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10 Top-Notch Stocks to Watch in 2016

01/04/2016 9:30 am EST


Michael Berger

President & Founder,

To ring in the new year, Michael Berger, of, shares the names of his top ten stocks to watch in 2016 and the factors that led him to believe each one deserves the attention of investors.

The Walt Disney Company (DIS): Mega-cap company that has a strong balance sheet and low EPS variability. DIS has solid dividend growth and a strong catalyst pipeline which could lead to upward estimate revisions by Wall Street firms. DIS has pricing power and the company is an underweight position by active managers (63% held by institutions).

Qualcomm, Inc. (QCOM): One of the most inexpensive, high quality mega-cap companies. Shares have been negatively affected by weak market sentiment and QCOM has an attractive and growing dividend (3.8%). The company has a strong balance sheet and more than $17.3 billion in cash (over $11.50 per share in cash). QCOM is trading right below $50 and shares fell 32.7% during 2015.

Citigroup, Inc. (C): They are the only United States universal bank trading below tangible book value. C continues to grow its dividend (0.3% yield) and has further potential to increase its payout ratio. The company has the capital needed to take advantage of a pick-up in trading volumes and is well positioned for growth in 2016.

Exxon Mobil Corporation (XOM): One of the highest quality energy stocks by low EPS variability. XOM has a strong balance sheet and the company offers an attractive and growing dividend (3.6%). The company can withstand continued oil price weakness better than many of its peers and is very underweight by active managers.

ServiceNow (NOW): Mid-size software vendor and SaaS pioneer who is disrupting the on premise IT Service Management Tools market. NOW is rapidly expanding across infrastructure and extending into PaaS. Favorable on NOW’s ability to broaden into IT operations management and business services applications, as well as drive adoption as a broad platform for enterprise workflow management and automation.

Microsoft (MSFT): During 2015, MSFT rallied 18.6% and greatly outperformed the S&P 500, which was down less than 1%. We attribute much of this rally to the worst of the headwinds associated with the move from XP to Windows 7 being behind them. Going forward, we expect this to serve as a catalyst for the March and June quarters because of the easy comparables from the same periods during 2015. Our investment thesis is based off of both gross and operating margins reversing its declining trend. MSFT’s commercial software business is turning the corner and recording positive mid-single digit growth. This is a major improvement after recording negative growth last year as the headwinds from a Windows XP refresh dissipates.

Concho Resources (CXO): Favorite exploration and production company due to 1) its premier asset base in the Permian basin, 2) well positioned for another beat-and-raise performance during 2016, 3) balance sheet offers capital flexibility, 4) proven acquisition model, and 5) attractive valuation. CXO has a solid balance sheet with net debt/EBITDA of 1.7x. CXO also recently completed a $794 million equity offering to fund acquisitions.

Baker Hughes, Inc. (BHI): Recent market weakness and our bullish long-term outlook on the North American energy service market have made us increasingly favorable on BHI. In November 2014, Halliburton (HAL) agreed to acquire BHI for $34.6 billion. If the deal closes, each BHI shareholder will receive 1.12 shares of HAL and $19 in cash per share. Should the deal not close, HAL must pay BHI $3.5 billion or $8 per share, giving BHI shareholders some additional protection. The combined company is levered to the pressure pumping industry, which we expect to lead the United States oilfield recovery. The merger will provide ample cost reduction efficiencies as BHI’s operations become integrated into HAL’s supply chain. The merger will improve the company’s offerings as it combines BHI’s drilling portfolio with HAL’s completions business.

American Homes 4 Rent (AMH): Trading at a discount to net asset value, which is supported by: 1) AMH’s accelerating cash flow growth, 2) Operational platform and sponsorship is strong, 3) Pending merger with American Residential Properties (ARPI) has funds from operations (FFO) accretion and synergies, 4) Visible value accretion as median existing home prices steadily close gap versus current replacement costs.

Quintiles Transnational Holdings (Q): Largest provider of drug development services by revenue. Q continues to buy back stock and we are favorable on its leading position and diversified client base. In mid to late 2016, we expect to see financial performance strengthen as clinical trials in the start-up phase mature and new opportunities are presented by its Integrated Healthcare Services business segment.

Michael Berger, Founder and President,

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