For much of the longest bull run in American history, retail investors could just throw some money into index ETF's. And if they picked some big winners in the market on top of that, they could beat the market.
Even if the bull run isn't over, the days of just throwing cash into ETF's and maybe buying a few FAANG stocks are likely over. Many top economists and strategists are calling for a slowdown in the U.S. economy in 2019 and 2020, which one economist said leaves the U.S. vulnerable to external shock. Beating the market now rests on a heavy dose of stock picking.
"We wouldn't want passive exposure -- stock picking can add a lot of value," Amanda Agati, co-chief investment strategist for PNC Financial told TheStreet.
So investors that want to be defensive and pick consumer staples, healthcare, and dividend stocks may be able to protect their portfolio. But picking the best stocks in each sector, or even the best ones in general, could prove to be lucrative.
Let's start with high growth software companies.
Microsoft Corp.'s (MSFT) cloud business is still in high growth mode. Cloud pricing has not yet "commoditized," said David Miller, chief investment officer at Catalyst Funds, meaning that Microsoft can still charge higher prices for cloud services. That's pricing. But volumes are set to continue big increases as well, as cloud adoption is still growing. Many companies have adopted the cloud, but they can still move more of their data into it, and Microsoft has been pulling ahead in market share of late, with Amazon.com Inc's (AMZN) Amazon Web Services leading in many segments.
Although Microsoft and Amazon share much of the market, which is slowing somewhat, the expected growth rate is so high that cloud revenues are set to increase, which bodes well for Microsoft Azure. Cloud revenues grew at roughly 50% year-over-year in the second quarter of 2018, according to Synergie Research Group data. So even if there's a slowdown, the growth is still high. Microsoft is trading at a trailing earnings multiple of 43.16, which isn't exactly at the higher end of the business.
Investors can buy Amazon for the same reason, but Amazon is in other businesses outside of the cloud that one has to consider as well, and has a trailing earnings multiple of 100.
Adobe Inc. (ADBE) is in the cloud business as well. And it's not priced unattractively either. Its forward earnings multiple is 31, against an expected earnings growth rate of roughly 30% in the near future. Adobe has "extremely high-powered earnings growth and revenue growth," Miller said.
Here come some companies many people may not have heard much of before.
Heico Corp. (HEI) supplies electronics and other parts to aerospace makers. Heico has a big valuation, trading at almost 60 times trailing earnings, but "they have a real true moat around their business at Heico," Miller said. Plus, the suppliers of aerospace makers can be valued pretty highly, as the aerospace companies will always pay up for parts they need replaced, so pricing power could be in the equation for Heico, long-term. "Once you have that part that you need replaced, you're willing to pay what you need to get that part replaced," Miller said.
Mercury Systems Inc. (MRCY) is a very similar business to Heico, but it's a smaller-cap company, with a market value of $2.29 billion, compared to Heico's $9.7 billion. Also, Mercury mainly supplies defense contractors, a different segment of the market than what Heico supplies, so owning both of them isn't like owning two competitors, where one could cancel out the other.
The rub on Verisk Analytics Inc. (VRSK) is less about the consensus on earnings potential and industry strength, but more about one key element: insider buying. Company executives and management have been buying up shares of the data analytics company, which means the people on the ground and closest to the action on the firm are saying they think the stock will do very well soon. Insiders added 5,000 shares to their holding in the last few months, bringing their total position in the company to 1.17%.
"Procter and Gamble, Coca-Cola, and Pepsi," was the response from JJ Kinahan, chief market strategist at TD Ameritrade, when asked which stocks look the best for a defensive investor.
Procter & Gamble
Procter & Gamble (PG) has stayed in the green since November 7, the date that kick-started a downfall for U.S. stocks. Since that date, the S&P 500 is down 8%. But Procter & Gamble is up 4.5% in that span. That may not sound so rosy, but it puts a bad market to shame. It's trading at 24.89 times trailing earnings, which is above the average multiple for the S&P 500, but below its main competitor, Colgate-Palmolive Co. (CL) , which is at 26.8.
Coca-Cola (KO) , another consumer staple, is down just 0.6% since November 7, a far lighter loss than the broader market. It was up between November 7 and the end of the month. A risk with Coca-Cola is aluminum tariffs. It's not clear the 10% tariff on aluminum will get worse, but if it does, that will put cost pressure on Coca-Cola, which has already had to hike prices on products to keep its margins in shape, in turn hurting demand.
PepsiCo Inc. (PEP) , of course a competitor to Coca-Cola, is down just 1% since November 7.
All three large consumer staples, which all have consistently strong cash flow, offer nice dividend yields as well. Procter & Gamble's dividend rate is 3.11%. Coca-Cola's dividend is 3.2%, and Pepsi's is 3.22%.
Fifth Third Bancorp
Fifth Third Bancorp (FITB) may have a discernible competitive advantage over other regional banks. A Morgan Stanley note said Thursday that management said it doesn't expect non-bank lenders to hurt its market share in 2019. Meanwhile, other regional banks may in fact face that headwind in 2019, the Morgan Stanley analysts wrote. Non-bank lenders have taken roughly 50% of mortgage loan market share since the financial crisis. Morgan Stanley raised its earnings-per-share estimate for Fifth Third for 2019 by 1.5% to $2.77. Morgan Stanley has a $32 price target on the stock, roughly 39% above its current level.