Five core holdings for 2016

 

Like it or not, 2015 is just about to be in the record books. It was not the best of years for investors, but all things considered, it could have been a lot worse.

Perhaps the biggest news of the year just occurred, with the Federal Reserve deciding the time was finally right to lift interest rates. Such a move tends to hurt the overall stock market, but this time around we did not experience any knee-jerk reaction to the downside because the market was ready for a rate hike, and the possibility had already been priced into the market.

However, just because the initial reaction was optimistic, the rate hike does pose a threat to stocks moving forward should investors decide to move money out of stocks and into traditional fixed-income securities.

With the heightened level of risk in the wake of the Fed’s decision, your core holdings for 2016 need to be solid companies that are leaders within their sectors. These will be the most shielded against any possible weakness that hits the market next year.

When building my list of five core holdings for 2016, I looked for not only companies that were leaders within their sector, but I also wanted to make sure they were companies which operate in industries with high barriers of entry. Dividends are always a nice thing to look for, but given recent Federal Reserve decision, dividends are less important than in years past, and could actually be a problem for stocks that have been strong as of late solely because of their dividend program.

I believe that the following five stocks all have a high likelihood of price appreciation in 2016, and each could be considered as core holdings for investors over the next twelve months.

Facebook

Social media leader Facebook (FB) has been trending steadily higher since the summer of 2013, and there are plenty of reasons to expect more upside ahead. The best thing the company has going for it right now is the clear lack of competition for its core business. Facebook is so dominant in social media it is hard to imagine another company knocking it off its perch. Granted the same could have been said for MySpace before its demise, but Facebook is so aware of what it did to MySpace that you have to imagine they are doing everything to prevent becoming the next MySpace. So far, Facebook has answered all critic concerns over its ability to monetize mobile users, and was really the first company to solve the riddle. Now there is an ongoing shift in ad dollars to mobile and social sites, which will benefit Facebook moving ahead. The company is arguably the most engaging internet site, and the possibilities surrounding video are just starting to take off. There are also big possibilities for Instagram and WhatsApp that could drive revenue moving forward. Earnings rose 32.5% during the company’s most recent quarter, and analysts forecast earnings growth of 33% next year. As the company continues to expand, the stock will continue to reward investors, and I consider it a core holding in the technology sector.
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Chart courtesy of www.stockcharts.com

McDonald’s

Fast-food chain McDonald’s (MCD) faces a dilemma with the recent health shift in the U.S. away from fatty fast food offerings, but the company has made solid progress in revamping its menu and as a result, same store Sales in the U.S. are starting to improve. During the company’s most recent quarter, U.S. sales rose for the first time in two years, rising 0.9%. Analysts had forecast another decline during the quarter. McDonald’s has been in business since 1940, and has boosted its dividend 38 straight years. The stock is currently paying a 3.0% yield, and trades with a P/E of 25. Analysts forecast earnings growth of 9% in 2016 versus 2015, which combined with the valuation and the solid dividend program makes the stock a perfect core holding for 2016.

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Chart courtesy of www.stockcharts.com

JP Morgan

Financial giant JP Morgan (JPM) has moved higher over the last year, and the Federal Reserve’s recent decision to allow interest rates to rise should keep strength under the stock moving ahead. Higher interest rates are good for banks, as they allow for a wider spread between the money banks borrow and the money they loan their customers. Like most of the big banks, JP Morgan was forced to slash its dividend during the recession, but the company has returned to the path of dividend growth, and boosted its dividend each of the last four years. The stock currently has a 2.7% yield. Analysts forecast modest earnings growth of 4% in 2016, and the stock has a very low valuation, with a P/E of just 11.1. The financial sector should do well next year, and with JPM’s low valuation and 2.7% dividend yield, the stock should be one of the better performing stocks in the group.

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Chart courtesy of www.stockcharts.com

Walt Disney

Walt Disney’s (DIS) marketing machine has been on full display in the months leading up to the release of Star Wars 7: The Force Awakens. There was a lot of speculation as to whether or not the newest movie in the franchise would break opening weekend sales records, but not only did it outpace Jurassic World’s figures, it easily outpaced the opening weekend $208 million by raking in $247 million in box office sales in the U.S. alone. It also set a new worldwide record of $528 million. The stock sold off during the latter part of the summer over concerns of subscriber losses for the ESPN network, but those concerns were overblown, and the stock is once again trending higher. There is no denying that the paid television sector is being disrupted, but ESPN is insulated for the most part from cord cutting due to the live nature and zero shelf life of sporting events. The company’s movie segment is firing on all cylinders, which will drive revenues in merchandising and theme park attractions. DIS offers a 1.3% dividend yield, has a P/E of 21.7, and analysts forecast earnings growth of 10% in 2017 versus 2016. I like the stock, and consider it a definite core holding for 2016.

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Chart courtesy of www.stockcharts.com

Johnson & Johnson

Consumer goods and pharmaceutical leader Johnson & Johnson (JNJ) is trading just shy of its all-time high, but with a P/E of 19.3, and earnings expected to rise a modest 4% next year, the stock should remain solid. There is some fear that rising interest rates will hurt dividend stocks, but with a yield of 3.0%, and an amazing 52-year streak of dividend increases, the stock is more shielded than dividend stocks that are not growing dividends. The company’s consumer goods sector boasts some of the best brand names in personal care, and its pharmaceutical and medical devices segments should continue to benefit from an aging U.S. population and fewer uninsured Americans under the Affordable Care Act. If the market does turn bearish, money will flow into stable companies with long histories and solid dividend programs, which makes JNJ a great core holding for 2016.

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Chart courtesy of www.stockcharts.com

Symbols: DIS FB JNJ JPM MCD

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