My top picks for 2018

 

Investors enjoyed strong gains in 2017, and the current year is already off to a strong start. The market’s recent gains have pushed a lot of stocks into overbought territory, but there are still plenty of great values left in the market, with plenty of upside potential for the current year.

Corporate earnings have been good, and the recently passed GOP tax plan should help drive earnings higher and allow the market to build on its recent gains. The newly passed tax plan will lower the corporate tax rate from 35% to 21%, which will result in a big jump in profits. The tax plan will lower taxes for most Americans, which will lead to increased discretionary income that should boost consumer spending.

The new year is a great time for investors to put some money to work in the market. Investors that sold stocks at the end of 2017 to realize losses need to find somewhere to put that money to work, and now is also the time to realize that you can still make qualified contributions to 2017 IRA plans.

If you are among those investors with some money that needs to be put to work, here are a few stocks to consider that are among my top picks for the current year.

Bank of America

The outlook for the financial sector remains bright. Big banks like Bank of America (BAC) have enjoyed big gains over the last year, but tax reform, higher interest rates, and deregulation should all help drive stocks in the sector higher. Bank of America has an attractive valuation, with a P/E of 17.9, and analysts forecast earnings growth of 31.1% over the next year, and 14.8% per annum over the next five years. With the strong growth estimates, and the attractive valuation, BAC is a top pick for 2018. The stock is now trading at $31.41, with an average price target of $30.97, but if the company is able to hit its future estimates analysts will lift their targets to allow shares to trend higher.

bac180116

Chart courtesy of www.stockcharts.com

Caterpillar

Heavy machinery maker Caterpillar (CAT) is among the top performing stocks over the last two years, and there are plenty of reasons to expect the stock to continue building on its recent gains. Increased federal spending on infrastructure will keep demand high for the company, and ongoing strength in the housing market and commodities will also keep shares moving in the right direction. The stock has a high valuation, with a P/E of 115, but analysts forecast strong earnings growth of 25.1% next year, and 40.1% per annum over the next five years. The stock is trading at $172.58, well above its $156.79 average price target, but the market remains incredibly bullish on the stock, which is just below its all-time high. The company next reports earnings on January 25, and if the company tops estimates you can expect analysts to lift their price targets.

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Chart courtesy of www.stockcharts.com

Apple

Apple (AAPL) enjoyed big gains in 2017, and the stock is currently trading just shy of its all-time high. Apple holds around $270 billion in cash overseas, and under President Trump’s new tax reform, the company will be able to bring the cash back to the states at a reduced tax rate. Instead of paying 40% on money it repatriates, the new tax plan will allow the company to bring the money back at a rate of 15.5%. Analysts believe Apple will tac advantage of the new rule to repatriate a large chunk of its overseas cash, which it can in turn use to buy back more shares, boost its dividend, or use to fund new acquisitions. The new tax plan also lowers the corporate tax rate from 35% to 21%. Apple stands to be one of the biggest beneficiaries of the new tax plan, and as such shares traded up to a new high following the passing of the GOP tax plan.

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Chart courtesy of www.stockcharts.com

Lockheed Martin

Defense stocks have enjoyed steady gains over the last year, and Lockheed Martin (LMT) is likely to build on its recent gains during 2018. There is a lot of geopolitical uncertainty around the world, which should continue to boost demand for Lockheed Martin’s goods. President Trump has made it a top priority of his administration to modernize and increase the size of the U.S. military, which has the market very bullish on the entire sector. LMT has a slightly high valuation, with a P/E of 26.9, but analysts remain bullish on the stock, with 7 of the 11 analysts that cover it giving it a “strong buy” rating. LMT trades at $334.50, and analysts have an average price target of $341.91 on the stock.

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Chart courtesy of www.stockcharts.com

SPDR S&P 500 ETF

For investors that remain bullish on the market, but are worried about current valuations, an investment in SPDR S&P 500 ETF (SPY) is a great way to get into the market, while diversifying over a group of stocks for protection against a possible sell off in any particular security or sector. SPY is designed to track the performance of the overall S&P 500, so as long as the market continues its bullish run, SPY will move higher as well. The position is diversified over all the stocks in the S&P 500, with each stock getting weighted to correspond with its weight in the broader index. The GOP’s tax plan is expected to put more discretionary income in the pockets of consumers, which should lead to increased spending and higher profits for corporations. Lower tax rates should also boost profits, which is turn should drive the market higher and SPY with it.

spy180116

Chart courtesy of www.stockcharts.com

Symbols: AAPL BAC CAT LMT SPY

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