It’s certainly been an interesting six months! The hope of better economic growth at the beginning of the year—heightened by December’s rate hike—sank with bottoming energy prices and renewed fears of recession, knocking more than 200 points of the stock markets by February. But steady—albeit slow—economic progress and a brightening employment picture kicked them back into high gear.
Market momentum in the past quarter has been so great that even global unrest, presidential politics, domestic terrorism, Brexit, and the Fed’s retreat on interest rate increases, have not interrupted the upward movement for long.
As you can see from this graph of the Dow Jones Industrial Average, the markets are reaching new highs.
How long that fantastic momentum will endure is unknown. But if the economy returns to a high-growth stage, it’s certainly conceivable that higher earnings and a robust GDP growth rate could keep markets moving ahead at a good clip for some time.
What I do know for sure is that those market rises boosted our Top Picks for 2016, increasing our returns considerably. It has been a stellar year for our January picks, with 84% of them gaining at least 5% in the past six months—better than the Dow Jones Industrial’s return of 4.6% year-to-date. The average return of all our January Top Picks is 18.9%. And our Top Five Picks have absolutely pummeled the broad markets, as you can see below.
Congratulations to our contributors—great job!
It’s always interesting—and educational—to take a look back and review the reasons why our contributors chose these winners. Here are brief excerpts from their original recommendations.
American Midstream Partners (AMID) Joseph Cotton, Cotton’s Technically Speaking: “The company owns a 66.7% interest in Main Pass Oil Gathering, LP, a crude oil gathering and processing system, as well as a 50% undivided interest in the Burns Point Plant, a natural gas processing plant. AMID recently indicated that it expects 2016 adjusted EBITDA in a range of $105-$120 million, an increase of 50%, year-over-year. We think it is a real bargain at this price.”
Veresen (VSN.TO) Vivian Lewis, Global Investing: “VSN is our play on global warming. Veresen links North American gas fields in the Midwest and Rockies to a port being built in Oregon, Jordan Cove at Coos Bay. I think it will attract a big oil patch partner to build a natural gas liquefaction (NGL) plant there to serve Asian markets. It is licensed to export 1.55 billion cubic feet of LNG/day for 25 years.
“VSN issued upbeat forecasts for 2016 based on the midstream pipeline business alone. These are fully contracted and management stressed that VSN has virtually no commodity exposure in its contracts.”
Medical Properties Trust (MPW) Chris Temple, The National Investor: “MDW’s portfolio of hospital, acute care and similar properties in the U.S. and abroad remains compelling. So too is the fact that it has continued to grow its funds from operations (FFO) at a healthy double-digit pace. A sustainable dividend yield exceeds virtually all its peers.
“I see Medical Properties Trust benefitting twofold in 2016. First, its sell-off in 2015 was overdone; and as investors re-embrace its growth story and recognize the valuation, it should benefit. More broadly—as I have written of late—long-term U.S. interest rates will stay subdued or even decline in 2016.”
Amerigas Partners (APU) Roger Conrad, Capitalist Times: “Large distributors like Amerigas have shown time and again they can offset the impact on cash flow with cost cutting, even as geographic diversification reduces the effect of lost heating degree days. And low propane prices are also increasing volumes at its barbeque cylinder exchange business, which rose by 14% during the fiscal year ended September 30. The company has also used its unmatched scale to add more business, closing nine small scale acquisitions for its distribution business that add $4 million to projected fiscal year 2016 cash flow.
“Despite a mild year in fiscal 2015 (end September 2015), Amerigas’ free cash flow covered not only its distribution but all capital spending, including outlays to grow future revenue. Expected 2016 cash flow of $660 to $690 million is right in line with long-term growth guidance of 3% to 4% and a commensurate dividend increase next spring. The balance sheet remains strong, with no debt maturities until 2019, nearly $400 million in available credit lines and the backing of general partner UGI.”
AT&T (T) Donald Pearson, Pearson Investment Letter: “AT&T is the best dividend payer of the major telecom and wireless carriers. It also now has closed on its long-pending DirecTV merger, a move that will increase its dividend even further The company has paid a growing dividend during the last 31 years, and therefore, it is considered a dividend champion. This stock is currently valued at just 11.5 times expected 2016 earnings, and its current cash flow from operations should offer more than ample dividend coverage for quite some time.
“Investors hate price wars and desire more certainty. We believe that this uncertainty is a buying opportunity, and have faith that management will continue to move forward into the future by pursuing more acquisitions.”
It should be no surprise that the takeaways from our contributors’ choices come down to fundamental strengths like value, growing earnings, sustainable—and rising—dividends, strong balance sheets, and increasing cash flows. And certainly, having a market skewed to the positive side helped to support those strengths.
For our Mid-Year update, most of our advisors retained their original Top Pick ideas. However, we do have a couple of changes—a new pick, plus a sale to take some hefty profits.
