We believe the US stock market has the potential to add to its gains in 2020. Low interest rates and growing dividends make stocks attractive.
We’re optimistic about US stocks in 2020. From New Year’s Day to December 8, 2019, the Standard & Poor’s 500-stock index jumped by 25.5 per cent. That’s partly because central banks around the world sharply cut their interest rates. This has made stocks much more attractive than government bonds, particularly bonds with negative yields.
Some companies are earning significantly more and continue to raise their dividends each year. As long as stocks remain much more profitable than bonds, we expect high-quality stocks to continue to outperform, even though they did very well last year. We foresee no recession in the US in 2020.
One risk is the ongoing trade war between the US and China. You can reduce this risk by focusing on stocks that do little business in China.
We’ve selected three US stocks that we believe are well positioned for 2020.
Amazon.com, Inc. (NASDAQ—AMZN)
Amazon is one of the world’s largest online retailers.
The online retail industry continues to grow rapidly and take business away from traditional bricks-and-mortar retailers. We’ve noticed that many children, teenagers and adults want Amazon gift cards. That way they can buy what they want.
In 2020, Amazon’s earnings are expected to advance by 29.2 per cent, to $26.50 a share. This gives the stock a forward P/E (Price-to-Earnings) ratio of 65.6 times. This is a high multiple to be sure, but one that is arguably justified in view of the company’s growth history and robust potential in the coming years.
Amazon remains a buy if you can tolerate high share price volatility, you seek long-term share price gains and you need no dividends.
Paychex, Inc. (NASDAQ—PAYX)
Paychex provides computerized payroll-accounting services and various human resources products and services to about 670,000 small- to medium-sized businesses, mostly in the United States and Europe. The strong and growing economy south of the border bodes well for Paychex’s earnings.
In the year to May 31, 2020, Paychex’s earnings are expected to grow by 8.7 per cent, to $3.11 a share. Based on this estimate, the shares trade at a forward P/E ratio of 26.9 times. This is costly.
On the positive side, Paychex has earned more in each of the past 10 years—since the financial crisis and recession of 2008 and 2009. Its earnings are expected to climb to $3.35 a share in fiscal 2021. The company also raises its dividends most years. It continued to pay $1.24 a share in the financial crisis and recession.
Management owns 11.7 per cent of Paychex’s shares. This makes its interest similar to yours. The shares remain a buy for further long-term share price gains as well as decent and growing dividends.
The Walt Disney Company (NYSE—DIS)
Consumer stock Walt Disney operates media networks, parks and resorts and a cruise line. This diversification by business improves the company’s safety. Disney remains a ‘Very Conservative’ stock.
Disney merged with Twenty-First Century Fox. The US$71.3 billion merger has good growth prospects. Fox’s content library complements that of Disney’s. And its technology and streaming services will help Disney create a direct-to-consumer platform. The combination is also expected to generate cost synergies of $2 billion by 2021.
Disney should earn $5.61 a share in the year to Sept. 30, 2020. Based on this estimate, the stock trades at a hefty P/E ratio of 26.2 times. Then again, the company’s earnings per share are expected to jump by 18.5 per cent in fiscal 2021.
Disney, meanwhile, offers a dividend that has grown every year since the financial crisis and recession of a decade ago. But due to the higher share price, the dividend currently yields a modest 1.2 per cent. Disney remains a buy for further long-term share price gains plus modest and growing dividends.
This is an edited version of an article that was originally published for subscribers in the December 27, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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