Diversity and expansion are key in this year’s installment of Business North Carolina’s annual stock-picking contest. In early December, each contender selected three companies based or with major operations in the state that they predict will post the strongest gains over the next year. This year, dividend payments will be included as a measure of total return.
Eschewing more risky bets, our experts generally selected companies with diverse income streams, strong balance sheets and the ability to expand effectively. John Stamas, last year’s most successful participant, chose LendingTree, Fortive and Honeywell International. (Two others also selected Honeywell, making it this year’s hot pick.)
Frank Jolley and Ann Zuraw see Albemarle Corp.’s 23% stock decline over the last year as a good buying opportunity. Both expect the lithium producer to benefit from the growing demand for electric vehicles. Bobby Edgerton predicts Cisco Systems will bounce back after trade disputes with China hampered the stock price last year.
Zuraw and Christy Phillips favored two iconic N.C. clothing manufacturers. Zuraw believes Winston-Salem-based Hanesbrands’ pivot to digital will boost revenue, and Phillips is expecting gains for Greensboro-based Kontoor Brands as it sells Wrangler jeans in China.
Frank Jolley
president and chief investment officer,
Jolley Asset Management,
Rocky Mount
GlaxoSmithKline
(GSK)
Market Cap: $119 billion
Dividend yield: 4.3%
Health care giant GlaxoSmithKline’s established product line provides cash flows that can fund its expansive drug pipeline and move into emerging markets. Shares of the United Kingdom-based company, which employs 2,600 in the Triangle, trade at less than 15 times forward earnings, and the yield is just under 4.4%. Shares are attractive for investors seeking growth and income.
Albemarle
Corp. (ALB)
Market Cap: $7.2 billion
Dividend yield: 2.3%
Charlotte-based Albemarle is the world’s largest producer of lithium, which generates roughly half of the company’s profits. Most electric vehicles use lithium-ion batteries, which should result in growing demand over the next decade. Albemarle’s stock has declined by approximately 55% from its peak of $142 in late 2017, which has resulted in an attractive entry point on the shares.
Dollar Tree
(DLTR)
Market Cap: $22 billion
Dividend yield: NA
Virginia-based discount retailer Dollar Tree operates under the Dollar Tree and Family Dollar banners. The company disclosed disappointing guidance for projected 2020 profit, largely due to negative effects of trade tariffs and higher freight costs. We think that investors have overreacted, and we see an opportunity in the price weakness.
Ann Zuraw
president,
Zuraw Financial Advisors,
Greensboro
Albemarle
Corp. (ALB)
Market Cap: $7.1 billion
Dividend yield: 2.3%
In addition to lithium, Albemarle manufactures specialty chemicals. The company’s disappointing earnings results in 2019 stem from an oversupply of lithium, but strong projections for electric vehicle growth should drive demand to increase at a rate in the mid- to high teens annually through 2030. That is great news considering it has more than doubled its lithium-production capacity since 2018. While pricing has hurt recent returns, we believe shares have bottomed and will improve as demand grows.
Extended Stay
America (STAY)
Market cap: $2.7 billion
Dividend yield: 6%
Charlotte’s Extended Stay America is the largest lodging real estate investment trust in North America. The company strengthened its balance sheet by extending maturities at fixed rates and has finished installing new technology in a majority of its hotels. While renovation disruption and hurricanes negatively affected results, Extended Stay believes it can double its U.S. footprint.
Hanesbrands
(HBI)
Market cap: $5.3 billion
Dividend yield: 4%
Winston-Salem-based Hanesbrands has suffered from higher cotton prices and closings of retail stores that carry its clothing. It’s responding with new online offerings and brand extensions. Consumer preference for low-cost innerwear garments, staples of Hanesbrands, implies revenue even in recessions. The company is expanding into other countries with promising growth prospects, and demand for its Champion brand and other athletic apparel is growing. Dividend payments and share repurchases should provide a base for the stock price.
Bobby Edgerton
co-founder,
Capital Investment Cos.,
Raleigh
Cisco Systems
(CSCO)
Market cap: $197 billion
Dividend yield: 3%
Rocky Mount native and UNC Chapel Hill graduate Chuck Robbins is CEO of the company, which has a big Research Triangle Park operation. Cisco has a cash balance of $28 billion that exceeds its $18 billion in debt, and the company recently hit the $50 billion annual revenue mark as demand for communications-network software grows. Its stock has declined since July due to the tariff war with China, but we have positive expectations for 2020.
Honeywell
International (HON)
Market cap: $126 billion
Dividend yield: 2%
The Charlotte-based company dominates distribution-center technology for Amazon.com and other companies. Cash flow is expected to remain steady at about $6 billion, and the company has a cash hoard of $10 billion. Honeywell’s earnings should grow about 10% next year due to huge opportunities in China, and the company is showing great promise in the software space. Its annual dividends have nearly tripled over the last decade from $1.21 to $3.36.
Weyerhaeuser
(WY)
Market cap: $22 billion
Dividend yield: 4.6%
Seattle-based real estate-investment trust Weyerhaeuser is the world’s largest individual owner of timberlands, with a huge ownership presence in North Carolina. It is also one of the leading North American manufacturers of wood products. Dividends have grown from 20 cents in 2010 to $1.36 in 2019. Housing is strong, and this stock is way too cheap. Weyerhaeuser’s total return potential eclipses other N.C. companies, and the dividend is a solid 4.6%.
John Stamas
co-founder and chief investment officer,
Defender Capital,
Charlotte
Honeywell
International (HON)
Market cap: $126 billion
Dividend yield: 2%
Honeywell is a diversified company that is run extremely well with plenty of opportunities to grow. It has a track record of growth and a balance sheet to fund it. The trade troubles last year held back the stock a bit. But the company should benefit once it becomes clear to Wall Street that its earnings are more durable and less cyclical than expected.
Fortive
(FTV)
Market cap: $25 billion
Dividend yield: 0.4%
Fortive is a spinoff of Danaher that owns Greensboro-based fuel pumpmaker Gilbarco Veeder-Root. It has a high level of board ownership, something sorely lacking in many S&P 500 companies. It has a diversified portfolio and opportunities to reinvest internally, with a solid balance sheet. Many one-trick companies are forced to either pay a dividend or buy back stock, both activities that pale if reinvestment is done well.
LendingTree
(TREE)
Market cap: $3.8 billion
Dividend yield: NA
Online-lending marketplace LendingTree operates with a high return on capital and uses free cash flow to enter new verticals. While some ventures may be lower-margin opportunities, the earnings diversity makes the Charlotte-based company more stable. We are often attracted to founder-led companies with a high level of board ownership: Great boards find great leaders, and great leaders find they have followers. Shareholder returns naturally become the byproduct.
Christy Phillips
head of equity strategies and director of research,
Franklin Street Partners,
Chapel Hill
Lowe’s Cos.
(LOW)
Market cap: $92 Billion
Dividend yield: 1.9%
Mooresville-based Lowe’s Cos. is positioned to outperform in 2020, thanks to a powerful combination of its near duopoly in the industry, a favorable economic backdrop of low interest rates, and new leadership in CEO Marvin Ellison. We think Ellison is a game changer who has demonstrated an ability to execute a strategic plan to increase sales and enhance operating margins, which should increase earnings and the company’s price-to-earnings ratio.
Kontoor Brands
(KTB)
Market cap: $2.2 billion
Dividend yield: 5.7%
Greensboro’s Kontoor Brands holds the No. 2 position in the highly fragmented $100 billion jeanswear market through its Lee and Wrangler brands. The company is poised for global expansion as it expands Wrangler sales in China. Size and scale offer a distinct advantage in a global business, which should lead to operating margin improvement. Kontoor’s slow growth, yet cash-cow characteristics, support a very attractive dividend income.
Honeywell
International (HON)
Market cap: $126 billion
Dividend yield: 2%
Charlotte transplant Honeywell International transformed itself in recent years from a traditional conglomerate to a leaner, diversified growth company with exposure to several attractive markets. Despite ongoing uncertainty in the global environment, the company’s aerospace backlog provides a solid base for 2020 earnings. Honeywell’s organic growth, margin-expansion opportunities, and balance sheet strength make the company a compelling investment.
There’s always next year
The S&P 500’s robust 26% year-over-year gain as of Dec. 12 was hard to beat for our stock pickers who made selections a year ago. John Stamas had the best choice, Raleigh-based Martin Marietta Materials, which soared 57% over the 52 weeks. Another excellent pick by the Charlotte adviser was Honeywell International, which gained 30%.
But none of the other four investors isolated a stock that topped the S&P 500 index. Christy Phillips deserves props for having positive gains in each of her three picks: Iqvia Holdings gained 23%, IBM 13% and Dollar Tree 8%.
Bobby Edgerton’s picks struggled last year, particularly Morrisville-based leaf-tobacco processor Pyxus International, which shed 57%. The company suffered from the impact of eastern North Carolina’s hurricanes, irregular crop cycles at its foreign subsidiaries, and investments in cannabis and e-cigarette liquids that didn’t pan out as expected. Mount Airy-based Insteel Industries’ stock declined 7% as the company struggled to recover from the impact of steel tariffs imposed by the Trump administration.
Per contest rules, contestants aren’t allowed to alter their portfolio throughout the year. We thank the participants for their insight.
