Try to beat the market in 2016 with these

By Steven Goldberg
Posted on March 23, 2016

Even after the sharp sell-off so far this year, the stock market isn’t bargain-priced. But many stocks are cheaper than they were at the first of the year — making this a good time to beef up your investments in solid companies like the ones I recommend below. These five picks, in my view, ought to beat the market — whether the sell-off accelerates or ends today.

I have a lot of confidence in my fund picks. But when I’m hunting for stocks, I often turn to Morningstar. Morningstar is far better known for its fund coverage, but it employs more than 100 stock analysts. More important: The track record of Morningstar’s stock picks is superb.

Over the past 10 years, the recommendations of Morningstar Stock Investor, which draws on the work of the firm’s analysts, returned an annualized 9.6 percent — an average of 2.3 percentage points per year better than Standard & Poor’s 500-stock index. (The figures are through December 31, the last date for which returns for the newsletter are available.)

What’s more, the clearly written newsletter, which costs $125 a year, doesn’t have a huge audience. Unlike what happens when a big brokerage makes a call, the price of a stock rarely pops or drops dramatically when Morningstar makes a buy or sell recommendation.

Editor Matt Coffina, like most market analysts, sees stocks as close to fully valued. But below are a few of his best picks for 2016. Returns, prices and related data are as of March 14.

Berkshire Hathaway

Berkshire Hathaway Class B (symbol BRK.B $130.34). Warren Buffett, who painstakingly assembled this sprawling conglomerate, with annual sales of about $212 billion, over the past half-century, is 85 years old and irreplaceable. But he’s done as much as any CEO could to prepare the firm for his successors, including delegating most of the stock picking to two much younger men. Berkshire lost 15 percent over the past year, setting up an attractive buying opportunity.

The stock trades at 1.2 times book value (assets minus liabilities). In Buffett’s view, Berkshire is undervalued when it trades at 1.2 times book value, and he will buy back shares when its valuation falls to that level or below. That effectively sets a floor under the stock’s price unless, of course, book value falls.

Cooper Companies

Cooper Companies (COO $146.84) is the third largest manufacturer of contact lenses in a business that four global companies dominate. It stands to benefit from the growing number of people in emerging markets who are getting contacts and the shift in developed nations to more expensive lenses that are disposed of daily.

Coffina says Cooper should generate double-digit-percentage annual earnings growth over the next five years. The stock trades at nearly 17 times estimated 2016 earnings, somewhat more than the price-earnings ratio of Standard & Poor’s 500-stock index.

Novartis

Healthcare stocks in the S&P 500 gained 7 percent last year, handily beating the S&P 500’s 1.4 percent return. Healthcare continues to be my favorite sector.

Unlike some big drug makers, Switzerland-based Novartis (NVS $70.12) has remained innovative, and most of its patent losses are behind it. It has a large a pipeline of potentially important drugs in development, including treatments for heart failure and cancer. Novartis’s American depositary receipts trade at 16 times forecasted 2016 profits, a bargain if even only a couple of those development-stage chemicals become blockbuster drugs.

Express Scripts

Another defensive pick is Express Scripts Holding (ESRX $70.12), the largest U.S. pharmacy benefit manager, with more than 1.3 billion claims processed in 2014.

It contracts with major insurance companies and employers to provide prescription medications. Its size in this fast-growing industry gives it unrivaled power to negotiate prices with drug companies.

Its growing mail-order business, which supplies prescription drugs directly to consumers, boasts especially healthy profit margins. The stock, at 13 times estimated 2016 earnings, looks like a good deal.

Ventas

Ventas (VTR $60.10) is a real estate investment trust that owns 1,600 senior-living communities, assisted-living and skilled-nursing facilities, and other medical buildings in the U.S. and Canada. It rents out most of its facilities, but derives about one-third of its revenues from facilities it operates itself.

Most of the occupants of all of these facilities are relatively affluent patients with private insurance, meaning Ventas has little exposure to the vagaries of Medicare and Medicaid funding.

Coffina says that the high quality of the REIT’s properties will also protect Ventas from overbuilding in senior housing. The stock yields 5.3 percent, and Ventas has boosted its dividend at an annual rate of 6.4 percent over the past five years.

Steve Goldberg is an investment adviser in the Greater Washington area. He, one or more clients, or both own these stocks except for Cooper and Ventas.