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All Contents © 2017The Kiplinger Washington Editors
By Lawrence Meyers
| December 2016
Courtesy U.S. Navy
In my years of trading and investing, I’ve always found that the headlines can lead you to a few good opportunities, but the best stocks to buy are those that are underappreciated and underloved, and whose stories mostly go untold.
As we head into 2017, these are the stocks you want to be focused on.
We’re about a month away from the end of 2016, and the market is poised to close on a mighty note. But don’t be fooled. When you look at earnings growth compared to the S&P 500’s overall price-to-earnings ratio, the market is probably overvalued by about 15%.
That certainly jibes with many of the stocks that I’ve been writing about all this year, in that they are almost all significantly overvalued. I love a number of companies right now … but I don’t love how expensive their stocks are.
I think 2017 is going to be a huge year for value stocks given just how overbought the market is. Thus, that is the focus for my list of the best stocks to buy for 2017. You want to hop aboard the few stocks that are still flying unnoticed right now, because they’ll have the most potential to pop in 2017 when investors get tired of overpaying for every last opportunity.
Here are 10 of the best under-the-radar stocks to buy for 2017:
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Department of Defense via Wikipedia
Atlas Air Worldwide Holdings, Inc. (AAWW) — a provider of cargo airline and airline leasing services, among others — made second billing earlier this year when news broke that Amazon.com, Inc. (AMZN) would purchase and operate 20 of the company’s 767 airplanes to deliver its merchandise.
As part of this deal — the part I’m particularly interested in — Amazon also took warrants to buy up to 30% of Atlas Air.
Interestingly, AAWW went from $38 to $48 the day of the announcement, fell back to $38, and is now at $50 — but it’s still well within its 10-year trading range.
I frankly think Amazon will buy out all of Atlas Air. The logic is sound: Why rent airplanes when you can own them. And why buy them new when you can buy a company that already operates them?
James G via Flickr
Encore Capital Group, Inc. (ECPG) runs a business that you never want to get a call from: collections.
That’s right. Encore is one of two relative behemoths (it’s only $700 million in market cap) that have slowly been cornering the market on collection agencies around the world.
ECPG shares remain about 50% off their all-time highs from 2014 because of fears that the Consumer Financial Protection Bureau would curtail its business. As a result, many prime sellers of bad accounts stopped selling for fear they would get caught in some kind of regulatory nightmare.
But Encore is one of several stocks to buy thanks to a Donald Trump angle.
With the CFPB likely to be curtailed itself under President-Elect Trump, ECPG might be on the verge of a serious comeback. Shares have already spiked somewhat in anticipation, but the real gains will be made when the headlines come to fruition.
Mentifisto via Wikipedia
Teva Pharmaceutical Industries Ltd. (TEVA) originally made its name by being a major manufacturer of generic drugs. Over the past 15 years, however, it has been acquiring other big generic manufacturers and started creating its own drugs.
Teva Pharmaceuticals is set up to record more than 30 first-to-file launches across this year and next. In addition, it has strong cash flow from original concoctions: Copaxone for relapsing forms of multiple sclerosis, Azilect for Parkinson’s symptoms, Nuvigil for excessive sleepiness associated with narcolepsy, Fentora for opioid-tolerant adults with cancer pain and Zecuity for migraines.
TEVA stock is 50% off its high mostly because of general negativity in the space thanks to high-profile cases of inflated drug prices. But one Wells Fargo analyst that does have his eye on Teva sees a “robust” 2017 ahead.
Teva is probably the most high-profile of these picks, but it’s still a great under-the-radar buy here at $38.
Kecko via Flickr
Enova International Inc. (ENVA) is perhaps my personal favorite among the best stocks to buy for 2017.
Enova took a big hit when the CFPB issued its payday loan rules, which would severely curtail its business, and U.K. regulations stifled its British business.
However, Enova pivoted to different loan products, and those are ramping up quickly. That alone kept me believing in ENVA. But again, Donald Trump is likely going to hamstring if not kill the CFPB, and thus payday loans might make a resurgence.
This was an insanely profitable business for ENVA. The best-case scenario? This is a $30 stock trading for less than $12 currently.
EZCorp Inc. (EZPW) was once a well-run domestic operator of payday loans and pawn shops. But then it made a series of stupid acquisitions, gold prices cratered after the financial crisis and management has turned over more times than a spiraling football.
However, EZPW has finally gotten its act together and is focusing exclusively on its core expertise in pawnshops in the U.S. and Mexico.
I bought EZCorp shares earlier in 2016 when the price had bottomed out around $3. Now, the stock is at $11, but I haven’t sold out yet — because the stock is worth $20 based on future cash flows.
The sector has also been consolidating, so a buyout at that price is not out of the question, making it another top choice of my stocks to buy for 2017.
Czerwiec via Wikipedia
I think you also have to do a coal play going into 2017, now that Hillary Clinton isn’t going to put a hatchet to the industry.
There are many choices, but I would go with Teck Resources Ltd. (USA) (TCK).
Commodity prices have been destroyed over the past couple of years. They’re overdue for a rebound. And because TCK is a Canadian company, it hasn’t suffered like the U.S. producers have. But that’s also because Teck produces lead and zinc, so you get diversification.
TCK reduced expenses dramatically, by about 15% in short order. Meanwhile, Teck has nearly $2 billion in cash and short-term investments, and it was free cash flow-positive last year.
Yes, TCK stock has already run up quite a bit on renewed optimism in the space, but it’s still wildly depressed, and I still see more upside to come.
U.S. Air Force via Wikipedia
New Senior Investment Group Inc. (SNR) is one of a few real estate investment trusts (REITs) that I have my eye on as we head into 2017.
New Senior Investment Group is a high-yielding REIT that focuses exclusively on assisted and independent living senior housing. All the income for SNR comes from private payers, so you can throw out any issue regarding Medicare.
In fact, New Senior is the single biggest owner of senior living facilities in the U.S., with 154 properties across two-thirds of the country.
SNR has a perfect mix of fixed an variable debt, and a reasonable net debt-to-EV ratio of about 68%. Earnings are the problem here, but as revenues rise (and they’re rising substantially) profitability will come.
With adjusted funds from operations (AFFO) constantly on the rise, and a sustainable 10%-plus yield, this stock is both undervalued and pays well.
Vitaly Kuzmin via Wikipedia
Ashford Hospitality Prime Inc. (AHP) is an upper-upscale and luxury hotel REIT that saw a lot of controversy in the past year. There was a bitter proxy fight, hedge funds taking large stakes, and most recently, a buyout offer with a net of about $20.25.
Yet for some reason, the acquiring party refuses to sign a non-disclosure agreement.
So … AHP stock sits at $12.50 per share, while private market valuations would make the company worth about $20 per share.
It’s difficult to say when all of this will get resolved, but with Chinese firms buying up hotel assets in the U.S. another buyer might just step in when it is least expected.
This is among my favorite stocks to buy of any sort for 2017.
U.S. Navy via Wikipedia
Ashford Hospitality Trust, Inc. (AHT) is the company that AHP was spun out of, and it focuses on a different level of hotels.
The market still hasn’t given this REIT the respect it deserves, especially considering the experience that management brings to the table, the incredibly successful way it handled the financial crisis and its nearly 7% yield.
Then there’s also the overall health of the domestic hotel market. Hospitality continues to do well in general, with revenue per available room (RevPAR) and average daily room rate (ADR) up across the board.
Private market valuation on AHT assets is around $10-$11, leaving more than 50% upside from the present stock price of AHT of $6.70.
The last of the REITs and the last of our best stocks to buy for 2017 is Starwood Property Trust, Inc. (STWD). And as a note, it has nothing to do with the Starwood hotel chain.
Starwood Property Trust is instead a mortgage REIT (mREIT), and perhaps the only one I would consider buying. It originates commercial mortgages, but generally on terms for less than five years, at loan-to-value ratios of 65% or less.
STWD also is a major servicer of commercial mortgages besides being an originator. Best of all, it often will sell those loans to a securitization entity, grab the profits from it and reinvest the money after only six to seven weeks after the origination, reducing risk.
Meanwhile, STWD offers a 9% yield and has been steadily recovering from its early 2016 funk. This could be the dividend steal of the year.
This article is from Lawrence Meyers of InvestorPlace. As of this writing, he holds all the companies mentioned.
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