Five Good Stocks to Buy in 2019

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 2019. Last year was a poor one for investors in the stock market, with broader measures of the market’s performance declining significantly in December.

The Dow Jones Industrial Average was down 5.9%, while the S&P 500 Index finished the year with a 6.9% loss. Interestingly, earlier in the year the DJIA also hit several new milestones, surpassing the 25,000 and 26,000 mark for the first time in January of 2018.

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 2019, including the rationale for choosing each of the stocks selected.

2018 Stock Pick Performance

Only one of the five stocks picked last year performed well when compared to the Dow and the S&P 500. As the table below demonstrates, the worst performing stock was Citigroup, which came in nearly 25% lower than its peers:

Five Good Stocks to Buy in 2018

Ticker Company Performance
DIS Walt Disney Co.  -2.5%
DJI DJIA -5.9%
INX S&P 500 Index -6.9%
JPM JPMorgan Chase & Co. -8.0%
HON Honeywell International -10.3%
MMM 3M Co. -20.5%
C Citigroup Inc. -28.0%

The average of the portfolio was -13.8%. This performance is much worse than our 2017 picks, and lags both the DJIA and S&P 500 in what was a horrendous year for equities. The only standout is Walt Disney Co, which still lost over 2% on the year.

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

  2013 2014 2015 2016 2017 2018
Prior Year Stock Picks 59.0% 20.0% -9.97 14.57% 27.7% -13.8%
DJIA 28.1% 8.2% -2.29 16.50% 25.1% -5.9%
S&P 500 31.8% 11.8% -0.69 9.53% 18.9% -6.9%

Good Stocks to Buy in 2019

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 230 candidate companies from a universe of around 2,000 stocks. The five good stocks to buy in 2019 were selected because of their strong financial performance and widespread brand recognition.

Five Good Stocks to Buy in 2019

Ticker Company Industry / Sector
APPL Apple Inc. Consumer Electronics / Technology
BAC Bank of America Banks - Global / Financial Services
INTC Intel Semiconductors / Technology
JPM JPMorgan Chase & Co. Banks - Global / Financial Services
VZ Verizon Communications Telecom Services / Communication Services

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:

  • Apple Inc.: designs, manufactures, and markets mobile communication and media devices, and personal computers. It also sells various related software, services, accessories, and third-party digital content and applications.
  • Bank of America Corporation: through its subsidiaries, provides banking and financial products and services for individual consumers, small- and middle-market businesses, institutional investors, large corporations, and governments worldwide. It operates through four segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, and Global Markets.
  • Intel Corporation: designs, manufactures, and sells computer, networking, data storage, and communication platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Programmable Solutions Group, and other segments.
  • JPMorgan Chase & Co.: provides various financial services worldwide through four segments: Consumer & Community Banking, Corporate & Investment Banking, Commercial Banking, and Asset Management.
  • Verizon Communications: through its subsidiaries, offers communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company's Wireless segment provides wireless voice and data services.

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 2019. It serves as a demonstration of the thought process behind a sound stock-picking technique.


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