Top 5 Stocks for 2018

I am quoted in Smith Brain Trust (Robert H. Smith School of Business, University of Maryland) on “Top Five Stocks to Watch in 2018”.

Bet on Berkshire, Apple, Wells Fargo, BofA and Kraft Heinz

SMITH BRAIN TRUST – 2017 was a pretty happy year for stock investors, and David Kass says he expects 2018 to be rosy as well.

Kass, a professor of finance at the University of Maryland’s Robert H. Smith of Business, says he expects the S&P 500 and the overall stock market to climb another 10 to 15 percent this year. “And the major impetus to the increase,” he says, “is really the corporate income tax cut that will be going into effect, beginning in January, as well as the economies around the world continue to recover and as economic growth expands in the United States.”

“I expect interest rates in this country to rise only gradually,” he says, with two or three quarter-point increases over the course of the year. Investors, having long anticipated those interest rate increases, have already largely factored the impact of higher interest rates into their pricing of equities, he adds.

“Interest rates are near historically low levels and will remain relatively low, even with these increases,” Kass says. “The overall background will remain very favorable for stocks, as it was for 2017.”

Kass has closely followed the financial markets for over 50 years, and Warren Buffett’s investments and philosophy for more than 35 years. Kass says the stocks he likes in 2018 are the same ones he liked in 2017. “Like Warren Buffett, I have a long time horizon, and I’m focused on the long term when I consider investments,” he says.

Here are his top five stock picks for 2018:

Berkshire Hathaway. The Omaha-based conglomerate led by Buffett should be “a very major beneficiary” of the new 21 percent corporate income tax rate, approved by Congress last year. Berkshire had been paying an effective tax rate of 27.5 percent. “Plus they have common stock investments with large unrealized capital gains that they will be able to sell in 2018 or later at a lower corporate income tax rate, which reduces their deferred tax liabilities” Kass adds. The tax cut alone might add another 10 percent to the price of Berkshire Hathaway in 2018.”

Apple. Kass says he continues to recommend Apple, despite periodic hand-wringing in the market about the company’s outlook. “Apple has established a subscription model,” Kass says. “People who buy their iPhones tend to trade up to the latest, most up-to-date models, roughly every 2.5 years. And they also sign up for the latest apps.” The Cupertino, Calif.-based company functions as both a consumer and a technology company, Kass says. “It’s a perfect blend of both.” Apple’s stock price is reasonably valued at current prices, he says, around $170 this week. Berkshire owned about $21 billion of Apple’s shares as of Sept. 30.

Wells Fargo and Bank of America. Rising interest rates and lower corporate tax rates are good news for the financial sector. “With rising interest rates, banks in general should see their profits increase in 2018, as well as subsequent to 2018,” Kass says. He has his eye on the San Francisco-based Wells Fargo and Charlotte, NC-based Bank of America — both among Berkshire’s top five holdings. Berkshire was holding about $25 billion in shares of Wells Fargo and $17 billion of Bank of America as of Sept. 30. Wells Fargo, in particular, appears poised for a good year. It had been subject to a higher tax rate than some of its peers in the financial sector as well as its peers in the broader economy, so the new lower corporate tax rate is very welcome news for that financial institution. “I would recommend both of those banks at current (stock) prices,” Kass says.

Kraft Heinz. The food giant that makes Heinz ketchup and Kraft cheeses is 25 percent owned by Berkshire Hathaway and 25 percent owned by Brazilian private equity group 3G Capital. “Kraft Heinz has made a major food acquisition every two years for the past four years,” Kass says. (H. J. Heinz was acquired in 2013 and Kraft was acquired in 2015.)  “Their model is to buy an undermanaged food company and run it more efficiently, reducing costs and trying to grow the company, and substantially increasing profits in the process. I expect Kraft Heinz to make a large food acquisition in 2018.” The acquisition, he says, is likely to boost the share price of the Chicago-based Kraft Heinz.

(Note:  This blog post has been published by Seeking Alpha and Value Walk.)