Overall, tech stocks turned out to be the top performers for 2019. The gain in the technology sector helped the S&P 500 gain 29% in 2019. Among the sector-specific SPDR ETFs, the Energy Select Sector SPDR Fund (XLE), the Financial Select Sector SPDR Fund (XLF), and the Technology Select Sector SPDR Fund (XLK) outperformed last year.
The top stocks for 2020
According to a FactSet report released on December 23, among the S&P 500 constituents, Assurant (AIZ) has the highest percentage of “buy” ratings. In 2019, AIZ rose 46.6%. Assurant is a financial services stock.
All five analysts tracking AIZ have a “buy” or a “strong buy” recommendation on the stock, based on Reuters’ data. Analysts’ mean target price suggests an upside of 11.6% in AIZ in the next 12 months. In November, Morgan Stanley increased the target price on Assurant by $7 to $137. However, UBS cut its target price on the stock by $2 to $152. On Tuesday, Assurant closed at $131.10.
Assurant’s fundamentals and outlook
Since Q1 2016, AIZ’s quarterly adjusted earnings per share (or EPS) were above analysts’ mean estimates. In Q3 2019, AIZ’s adjusted EPS stood at $1.69, a rise of 59.4% on a year-over-year basis.
In Q4 2019, AIZ’s management increased the dividend by 5% on its common stock. With the increased dividend, AIZ’s dividend yield is 1.9%. Since 2004, AIZ’s dividend has risen steadily.
The S&P 500 Index dividend yield is 1.7%. The US government’s 10-year Treasury Note yield is 1.9%. Investment in fixed-income securities can be sensitive to changes in interest rates. Stock prices are sensitive to the company’s earnings growth outlook, financials, and other factors.
Assurant’s free cash flow was positive between Q3 2018 and Q3 2019. According to AIZ’s investor presentation, between 2019 and 2021, the company’s management expects strong cash flow. Until 2021, its Global Lifestyle business segment’s net operating income could grow by 10% annually. Similarly, its Global Housing and Global Preneed business segments could report operating ROE (return on equity) of 17%–20% and 13%, respectively.
On average, between 2020 and 2021, “operating EPS, excluding catastrophes” could grow 12% annually, based on the company’s guidance. The EPS growth rate assumes a double-digit rise in AIZ’s net operating income. The company aims to return $1.35 billion to shareholders through dividends and share buybacks.
AIZ’s forward PE (price-to-earnings) ratio is at 13.6x. Its peers American International Group (AIG), Kemper Corp. (KMPR), and Allianz SE’s (ALVG) forward PE ratios are 10.3x, 12.8x, and 10.8x, respectively.
Assurant’s institutional holdings
In Q3 2019, five of the top 10 institutional holders of AIZ stock have reduced their stakes. Wellington Management, AIZ’s third-largest institutional holder, increased its stake in the third quarter.
Dimensional Fund sold approximately 215,600 shares of AIZ—the highest stake sells among the top 10 institutional investors. However, Invesco, Viking Global Investors, and State Street bought approximately 1.1 million, 1.0 million, and 164,600 AIZ shares, respectively.
Invesco and Viking were the largest buyers of AIZ’s shares among all the institutional investors. Fidelity Management & Research LLC sold around 388,100 Assurant shares, the largest stake sell by any institutional investor.
Other top stocks for 2020
The other S&P 500 constituents with the highest percentage of “buy” ratings are Diamondback Energy (FANG), Amazon (AMZN), L3Harris Technologies (LHX), and Quanta Services (PWR), based on the FactSet report. To learn more about FANG, please read S&P 500 Stocks: Analysts Bullish on Diamondback.
According to Reuters, L3Harris Technologies has 95% “buy” or “strong buy” recommendations. Only one out of 18 analysts recommended a “hold.” Analysts’ mean price target for LHX is $244.76. On December 31, the stock closed at $197.90. In 2019, LHX rose 47%.
However, eight out of the top 10 institutional investors in LHX increased their stakes in Q3 2019. Wellington Management sold approximately 1.4 million LHX shares, the largest reduction by any institutional investor. Also, Wellington was among the top eight institutional investors of LHX in the third quarter.
In Q3 2019, Quanta Services’ (PWR) adjusted EPS was $1.14, 10.4% above analysts’ mean estimates. Year-over-year, its adjusted EPS grew 29.5%. Last year, PWR outperformed the S&P 500 Index with a gain of 35.2%.
PWR’s forward PE ratio is 10.6x. Its peers EMCOR Group (EME), Gates Industrial Corporation PLC (GTES), and Jacobs Engineering Group’s (J) forward PE ratios are 14.4x, 14.8x, and 15.5x, respectively.
Thirteen of the 14 analysts tracking PWR have either “buy” or a “strong buy” recommendations on the stock. Only one analyst recommended a “hold” on PWR. In December, D.A. Davidson increased its target price on PWR by $2 to $50 and upgraded its rating from “neutral” to “buy.”
In November, KeyBanc, Citigroup, and Credit Suisse increased the target price on PWR by $4, $1, and $5 to $49, $51, and $49, respectively. On December 12, Quanta Services’ Management increased the dividend for its common stock by 25%. PWR’s dividend yield is 0.5%.
Boston Scientific has 92% “buy” ratings. BSX is seventh among the S&P 500 constituents that have the highest percentage of “buy” ratings. BSX could be among the top stock picks for 2020 because of analysts’ bullish outlooks.
Last year, BSX stock rose 28%. In contrast, the Health Care Select Sector SPDR Fund (XLV) gained 17.7%. Analysts’ mean price target suggests an upside of 8.8% in 2020.
Last year, ConocoPhillips (COP) stock rose 4.3%, while the Energy Select Sector SPDR Fund (XLE) gained 4.7%. In 2019, WTI (West Texas Intermediate) rose 34.5%. On average, oil prices were lower in 2019 than in 2018, which impacted COP’s earnings. In Q2 2019 and Q3 2019, COP reported a contraction in its adjusted EPS on a year-over-year basis.
However, with the steady rise in oil prices after the OPEC+ production cut, we could see an upside in COP. Also, with the reduction in the OPEC+ oil supplies, the Brent-WTI spread has expanded.
COP’s net income has a higher sensitivity toward Brent compared to WTI crude oil prices. Analysts’ mean price target suggests an upside of 12.7% from the last closing level of $65.03. COP’s dividend yield is 2.6%.
Last month, Compass Point started coverage on Visa (V) with a “buy” rating and a target price of $215. On Tuesday, Visa closed at $187.90. Analysts’ mean target price for this stock is $203.40. Around 89% of the analysts surveyed by Reuters recommended a “buy” or a “strong buy” on the stock.
Visa constituted 0.8% of Berkshire Hathaway’s portfolio of publicly traded securities in the third quarter. Berkshire Hathaway has held Visa stock since Q3 2011. Warren Buffett, Berkshire’s chairman and CEO, is known for picking stocks that return more than 100%.
In Q3 2019, BlackRock bought approximately 2.3 million Visa shares, the largest buy by any institutional holder. BlackRock was the second-largest institutional investor in Visa. In the third quarter, JPMorgan Chase sold around 5.2 million Visa shares, the largest reduction among institutional investors. For more on credit card companies’ financials, please read MasterCard and Visa’s Valuation and Earnings Growth.