Five Good Stocks to Buy in 2018

Consistent with the approach taken over the past seven years, we'll use the techniques of value investing described elsewhere on this website to identify five good stocks to buy in 2018. Last year was a very good one for investors in the stock market, with broader measures of the market's performance rising significantly.

The Dow Jones Industrial Average was up 25.1%, while the S&P 500 Index finished the year with a 18.9% gain. The DJIA also hit several new milestones, surpassing the 24,000 mark for the first time on November 30, 2017.

Picking Stocks

We're going to start with a brief discussion of the stock picks' performance from last year. Next, we'll briefly run through the process of finding stocks that represent a good value. Then we'll finish up with a list of stocks for 2018, including the rationale for choosing each of the stocks selected.

2017 Stock Pick Performance

Three of the five stocks picked last year performed well when compared to the Dow and four of five stocks beat the S&P 500. As the table below demonstrates, the worst performing stock was Walt Disney Co., which performed poorly relative to its peers:

Five Good Stocks to Buy in 2017

Ticker Company Performance
APPL Apple Ince 47.3%
GOOG Alphabet Inc 33.3%
MMM 3M Co 32.4%
DJI DJIA 25.1%
C Citigroup Inc. 23.9%
INX S&P 500 Index 18.9%
DIS Walt Disney Co. 1.6%


The average of the portfolio was 27.7%. This performance is much better than our 2016 picks, and is slightly ahead of the DJIA while beating the S&P 500 by a sizable margin. The standouts include Apple Inc., Alphabet Inc., and 3M Corporation.

The performance of this approach over the last five years versus the S&P 500 and DJIA appears in the following table:

  2013 2014 2015 2016 2017
Prior Year Stock Picks 59.0% 20.0% -9.97 14.57% 27.7%
DJIA 28.1% 8.2% -2.29 16.50% 25.1%
S&P 500 31.8% 11.8% -0.69 9.53% 18.9%

Good Stocks to Buy in 2018

The process used for picking securities is based on a systematic approach to researching and selecting stocks. This multi-step approach is based on value investing; something embraced by Benjamin Graham, an economist and premier investor.

Intrinsic Value

There is always a choice to invest money in relatively safe, risk-free securities such as government bonds. When buying stock in a company, it's important to adequately compensate for the additional risk; that means investing in companies with high intrinsic value.

Benjamin Graham Formula

is first calculated, and then compared with the last price of the stock. Ranking companies is then possible according to their intrinsic value and last price ratio, using the intrinsic value calculation is shown below:

Intrinsic Value = (EPS x (8.5 + 2G) x 4.4) / Y

Where:

  • EPS = the company's earnings per share over the last 12 months
  • 8.5 = the value Benjamin Graham proposed as the price to earnings ratio for a zero growth company
  • G = the company's five-year growth rate
  • 4.4 = the average yield of AAA rated corporate bonds back in 1962, when the model was initially developed
  • Y = the current yield of AAA corporate bonds

In the above example, the value of Y was based on the 20-year composite AAA yield of 2.25%

Earnings per Share

Another important measure of a company's financial strength is their earnings per share. This measure tells the investor how much money a company earned in each period, stated in terms of each share of common stock issued. Industry analysts often project earnings per share into the future. This projection is based on guidance received from the company they're analyzing. The future earnings of a company are the key to deriving an estimate of a stock's future price.

Excellent Stocks

The last screen involves choosing excellent stocks. This eliminates from consideration companies that sell commodity-type products. It's important to find companies that command a price premium in the marketplace because they have either strong brand recognition and / or loyal customers.

Five Good Stocks

The above stock screening resulted in roughly 240 candidate companies from a universe of around 2,000 stocks. The five good stocks to buy in 2018 were selected because of their strong financial performance and widespread brand recognition.

Five Good Stocks to Buy in 2018

Ticker Company Industry / Sector
MMM 3M Co. Industrial Goods / Diversified Machinery
HON Honeywell International Industrial Goods / Diversified Machinery
JPM JPMorgan Chase & Co. Financial / Money Center Banks
C Citigroup Inc Financial / Money Center Banks
DIS Walt Disney Co. Services / Entertainment - Diversified

Rationale for Stock Picks

All the above stocks satisfied the requirements of the process, and show strength in the following three areas:

  • Excellent Companies:  these companies have strong brand recognition, and none sell commodity-type products.
  • Earnings per Share:  the consensus among market analysts is that these companies are all expected to demonstrate strong earnings per share growth over the next five years.
  • Financial Stability:  these companies also have a strong balance sheet when looking at interest coverage and debt-to-equity ratios.

Companies Selected

Below is a brief description of the companies picked in 2018, and their major business operations:

  • Walt Disney Co.: operates as an entertainment company worldwide, including a media network segment, a broadcast business, television stations, radio stations as well as parks and resorts.
  • Honeywell International: operates as a diversified technology and manufacturing company worldwide, including aerospace, automation and control solutions, and performance materials and technologies.
  • JPMorgan Chase & Co.: provides various financial services worldwide through four segments: Consumer & Community Banking, Corporate & Investment Banking, Commercial Banking, and Asset Management.
  • 3M Corporation: operates as a diversified technology company worldwide, including industrials, safety and graphics, electronics and energy, and health care.
  • Citigroup Inc.: operates a financial service holding company. Citicorp offers traditional banking services to retail customers including credit card lending, and investment services as well as wholesale banking to corporate, institutional, public sector, and high-net-worth clients.

Stock Pick Disclaimer

There are many ways to go about picking stocks, and we've mentioned several other methods in articles such as Dogs of the Dow and Dow Diamonds. The purpose of this publication goes well beyond distributing a list of stocks to buy in 2018. It serves as a demonstration of the thought process behind a sound stock-picking technique.


About the Author - Five Good Stocks to Buy in 2018