The Best Undervalued Trades of 2018

Tuesday, January 23, 2018

For the first time in history, the S&P 500 $SPX finished every single month of 2017 in positive territory on a total return basis. Many have called it “the perfect year.”

So now, what happens next?

Here’s some 2018 predictions, starting with an eye-opening statistic…

The S&P 500 has returned 20% or more 26 times since 1943. The following year in 20 of the 26 occurrences also closed positive, with a 12% average return. And just so you know, in four of the six negative years, the Federal Reserve was tightening credit severely.

Getting even more specific…

When the first five market days of a new calendar year are positive for the S&P 500 (like 2018), the index goes on to close January in the green 73% of the time. But more importantly, when the entire month of January is positive, the SPX has finished the year up 82% of the time.

Since we’re off to one of the best Januarys in history, the stats say our full-year guidance should be upbeat. But as a trader, you’re probably wondering how high can the market really go?

To answer this question, let’s take a look at the current market valuations of some of the biggest winners of last year.

After averaging a 50% return over the last 12 months, the FANG stocks — Facebook FB – NASDAQ, Amazon.com AMZN – NASDAQ, Netflix NFLX – NASDAQ, and Google GOOG – NASDAQ — are surprisingly still not considered overvalued. Case in point, the technology sector currently trades at 18.9x 12-month forward earnings, just a hair above the valuation of the entire S&P 500.

With this in mind, it’s reasonable to think the market will continue higher in 2018.

So which stocks in particular do we like?

Bryan recently told members that Merck MRK – NYSE is his favorite play for 2018. Why? Last year, MRK gained less than 7%, grossly underperforming the SPX. It’s among the lowest valuations, plus pays a 3% dividend.

This call paid off — and fast.

MRK

As seen on the chart, MRK shot out of a cannon to start the year. Our subscribers cashed in with returns of…

  • 37% on MRK February 55 Calls
  • 48% on MRK February 57.50 Calls

While we still like MRK, smart traders will want to wait for a pullback to play it again. In the meantime, you can piggyback the same premise using a similar name — GlaxoSmithKline GSK – NYSE.

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GSK aggressively sold off last summer, falling from a high of $44 to $35. The stock now trades at 12.5x 2018 projected earnings, a 32% discount to the entire U.S. market. That’s why Barron’s said it’s “the perfect time to buy the stock.”

GSK

Another name to consider is Chevron CVX – NYSE. Although CVX ended 2017 in the bottom third of the Dow with a 6.4% gain, the oil company is setup to reap the benefits of some major investments.

After being stuck in a trading range since 2014, CVX recently broke out. And with a 3.4% dividend yield, it’s no wonder that analysts at Cowen raised their price target to $160 — 28% above current levels.

Not only that, but oil rallied 12.5% in 2017 and closed at $60.42, marking the first time since June 2015 that it traded above $60. And while oil has bounced, oil stocks have not. That’s why David Rosenberg, chief economist at Gluskin Sheff said, “energy stocks are still not fully priced for the improved fundamentals.” CVX could be the best-positioned play in the entire energy sector.

CVX


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