Six veteran investment pros selected their three favorite North Carolina stocks, and one to avoid, for 2018 in our annual forecasting contest. The prices are as of Dec. 1, 2017, when the pros submitted their picks. Eligible stocks include companies based in the state or with large employment or investment here. Thank you to the participants!
First, the 2017 results: Greensboro money manager Ann Zuraw dominated last year’s stock-selection competition, registering a 22% average gain for her four picks. Frank Jolley of Rocky Mount followed at 13%, while Christy Phillips’ choices increased 9%. Phillips and Patrick Rush would have done much better except their suggestions for stocks to short — Qorvo and Old Dominion Freight Line, respectively — each advanced more than 35%.
Zuraw had the best pick, BNC Bancorp, which was acquired by Pinnacle Financial Partners and gained 122%. Another winner was Jolley’s Tyson Foods, which gained 51%. Less successful was Don Olmstead’s Argos Therapeutics, which lost 96%. Bobby Edgerton was slammed by declines at Cato and Cempra. Percentage change is based on share prices between Dec. 1, 2016, and Dec. 8, 2017.
Here are the 2018 picks and explanations:
Frank Jolley
Managing director, Jolley Asset Management, Rocky Mount
Potash Corp. of Saskatchewan (POT) $20
Potash is the world’s largest integrated fertilizer company with a major phosphate facility in Aurora. Potash is in the process of closing the acquisition of Agrium, with expected cost synergies of approximately $500 million. Potash is expected to divest of its 32% stake in [Chilean lithium producer] SQM for close to $4.8 billion, which will help finance Agrium deal.
Ingles Markets (IMKTA) $28
Ingles Markets is a southeastern supermarket chain headquartered in Black Mountain. The stock has declined 40% from its 52-week highs due to fears of the competitive landscape related to Amazon’s purchase of Whole Foods Markets. Ingles shares are cheap, trading at 12 times trailing earnings and 1.1 times book value.
Nucor (NUE) $57.30
Nucor is a Charlotte based manufacturer of steel and steel products. Nucor is a low-cost steel producer and also has an excellent balance sheet. Earnings are expected to accelerate to $4.40 in 2018, up from $3.72 in 2017. Company also yields 2.65%, giving investors excellent total return potential.
AVOID:
LendingTree (TREE) $304
LendingTree was spun off from IAC/Interactive and is based in Charlotte. While LendingTree has excellent growth prospects, the shares are expensive, trading at 133 times trailing earnings and 58 times 2018 estimates. The shares are up a whopping 204% over the last 12 months and appear ahead of themselves currently.
Anne Zuraw
President, Zuraw Financial Advisors LLC, Greensboro
Laboratory Corporation of America (LH) $157
Laboratory Corporation of America is the second-largest independent U.S. clinical laboratory. We believe the aging population and an increased focus on preventive care should benefit clinical labs. LabCorp operates more than 1,750 service sites and 39 primary testing facilities. LabCorp has cost and automation advantages compared to most hospitals, doctors’ offices and smaller independent labs. It has consistent organic growth within diagnostics. Covance is achieving faster growth. As a leading contract-research organization, Covance provides outsourced drug-development services worldwide, growing 7-8% annually. While we do not know the future of health care reform, LabCorp is positioned to be a part of health care expenditure growth in the future. LabCorp is benefiting from more insured patients, offering higher-margin more esoteric tests and exiting low-margin accounts. On the negative side, the projected Medicare reimbursement cuts ranging from 6% to 10% in the next three years should be considered.
Albemarle Corp. (ALB) $135
Albemarle is a global specialty chemicals company with leading positions in lithium, bromine and refining catalysts. Lithium and lithium derivatives represent one of the highest growth markets in the specialty chemicals industry. Lithium currently accounts for roughly one third of ALB’s operating income, and we expect this share to grow at an accelerating pace. Through its usage of lithium batteries in electric vehicles (EVs), and utility scale storage, lithium will be an increasingly important part of the world’s transportation and energy economies. Electric vehicle sales grew 40% year to date in 2017 and we expect similar growth in 2018 and 2019. Albemarle’s bromine chemistry plays a leading role in providing performance products for fire safety, oilfield drilling, high-tech cleaning, water treatment and food safety. Demand for consumer electronics is expected to continue to grow strongly which use brominated flame retardants for fire retardant properties. The refining solutions business has been weak as a result of lower sales volumes and unfavorable pricing impacts. This business is being more than offset by strong growth in lithium sales. Albemarle’s polymer catalysts business benefits from increased sales of co-catalysts and components to ethylene manufacturers. China and India are projected to increase their plastic consumption over the next five years by the amount equivalent to the total current US consumption. Possible risks to earnings include a drop in lithium and bromine pricing and lower catalyst demand.
First Bancorp (FBNC) $38
First Bancorp is a bank holding company headquartered in Southern Pines, with total assets of approximately $4.4 billion. Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that operates 95 branches in the Carolinas. First Bank also operates three mortgage loan production offices in the central region of North Carolina. First Bancorp is led by strong management, including Richard Moore, who previously served two terms as North Carolina State Treasurer. Its substantial customer deposits should positively impact earnings with rising interest rates. First Bancorp serves the retirement community in Southern Pines, which should be a growth area due to our country’s aging demographics. In recent years, First Bancorp has grown through strategic acquisitions to achieve its position as one of the top community banks in North Carolina. In 2017, First Bancorp acquired Carolina Bank Holdings Inc. in a cash and stock transaction of approximately $97.3 million. In the fourth quarter of 2017, a $175 million cash and stock deal for ASB Bancorp Inc. of Asheville was completed, adding $803 million in assets and 13 Asheville Savings Bank branches. Another positive for earnings is the potential decline of the estimated 37% if the tax bill lowers corporate tax rates.
AVOID:
Sonic Automotive (SAH) $21
Sonic Automotive is the fourth largest auto dealership in the U.S. BMW car sales account for an estimated 30% of profits. While BMW is coming out with a new series next year, current decreased sales are negatively impacting earnings. Sonic is building a competitor to CarMax called EchoPark in the used car market. Capital spending on EchoPark and the roll-out of the One Sonic-One Experience plan will lower profitability in the near term. Positives are the potential benefits from lower corporate taxes and stock repurchase programs. Finally, the founding family only owns 3% of Class A shares outstanding but has 100% ownership of Class B shares, which have 10-1 super-voting shares. This ownership structure gives them 75% voting control, and as a result, shares sell at a discount due to the inequitable voting rights. As a fiduciary, I am uncomfortable with shareholders not having equal voting rights in a public company.
Christy Phillips
Director of research and senior portfolio manager, Franklin Street Partners, Chapel Hill
IQVIQ Holdings (IQV) $101
Quintiles integration with IMS Health has been positive, as evidenced by backlog growing, cost synergies being realized, and an increased buyback program. Their data strategy is a competitive advantage in the CRO industry. We believe there is good earnings visibility into 2020 and multiple expansion is likely as the company returns to +5-6% top line organic growth. We estimate the company will generate close to $9 billion in sales and EPS of $6.25 in fiscal year 2019. IQV is suitable for core and growth portfolios.
Bank of America Corp. (BAC) $29
Bank of America’s strategy of simplification, efficiency, and risk reduction has slowly begun to pay off. The company is financially much stronger than it was in the prior decade and is now in a position to repurchase up to $17 billion in stock by June 2018. As the role in technology in banking grows, scale and scope advantages become increasingly more important. BAC’s nationwide deposit base continues to provide a low-cost source of funds, and it is at the forefront of the industry in mobile-banking functionality. Key risks are macroeconomic risks – namely, low interest rates and a potential turn in the credit cycle.
SPX Flow (FLOW) $44
SPX Flow is in the midst of a transformation from a holding company to an operating entity with associated cost out plans driving margin improvement over time. Investor confidence in the company is still relatively low, but successful execution would lead to improved confidence and multiple expansion. The opportunity for accelerated earnings growth creates an attractive risk/reward scenario for the shares.
AVOID:
Sonic Automotive (SAH) $21
Sonic Automotive operates new and used automotive dealerships, a historically cyclical industry that may be under some pressure with U.S. auto sales apparently peaking. U.S. interest rates seem likely to continuing rising in 2018; with nearly 70% of auto buyers utilizing financing, incremental growth in the industry may become more challenging. Additionally, we believe Sonic’s efforts to compete with CarMax in the used auto market are mistimed given the current automotive cycle. While SAH trades at only 11.2 times 2017 consensus EPS estimates, this valuation is in line with both its 5- and 10-year historic averages. With challenged earnings growth and concerns over the auto cycle, there is little reason to assign a higher valuation on the stock.
Don Olmstead
Managing director, Novare Capital Management, Charlotte
Martin Marietta Materials (MLM) $203
As one of the largest construction aggregate producers in the U.S., Martin Marietta appears well positioned to benefit from future upgrades to the country’s aging infrastructure, including highways, bridges and airport runways. While aggregate demand has recovered significantly from the trough levels of a few years ago, shipments remain well below normalized levels. A general improvement in U.S. economic growth and increased funding for public and private construction projects should be positive catalysts for Martin Marietta.
Live Oak Bancshares (LOB) $26
We believe that large community banks such as Live Oak are positioned to outperform in the current regulatory and interest rate environment. The government has started to reduce regulations on banks the size of Live Oak, and we expect this trend to accelerate over the next year. These actions will not only allow Live Oak to reduce its expenses but should make it easier for Live Oak to make additional acquisitions as well. The market forecast is for another increase in the Federal Funds Rate in 2017 and 3 additional increases in 2018. This should benefit all banks as their floating-rate loans get reset at higher interest rates, which causes their net interest margin to expand significantly. In addition, we view Live Oak as a potential acquisition target for a larger bank given its asset size and the attractiveness of its geographic footprint.
Lowe’s Companies (LOW) $81
Lowe’s is a strong holding in our America’s Finest Companies investment strategy, which is comprised of companies that have increased their dividend for at least 10 consecutive years. We view the home-improvement retail industry as poised for continued strong growth due to consumer confidence at a 17-year high, rising home prices, and a healthy job market. In particular, we view the remodeling and repair market as attractive given that private fixed residential investment as a percentage of GDP remains near a 66-year low and 70% of U.S. homes are more than 25 years old. LOW shares appear attractively valued at 16 time next year’s earnings, especially compared to EPS growth expectations in the low-to-mid teens over the next few years. In addition, LOW shares trade at a significant discount to Home Depot, and we believe as Lowe’s executes on its business plan this valuation gap should narrow.
AVOID:
LendingTree (TREE) $304
While we do not have a view on LendingTree’s fundamentals, the stock’s 192% rise over the past year and its 60 times P/E to next year’s earnings gives us pause. In our view, the combination of a meteoric rise in the stock price and high valuation implies high expectations for the company, and if they are not met there could be significant downside in the share price.
Patrick Rush
Chief executive officer, Triad Financial Advisors, Greensboro
American Airlines (AAL) $49
Airlines have traditionally been a “death-trap” for investors. Charlotte serves as American’s 2nd largest hub and is betting on a newer fleet and a more aggressive balance sheet. Language in the tax bill could punish non-U.S. carriers and potentially benefit American Airlines, along with additional revenue via comfort and convenience charges to passengers. More importantly, a strong economy with rising disposable income typically bodes well for air travel.
Lowe’s Companies (LOW) $81
Lowe’s should continue to benefit from a strong economy and healthy consumer. With a stable/improving housing industry and stable oil prices, consumers will likely continue to spend more in the home-improvement category.
BB&T (BBT) $48
This company has historically been a more conservative underwriter than its peer group, which served it well during the credit crisis. Their superior credit costs and strategic acquisitions make BB&T a solid stock to own at $48 a share if we see signs of deteriorating credit conditions in 2018. In addition, they should see a tailwind from higher interest rates and deregulation.
AVOID:
Wells Fargo & Co. (WFC) $57
At $57/share and dividend yield around 3%, many could argue Wells Fargo still has upside potential. However, WFC is going to continue to struggle to rebuild its reputation with longstanding clients after scandals of creating fake accounts, overcharging customers, etc. Rising interest rates and deregulation should soften the blow, but WFC is a stock I would avoid.
Bobby Edgerton
Co-founder, Capital Investment Cos., Raleigh
Target Corp. (TGT) $59
This great retailer is loved by millennials. Market value of $32 billion is the same value of their property, plants and equipment at cost. Average cash flow of $5 billion is only one-sixth of market cap.
Bank of America Corp. (BAC) $29
CEO Brian Moynihan has improved this company too much for this stock to be lagging. Over-regulation and capital requirements are on the decline.
Cato Corp. (CATO) $16
Debt-free retailer pays fat and well-loved dividend; 8.5% dividend looks well-covered to me. A great private-label company loved by women.
AVOID:
Red Hat Inc. (RHT) $125
Great company that has had a massive run. Unfortunately, I feel like they are due for a correction. Thirty times cash flow is a bit much for me.