Looking back over the past year provides ample evidence that bull markets love to climb a wall of worry. Despite the threat of a nuclear showdown with North Korea, anxiety over a potential trade war, and the end of easy money from the Federal Reserve, stocks are having what can easily be described as a very good year. Through the end of November, the S&P 500 Index gained 21%. The Dow Jones Industrial Average was up 25%, and the Nasdaq Composite surged 27%. Big technology companies in the Nasdaq 100 Index, tracked by the popular QQQ ETF, have jumped 32% since January.
To put this performance into perspective, large-cap U.S. stocks have produced a 10% average annual return over the past century. When market returns are more than double the long-term average, it naturally induces a fair amount of fear among investors that the next bear market lurks just around the corner.
Valuations of the overall market do not do much to diminish unease. Robert Shiller, the Yale economics professor, calculates the cyclically-adjusted price-earnings (CAPE) ratio of the S&P 500 going back to 1882. Shiller’s CAPE divides price by the past ten years of earnings to smooth out the noise of boom-and-bust economic cycles, and indexes profits for inflation. Over the past 135 years, that ratio has averaged 16.8. The S&P 500 currently trades at a CAPE of 31.3, a premium of 86% above the long-term average.
Nobody knows whether the reckoning comes next month, next year, or several years down the road. In the meantime, you don’t want to miss out on gains from stocks that still look cheap. To help identify some of those opportunities, I consulted with seven market-beating investment editors to find out what their top ideas are for new money in 2018. You’ll find their recommendations below.
Sandridge Energy (SD) is a petroleum and natural gas exploration company. This is a post-bankruptcy stock. Sandridge emerged from bankruptcy in October of last year with virtually no debt, flush with cash, and in position to take advantage of a big recovery in oil and natural gas prices. The company’s bankruptcy was a very bad deal for old shareholders, but it’s emergence from bankruptcy is potentially a very lucrative deal for new shareholders. Still, management and the board have a record of bad decisions, bad acquisitions and destroying shareholder value.
That’s why two big-time activist investors have just taken large stakes in Sandridge with an intent to block the company’s pursuit of a new acquisition. Fir Tree and Carl Icahn now own a combined 20.5% of Sandridge. Not surprisingly, the Sandridge board has responded with a poison pill. And I expect they will clean house at Sandridge and put a management team and board in place that will streamline the operations and optimize for higher oil prices. When oil was trading in the $90-$100 range in 2014, Sandridge was a $3 billion company. Today it’s valued at just $650 million and that’s after shedding $3.7 billion in debt.