ahead.
Market value: $8.8 billion
Dividend yield: N/A
T. Rowe Price New Horizons (PRNHX) – one of the original small-cap and (now mostly) mid-cap growth funds, and one of our top T. Rowe Price Funds for 401(k) retirement savers – celebrates its 60th anniversary in June 2020. It has beaten the Russell Midcap Growth Index, Morningstar's benchmark for the fund, in nine of the past 10 years (including 2019 through Dec. 10). The fund is currently closed to new investors, and a new manager arrived last March, but you can check out the portfolio for investing ideas.
Its top holding, as of this writing, is Bright Horizons Family Solutions (BFAM, $151.23), which runs child-care and early education centers, as well as providing college-entrance advisory services. This is no small outfit, either, with BFAM claiming more than 1,000 child-care centers worldwide.
It's an impressive business – one that has grown revenues and profits without interruption for half a decade, driving a 230% jump in shares over the past five years. As a result, the stock isn't cheap, but it is down from last summer's highs.
Courtesy Trein Foto via Flickr
Market value: $2.6 billion
Dividend yield: 6.2%
Daniel Abramowitz, of Rockville, Maryland-based Hillson Financial Management, is a go-to guy for small-cap value stocks. For the year ahead, he likes Chemours (CC, $16.19) – a chemical manufacturer that DuPont (DD) spun off in 2015.
Major products include titanium dioxides, which give brightness and hardness to porcelain enamels, and Opteon, a refrigerant with environmental advantages over Freon.
Chemours soared in price in 2016 and 2017, then ran into operating problems that Abramowitz believes are temporary. Chemours, he says, "is a well-run, shareholder-friendly business, and the stock is unreasonably depressed after a sharp selloff."
The P/E is just 5. That puts CC among the cheapest high-quality stocks to buy for 2020.
Industry: Automotive services
Market value: $20.5 billion
Regardless of your religion, pay attention to a mutual fund called Ave Maria Growth (AVEGX), which, according to its website, is part of the largest Catholic mutual fund family in the U.S. and places "equal emphasis on investment performance and moral criteria in selecting securities."
Whatever Ave Maria is doing, it's working. The fund has returned an annual average of 13.4% over the past five years, compared with 11.4% for the S&P 500. Its largest holding at the moment is Copart (CPRT, $88.38), which runs online vehicle auctions, mainly selling damaged cars on behalf of insurance companies.
CPRT shares have more than tripled in three years. But even at a forward P/E of 28.5, based on estimated earnings for the next four quarters, the stock doesn't appear overpriced. And looking even farther down the road, Value Line projects earnings will rise at an annual average of 17.5% for the next five years.
Industry: Discount retail
Market value: $130.0 billion
Dividend yield: 0.9%
Costco (COST, $295.78), the discount warehouse club retailer, has consistently posted strong comparable-store sales (revenues generated from stores open 12 months or longer). Michael Underhill, chief investment officer at Capital Innovations in Wisconsin, expects that trend to continue.
Indeed, Underhill likes a lot about Costco. Among the reasons COST belongs among the best stocks to buy for 2020: a solid macroeconomic environment, merchandising initiatives with grocery and organic offerings and apparel, low prices, ongoing retail consolidation and newer e-commerce services such as delivery.
Costco is on the pricey side. COST shares trade at more than 31 times forward-looking estimates for next year's profits, which could make the stock sensitive to numerous triggers. Underhill says changes in comparable-store sales and margins, challenges from various competitors across the brick-and-mortar and online retailing space, and softening consumer demand all at least threaten to bite Costco.
That said, Costco is consistently ahead of earnings estimates. It boasts a strong balance sheet that includes $2.2 billion more in cash than debt. And its customer base is loyal, as evidenced by its 90%-plus renewal rate in North America and some of the strongest foot traffic in retail, says Chris Osmond, chief investment officer at Prime Capital Investment Advisors (PCIA).
"With a plan to increase membership fees, which will add a significant boost to recurring revenue, Costco expects little negative impact," he says. "There also is reduced competition in the wholesale market with the closure of 63 Sam's Clubs in early 2018, which will benefit Costco."
Industry: Pharmacy retail/Health insurance
Market value: $95.2 billion
Dividend yield: 2.7%
Pharmacies aren't particularly exciting. They're essentially convenience stores that also happen to sell prescription drugs.
While that might be true, CVS Health (CVS, $73.18) isn't just any old pharmacy. The chain is quietly and efficiently replacing your doctor.
CVS has been running its walk-in MinuteClinics for years, offering basic health services like flu shots or tests for strep throat. And its HealthHUB concept is pushing CVS deeper into healthcare, providing patients with full primary-care services, dietitians and even weight-loss programs.
This is a smart move. Retail may not be "dead," per se, but CVS and other retail pharmacies face unrelenting pressure from Amazon.com (AMZN) and other online competitors. By offering services rather than just commoditized pills you can buy anywhere, CVS is ensuring it remains relevant in the decade ahead.
"This late in the economic cycle, it's probably a good idea to stick with more defensive names," says John Del Vecchio, co-manager of the AdvisorShares Ranger Equity Bear ETF (HDGE). "After a bad run with over-hyped tech IPOs, investors are a lot more likely to be comfortable with consumer staples."
CVS Health is exactly that kind of company. We can't know for sure what kind of year 2020 will be ahead of time, but come what may, CVS should be among 2020's best stocks to buy.
Industry: Oil & gas drilling
Market value: $823.4 million
For 2020, a search for bargains should include a look at market strategist Ed Yardeni's regular sector review.
The worst category for 2019 has been energy stocks – especially oil-and-gas drillers such as Diamond Offshore Drilling (DO, $5.98), which is a contract drilling service provider with 15 offshore drilling rigs. The stock traded above $25 a share in 2016. Now it's below $6.
However, Diamond's majority shareholder is Loew's (L), which is flush with cash and run by the savvy Tisch family. I am willing to wait for the inevitable rebound in energy prices. With shares trading at these prices, Diamond looks like a very good bet.
Market value: $263.3 billion
Dividend yield: 1.2%
Disney (DIS, $146.10) strengthened its direct-to-consumer strategy with the launch of its Disney+ streaming service in November.
Disney+ itself offers more than 500 movies, 7,500 television episodes and over 20 episodic series. Consumers can purchase Disney+ for $6.99 per month, but can add ESPN+ and Hulu for another $6 per month. That makes for a "pretty robust" content pipeline that includes Marvel, Star Wars, National Geographic, Pixar and FX Networks – all marquee brands, says Tuna Amobi, director and senior equity analyst covering media and entertainment at CFRA Research.
The company's foothold on film and television franchises is "arguably the best in terms of volume and potential upside, he says. "If you're an entertainment company, the more solid franchises you have, the better you are able to monetize them across film, TV, consumer products and theme parks."
Disney estimates its streaming service will generate 60 million to 90 million U.S. subscribers for the next five years. The new service will take four to five years to become profitable, which is fairly typical, says Amobi, who has a Buy rating on shares.
"It's not a sprint, but a marathon," he says. "The financial flex for Disney is their balance sheet and capital allocation, which allows them to provide a very solid foundation for them to return capital to shareholders and make some selective acquisitions (a la Marvel and Star Wars)."
Disney's balance sheet does include a considerable $38.1 billion in long-term debt, thanks to the 2019 closing on its $71.3 billion purchase of 21st Century Fox assets, as well as costs related to building out its streaming service. For now, "most of their cash is allocated to servicing debt and paying dividends," PCIA's Chris Osmond says.
The upside: Disney should be able to both service and pay down its debt while still growing its semiannual cash dividend, which has more than doubled since 2013.
Industry: Oil & gas midstream
Market value: $32.3 billion
Distribution yield: 10.1%*
Energy stocks had a rough year in 2019, and pipeline giant Energy Transfer LP (ET, $12.04), a master limited partnership (MLP), certainly was no exception. At time of writing, the shares were down nearly 25% from their 52-week highs – this, during one of the S&P 500's best annual runs in a decade.
But the tumble has made units (the term for MLP shares) cheap, and juiced the distribution yield to a little more than 10%. This, despite ET's successful efforts to lower its debt burden and generally de-risk its business.
"Energy Transfer has a good collection of infrastructure assets, and it's hard to beat the yield," explains David Harvey, a retired former fund manager who owns the stock in his personal accounts. "But the focus on empire building can be a concern, as can management's cavalier attitude towards the unit holders."
Back in 2016, Energy Transfer controversially converted some of the common units owned by CEO Kelcy Warren and other company insiders into preferred units. The move conserved much-needed cash at the time and was arguably the right move at a difficult crossroads for the company. But the move was poorly telegraphed, and unfortunately came across looking like self-dealing by management.
The experience spooked a lot of investors out of the stock, and they have yet to return. But this is exactly what makes Energy Transfer one of the best stocks to buy for 2020. We're getting an orphaned stock that has been effectively left for dead. The bad news has been priced in, and then some. It wouldn't take much in the way of unexpected good news to send shares up to and past its previous highs around $15.75 – a roughly 30% gain from current levels.
Management has teased that it is considering converting from an MLP into a standard C-corporation. If such a move were to happen in 2020, that could be exactly the catalyst that shakes Energy Transfer out of its slump. But even if a conversion is months or years away, investors are being paid quite handsomely to wait.
* Distributions are similar to dividends but are treated as tax-deferred returns of capital and require different paperwork come tax time.
Market value: $109.6 billion
Dividend yield: 1.7%
Linde (LIN, $203.95), a major supplier of industrial gases including nitrogen and oxygen, is a recent acquisition of the Artisan Thematic Investor (ARTTX), and one of the fund's top 10 holdings.
The company was formed in 2018 through a merger of the German firm Linde AG and the U.S. giant Praxair. By swallowing Praxair, a Dividend Aristocrat at the time, Linde inherited Aristocrat status, boasting more than a quarter-century of uninterrupted dividend increases.
Analysts are expecting a solid 2020 ahead, with revenues anticipated to grow in mid-single digits, and profits slated to improve by more than 10%.
Market value: $146.8 billion
Dividend yield: 2.6%
Other than perhaps the red Coca-Cola logo, there is no piece of corporate imagery more iconic than the McDonald's (MCD, $194.95) golden arches. The company has been part of the American landscape since the 1950s. McDonald's has more than 38,000 restaurants in over 100 countries. And yet despite its size, the company continues to find new avenues for growth.
The third quarter of 2019 (the most recent quarter for which reported data was available) was the 17th consecutive quarter of global comparable-store sales growth. Even in the mature U.S. market, McDonald's was able to generate comparable-store sales growth of nearly 5%.
"Few companies have proven to be as adaptable to fickle consumer tastes as McDonald's," says Rodney Johnson, co-editor of the popular Boom & Bust investment letter. "The company seems to reinvent itself about once every decade, changing with the times."
"McDonald's is also recession-resistant," Johnson adds, "which is a nice quality to have this late in the economic cycle. When money gets tight, consumers tend to trade down to cheaper alternatives like fast food, and eating McDonald's can often be cheaper than eating at home."
MCD shares took a hit after former CEO Steve Easterbrook was forced to resign over an office romance that was against company policy. Easterbrook oversaw McDonald's recent turnaround and was responsible for popular changes such as the move to all-day breakfast. But remember: McDonald's has seen plenty of CEOs come and go over the years, and Easterbrook, as talented of a manager as he is, had already left his mark. His replacement, John Kempczinski, was already running the domestic U.S. division and should prove to be more than capable.
So as we come upon yet another year, McDonald's yet again ranks among the best stocks to buy ... this time, on the dip.
Industry: Medical devices
Market value: $148.8 billion
Dividend yield: 2.0%
The Value Line Investment Survey is an invaluable resource that packs tons of information into a small space. Last year's highly rated choice from Value Line was Home Depot (HD), which has returned 26%.
For 2020, Value Line's 20-stock model portfolio for aggressive investors included a single stock with the top ranking for both timeliness and safety. That stock is Medtronic (MDT, $111.04), which makes cardiac pacemakers, insulin pumps and other medical devices.
Medtronic's products – a wide array of devices protected by more than 47,000 patents – can be found in more than 150 countries.
MDT's earnings have increased year-over-year for more than a decade in a good-looking line. Medtronic is among the most solid stocks to buy for 2020 or any other year.
Industry: Communications equipment
Market value: $27.6 billion
Dividend yield: 1.6%
Motorola Solutions (MSI, $160.92) is the Chicago-based data communications and telecommunications equipment provider that succeeded Motorola after the 2011 spinoff of the mobile phone division into Motorola Mobility.
In other words, this isn't the Razr-slinging Motorola you might be thinking of. Instead, MSI offers up communications products and services – such as two-way radios, dispatch software and video security – oriented toward public safety. The company's customers include federal, state and municipal governments that operate private communications networks.
"MSI's product and service portfolio is out in front of global trends in public safety," says Barry Randall, chief investment officer of Crabtree Asset Management. "These trends include the expectation that surveillance video will exist in any public settings such as body cams and that any audio or video transmissions will be recorded, archived and conveniently searchable."
MSI should finish 2019 on a strong note, with the company raising its full-year earnings guidance, from $7.67 to $7.77 per share to $7.77 to $7.82, during its third-quarter earnings announcement. Operating profit margins also rose to 25.5% from 24.3% in the year-ago quarter, and cash flows jumped 50% from year-ago levels.
As for 2020? "In its earnings conference call, MSI management encouraged investors to expect 4% revenue growth in 2020 vs. 2019," Randall says. "But MSI has made a habit recently of growing not only organically, but also via acquisition, and that dynamic is expected to continue in 2020."
Randall also notes that MSI, from an EBIT (earnings before interest and taxes) standpoint, is below-average in its segment, which includes Honeywell (HON) and L3Harris Technologies (LHX).
Capital Innovations's Michael Underhill is taking the long view on Motorola Solutions. He says revenue should increase by nearly 115% in five years. As a result, "Your current $100 investment may be up to (roughly $215) in 2024."
Market value: $131.0 billion
Dividend yield: 0.3%
Jerome Dodson, founder of Parnassus Endeavor (PARWX), took advantage of a big price drop and began acquiring shares of Nvidia (NVDA, $213.98).
Nvidia is best known for its gaming computer chips, but it's also a leader in artificial intelligence. It also produces solutions powering several technology trends, including autonomous vehicles, big data and the internet of things (IoT).
Nvidia has richly rewarded investors over the past few years, though it hit a serious slump in 2018's broad-market swoon. However, NVDA shares have already bounced nearly 60% their June lows, and they still offer excellent value, putting NVDA among the best tech stocks to buy for 2020.
Market value: $14.5 billion
Terry Tillman, an analyst with a golden touch at SunTrust Robinson Humphrey, has offered up S&P 500-beating picks to Kiplinger for eight years in a row. That includes Coupa Software (COUP), his pick for 2019 that raced ahead 136% with just a couple weeks left in the year.
Okta Inc. (OKTA, $119.61) stands out among his best stocks to buy for 2020.
Okta is a tech stock whose software verifies and manages the identity of people seeking online access to company websites – a valuable corporate defense against hacking. Okta went public in 2017 and now has a market value of more than $14 billion.
The company still hasn't turned a profit, but that's OK – money-losing stock picks can make investors money too. What counts, for now, is that revenues are soaring.
Market value: $4.7 billion
Distribution yield: 8.8%
Energy Transfer, mentioned above, is one of the cheapest midstream energy players and one that is priced to deliver the most outsized returns. But those returns also come with a larger degree of risk.
If you're looking for another cheap pipeline play but one a little less likely to give you heartburn, Shell Midstream Partners LP (SHLX, $20.20) might fit the bill.
Shell Midstream was spun off by energy supermajor Royal Dutch Shell (RDS.A) in 2014. For tax and capital-raising purposes, Shell formed Shell Midstream to own and operate pipeline and other midstream assets. In a nutshell, Shell Midstream moves energy products for Shell and collects a stable fee as a result.
In addition to owning Shell Midstream's general partner interests, Shell owns fully 44% of the outstanding common units – the same units you or I would buy. One of the biggest complaints about MLPs in general is that the interests of the general partners running the company are not properly lined up with the interests of regular limited partners like you and me. Well, in this case, Shell's interests are aligned with our own. That's important.
"MLPs as a sector have had a rough couple of years," says John Musgrave, co-CIO and portfolio manager for Cushing Asset Management. "After getting burned in the energy bust of 2015 and 2016, investors have been reluctant to allocate to the sector. But MLPs as a group are in their best financial health in years, and prices have rarely been this cheap."
At current prices, SHLX yields around 9%, and it has raised its distribution for 19 consecutive quarters. This from an MLP backed by one of the largest energy companies in the world. Not too shabby.
Industry: Commodities (Exchange-traded fund)
Market value: $1.1 billion
Expenses: 0.18%, or $18 annually on a $10,000 investment
The historical track record for gold is pretty abysmal when compared to the total returns (price plus dividends) of stocks. Gold doesn't pay interest or a dividend. In fact, gold doesn't actually do anything. It's an inert piece of metal.
But that doesn't mean that gold isn't potentially valuable, in certain uses.
Gold is an inflation hedge. And, in an era in which the Federal Reserve and other central banks seem to find new ways to break monetary taboos on an almost daily basis, gold can be thought of as a central bank hedge.
When it looked like the world was ending in 2008, the Fed stepped in and put a backstop behind the financial system. This stopped the bleeding and restored faith in the financial system. But after more than a decade of ultra-loose policy – including 0% interest rates and trillions of dollars in asset purchases – the Fed's playbook is looking tired. In Japan and in much of Europe, negative interest rates are now a reality, and President Trump has been pressuring the Fed to push rates into negative territory in the U.S. as well.
Negative interest rates are the sign of a broken system. Will 2020 be the year that people finally lose faith in the system and the dollar collapses?
Frankly, no one knows, and only a crackpot would attempt to make a firm prediction like that. But if you pay to insure your house against the remote chance a tornado hits it or a fire burns it down, doesn't it make sense to add a little central bank insurance via a gold investment?
No stock can actually give you direct access to gold, however. So the recommendation here is the SPDR Gold MiniShares (GLDM, $14.61), an exchange-traded fund (ETF) that owns physical gold bullion. GLDM is a cheaper version of the popular SPDR Gold Shares (GLD). The GLDM shares trade for approximately a tenth of the price of GLD, making them easier to buy in smaller accounts. And importantly, the expense ratio is considerably lower. GLDM has an expense ratio of 0.18% vs. GLD's 0.40%.
We should all hope that the financial system remains healthy and that the price of gold goes nowhere. But if it gets gnarly out there, gold could have a fantastic run in 2020.
Industry: Internet travel services
Market value: $18.7 billion
Despite China's tariff strife with the U.S., Chinese stocks can still pack a punch – especially those that don't depend on selling manufactured goods abroad, such as Trip.com Group (TCOM, $31.85), the company formerly known as Ctrip.com International.
The "Expedia of China" – one of the top 25 holdings of Asian-stock mutual fund Matthews China (MCHFX) – serves a nation crazy for travel. TCOM is trading well below its 2017 highs, with a forward-looking price-to-earnings ratio of 20 – much lower than its historically high P/E levels.
As far as emerging markets go, Trip.com Group looks like one of the best stocks for 2020.
Market value: $93.6 billion
Dividend yield: 2.8%
Warren Buffett's Berkshire Hathaway (BRK.B) was a big owner of U.S. Bancorp (USB, $59.95) in 2018, and that continued into 2019. The Oracle of Omaha added to his holdings and now owns 8.3% of America's fifth-largest bank (more than any other shareholder). Indeed, USB is one of the top stocks in the Berkshire portfolio, at a weight of more than 3%.
U.S. Bancorp is America's fifth-largest bank by assets, at $488 billion, and its largest so-called regional bank. That "region" is half the country – its operations span 2,857 banking offices in 25 states, and 4,532 ATMs nationwide.
Earnings have been rising consistently for the broadly diversified bank, and the stock is yielding nearly 3%, well above the S&P 500's 1.8%.
Industry: Credit services
Market value: $405.0 billion
Dividend yield: 0.7%
Visa (V, $182.26), the global credit card company, should outperform over the next 12 months, says Chris Kuiper, senior analyst at CFRA. Given that 80% of the world's transactions still are done with cash and check, the number of electronic transactions should continue to grow exponentially.
"We believe investors continue to underestimate the pace of growth in electronic and mobile payments that will occur over the next several years, given the penetration of smartphones around the world and the rise of mobile banking, mobile payments and a still-underpenetrated e-commerce market," Kuiper says.
Specific to Visa: V shares don't fully reflect the opportunity in real-time payments (Visa Direct) nor adjacent markets of consumer-to-consumer and business-to-business payments, which combined could be another $20 trillion market opportunity, he says.
Also, while Visa might sport a trivial yield, it's a dividend-growth giant. Its quarterly payout has tripled, to 30 cents per share currently, in just the past five years. That includes a 20% hike in 2019.
Even the best stocks to buy for 2020 aren't without risk, and that's true for Visa. Specifically, a slowdown in consumer spending would hobble the company, which relies heavily on total payment volume.
But for one, consumer spending remains strong heading into the new year. And if the script does flip, Kuiper says "this may affect shares in the short run, (but) we do not see it meaningfully impacting our long-run thesis of five to 10 years of electronic payment adoption."