The following was originally published on InvestorPlace as part of the Best Stocks for 2020 contest.
They say lightning never strikes twice. But that’s exactly what I’m betting on in InvestorPlace’s Best Stocks for 2020 contest.
Four years ago, in the 2016 contest, I recommended leading midstream pipeline operator Energy Transfer (ET). It was a controversial pick, as the energy sector was in free fall at the time. The fracking boom had created a surge in domestic oil and gas production, and the resulting drop in prices showed just how fragile the industry was.
As Warren Buffett once said, it’s not until the tide goes out that you can see who was swimming naked. And once energy prices crashed, it became very obvious that a good chunk of the energy infrastructure industry was swimming in its birthday suit.
Today, as in late 2015, Energy Transfer finds its shares under attack.
Energy Transfer’s share price is nearly 40% below its post-oil bust highs and is trading at levels last seen in 2013.
Well, I should probably start this by mentioning that I no longer personally own the ETF I recommended in InvestorPlace’sBest ETFs for 2018 contest.
I recently sold my shares of the iShares Emerging Markets Dividend ETF (DVYE). While I still believe that emerging markets are likely to be one of the best-performing asset classes of the next ten years, it’s a minefield in the short-term. As I write this, the shares are down 4% on the year. That’s not a disaster by any stretch, but it is a disappointment.
There are a couple reasons for the recent underperformance in emerging markets. To start, the U.S. market remains the casino of choice for most investors right now. Adding to this is dollar strength. While dollar strength is good for countries that sell manufactured products to the United States, it’s bad for commodities producers, as a more expensive dollar by definition means cheaper commodities.
President Donald Trump’s trade war isn’t helping either. While it’s hard to argue that anyone truly “wins” a trade war, Trump isn’t incorrect when it says that our trading partners need us more than we need them. In a war of attrition like this, you “win” by losing less.
Of course, these conditions are not new, and virtually all of them were in place when I made the initial recommendation of DVYE. None of these factors would be enough for me to punt on emerging markets just yet. No, the problem is a greater risk that has only recently popped up: the twin meltdowns in Argentina and Turkey.
A 14% return is nothing to be ashamed of in a year where the S&P 500 is up only 8%. Yet it looks awfully meager when my competition in the Best Stocks contest is up 144%.
As I write, my submission in InvestorPlace’sBest Stocks for 2018 contest — blue-chip natural gas and natural gas liquids pipeline operator Enterprise Products Partners (EPD) — is up 14%, including dividends, as of today. Yet Tracey Ryniec’s Etsy (ETSY)is up a whopping 144%. Chipotle Mexican Grill (CMG)and Amazon.com (AMZN) take the second and third slots with returns to date of 71% and 68%, respectively.
So, barring something truly unexpected happening, it’s looking like victory may be out of sight this time around.
Can’t win ‘em all.
While Enterprise Products may finish the contest as a middling contender, I still consider it one of the absolute best stocks to own over the next two to three years. Growth stocks have dominated value stocks since 2009, but that trend will not last forever. Value and income stocks will enjoy a nice run of outperformance — and when they do, Enterprise Products will be a major beneficiary.
I can’t say I’m happy to be finishing the first quarter in last place in InvestorPlace’sBest Stocks for 2018 contest.
But I’ve been here before.
In the 2016 contest, I was dead last by the end of the first quarter, and at one point in time I was down by more than 70%.
Yes, you read that right. My pick that year — midstream pipeline operator Energy Transfer Equity (ETE) — was sitting on a 70% loss. But by year end, it had made back all of those losses and finished the year with a 53% gain — handing me the Best Stocks crown in the process.
Then, as now, the entire pipeline sector had just come off of a brutal bloodletting. As I write this, many of the blue chips in the space are down 20%-30% from their 52-week highs.
But by the second quarter, the fear started to dissipate, and buyers began to return to the market. 2016 ended up being a good year for the sector, and I expect that 2018 will be as well.
Now let’s take a look at my entry for 2018, blue chip MLP Enterprise Products Partners (EPD). Enterprise, like the rest of the MLP sector, has taken its lumps and is down about 9% year-to-date. But news for the company has generally been positive. The company beat analyst expectations for both revenues and earnings last quarter and raised its distribution nearly 4%.
If there is a dominant theme in the Best ETFs for 2018 contest, it would seem to be “Go America!” and specifically “Go American tech!”
The Market Vectors Semiconductor ETF (SMH)is leading the pack, up 7%, and four of the top five places are all held by ETFs specializing in tech or biotech.
But we still have a long way to go in 2018, and tech is starting to show signs of breaking down as we finish out the quarter. I expect my pick – the iShares Emerging Markets Dividend ETF (DVYE) to ultimately take the crown.
The U.S. market has been the undisputed winner of the post-2008 bull market. Since March 2009, the SPDR S&P 500 ETF (SPY) is up about 240%. The iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM)— popular proxies for developed foreign markets and emerging markets, respectively — are up 111% and 142% over the same period.
But with that outperformance has come major overvaluation. The U.S. market is the most expensive major market in world based on the cyclically adjusted price/earnings ratio, or “CAPE” (only tiny Denmark and Ireland are more expensive). The U.S. market trades at a CAPE of 31 … which is the level it reached in late 1997, in the midst of the dot com bubble.
Meanwhile, emerging markets are downright cheap. As a sector, emerging markets trade at a CAPE of less than 18, and many individual countries are even cheaper. Brazil trades at a CAPE of 14, and Russia 7.