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[Pages:12]The Ten (10) Best Stocks To Own In 2022 What Makes A Good Stock To Own In 2022?

As always, the factors that make a good stock to own in 2022 are the same that make it a good stock to own at any other time. What we're talking about is sound management, fundamentally strong business, growing revenue and earnings, and for us, a healthy capital return plan. The catch is that what makes a stock good specifically for 2022 may not be the same for other years. For one, this year we are faced with the rising tide of inflation. There is going to be earnings growth but much of that growth is going to be based on higher prices and not increased activity so we have to be choosier than ever with our investments. The FOMC indicated the start of the taper but it is still a little iffy when it comes to the outlook for interest rate hikes. Based on the information at hand, we think it safe for investors to assume there will be at least one interest hike by June, possibly at the June meeting, and it might be as much as 50 or even 75 basis points. If the PPI, CPI, and PCE price indices don't cool off before then, we favor the more aggressive stance when it comes to interest rate outlook.

Earnings growth is going to be a big factor regardless of the industry and earnings growth is going to come to a standstill for the average S&P 500 company. The consensus estimate for S&P 500 earnings

growth has growth falling from a robust +45% in 2021 to a very tepid but far more sustainable 8.5% in 2021 with more of the growth in the back-half of the year. In the front half of the year, growth will slow to the low-single digits but that's only consensus figures. The S&P 500 tends to outperform its consensus estimates all of the time so it's a given that growth will be better than expected, the question is by how much? When choosing stocks we prefer value and yield to growth although growth is important. This year, however, with growth expected to be so tepid, value and yield will be more important than ever. In that regard, we still favor the consumer discretionary sector for our long-term dividend growth portfolio so you will find some of these stocks on our list as well. The financial sector is usually a good sector when it comes to rising interest rates but it has one of the poorest outlooks for growth in 2022 so there is that to consider. We like many of the big banks and more of the smaller, regional banks, but we aren't overly optimistic right now.

A few of the stocks on our list are repeats from last year. We've chosen these stocks again because they fit the profile for sustainable, long-term growth and capital returns, and they fit the profile for stocks we think will do well this year.

Follow The Money To These Three Sectors

Looking at earnings on a sector-to-sector basis there are a few that stand out. The ones we are gravitating towards are the Industrials, the Consumer Discretionary, and the Energy sectors which are

expected to post the strongest growth of all 11 S&P 500 sectors. The financial sector ironically is the only S&P 500 sector expected to post a YOY earnings decline

The Industrials will be the strongest with growth approaching 40% for the year. This is going to be driven in large part by global economic reopening as well as infrastructure spending tied to President Biden's infrastructure package. While we expect the big boys like Caterpillar and Honeywell to do well in this environment we're also in favor of green and EV company's and in particular EV infrastructure like charging stations.

The Consumer Discretionary sector will have similarly strong growth as will the energy sector and there is upside risk in both. In regards to the consumer discretionary sector, trends in the U.S. labor market are strong and should sustain a healthy consumer appetite. eCommerce will, of course, play a large role here although brick & mortar is also making a nice comeback. Regardless, the entrenched brands and those with a successful eCommerce presence will lead the group.

As for the energy sector, demand for energy and petrochemicals is rising along with the global recovery and that, along with tightening capacity, is driving prices to long-term highs and delivering windfall profits for the energy companies. We expect to see WTI trade well above $100 by the end of the year and that will drive earnings, dividends, dividend growth, and share buybacks in the energy sector.

Travel & Leisure Could Be The Big Story Of The Year

Travel & leisure stocks were among the hardest hit by the pandemic and the slowest to come back in its wake. As long as it takes for them to make a full rebound, we expect the travel & leisure industry to make a full rebound and for recovery to accelerate in 2022. Reduced restrictions (fingers crossed) are going to unleash two+ years of pent-up travel demand in both business and tourism that we see taking

several years to recede.

Exxon (NYSE: XOM) It's Time To Buy The World's Largest Integrated Oil Producer

With oil prices on the rise and the energy sector set to profit from it the time to buy Exxon, the world's largest integrated oil producer, is now. Shares have been making a nice comeback from multi-year lows but we see 50% in gains for the stock on top of the very attractive 5.5% dividend yield. We are also anticipating a dividend increase as well as share buybacks that could lift the stock well above its 2014 high.

The analysts are expecting the company to produce about 7% revenue growth next year and we think that grossly underestimates the market. The forecast for demand alone is enough to account for that target and there is the trajectory of the oil price to consider. While demand and usage are rising so is the price for oil and that is a lever for revenue that should propel Exxon to low-double-digit growth if not growth in the 20% to 30% range in 2022. It is our opinion that WTI will trade above $100 at some point in 2022 and it may sustain that price for some time.

More importantly, the company is expected to produce significant earnings growth and that is backed up by CEO commentary as well. The analysts are predicting a more robust 17% increase in earnings for next year that again, we think is underestimating the business. Company CEO Darren Woods recently came out to say the company was back on track to hit goals it had set in 2017 ie that it would double earnings by 2025 and we think they'll come in well ahead of target. He also made comments to the effect Exxon Mobil was able to deliver growth with less capital and was ready to start using its excess

capital to buy back shares, yet another catalyst for stock prices.

Buy Chevron (NYSE: CVX) Too, And Own Half The XLE Energy Sector ETF

For those thinking they can just buy the XLE energy ETF and get the whole energy industry in one chunk consider this. Exxon and Chevron account for nearly 50% of the ETF and together have a dividend yield that is 200 basis points better than what it pays. In our view, this is a win-win in a sector we want to own.

Chevron pays about 4.6%, about 90 basis points less than Exxon, but it comes with an equally attractive outlook for distribution growth. While the company has only been increasing for 3 years compared to Exxon's 20 the payout ratio is a little better and the outlook for earnings is just as good.

The analysts are expecting good numbers from CVX relative to the broad market but the consensus is still shy of the group and Exxon in terms of strength. The consensus for revenue is running near 6.0% with EPS slightly stronger at 13% providing an opportunity for either the analyst to up their targets and drive price action or for the company to outperform consensus and drive price action.

Analyst John Rigby of UBS recently upgraded the stock to Buy from Neutral along with raising his price target for oil in 2022 and 2023. In his view, the price of Chevron does not yet reflect the upcycle in oil and we agree. He put a price target of $125 on the stock but we think that is a cautious estimate. With oil prices rising and dividends and buybacks on the horizon, we see shares of CVX moving up above $130 to set new all-time highs. The consensus sentiment on Chevron is a Buy with an average price target near $122 and a high price target of $150. We expect to see both the consensus and high price target move higher over the next several quarters.

Caterpillar(NYSE: CAT) Is Building The World

The outlook for Caterpillar in 2022 was robust before the infrastructure bill was passed and has only gotten stronger since. The company is at the root of most things industrial as it is the maker of much of the world's heavy machinery and there is demand at all levels. The analysts are expecting to see revenue growth in the low teens for the year and we see upside potential in the numbers. The better news is that earnings growth will double revenue growth which is very good news for income investors.

Caterpillar is a Dividend Aristocrat with 28 years of consecutive increases under its belt and the capacity to extend that streak another 28 years. The payout ratio is still very low at 43% of the 2021 consensus for earnings and 35% of the 2022 consensus with no red flags on the balance sheet. The company is net debt but cash flow is strong and debt is well managed. The leverage ratio is well below danger levels at 2.8X FCF and is expected to fall considerably in the coming year. The only negative, if it can really be called one, is that distribution growth has been sluggish. The distribution CAGR is running about 6% so we don't expect big dividend increases, just steady and reliable ones.

One of Caterpillar's many appeals is its forays into green technologies. Among them is a partnership with Newmont Mining to produce an end-to-end mining system that is both fully automated and emission-free. If successful, even in part, it would open up new avenues for growth in a world increasingly focused on environmental impact. The first autonomous/EV mining vehicles are expected out in 2026 and this is not the only green project.

J.B.Hunt (NYSE: JBHT) Is Delivering Results

J.B. Hunt is the first of several stocks to make a repeat appearance on our Best Stocks To Own list. First highlighted for 2021, the stock is up more than 50% and headed higher if demand for shipping, freight, and trucking services are any indication. While business has been impeded by the shortage of truck drivers, we see that issue fading and helping to drive revenue growth in the coming years.

In the near term, rising cost per load is offsetting a decline in volume related to the driver shortage and driving revenue growth. Longer-term, an increase in drivers will cut into revenue per load but enable greater capacity, more than enough to offset any differences. In the mid-term, rising prices and increasing capacity are a recipe for leverage in both revenue and earnings and J.B. Hunt itself sees higher costs lingering well into 2022. We think it could take even longer for backlogs within the

economy to subside and demand to recede and there are others more bullish on the trucking industry than we.

Analyst John Scarola of CFRA Research is among the most bullish on the stock and the industry. In his view, the driver shortage could extend into 2023 and for rates to continue climbing rather than recede back to historic norms. Regardless, it is generally accepted within the industry that higher pricing relative to pre-COVID levels are here to stay.

J.B. Hunt is another safe, steady dividend growth if one with a less-than-average yield. The stock tends to yield less than 1.0% but it is among the safest payouts you will find. The 2021 payout is less than 18% of the company's earnings and the balance sheet is strong. We aren't expecting robust dividend increases here, either, but we are expecting annual increases to go on for at least another 17 years at a mid to low-single-digit rate.

The Kraft Heinz Company (NASDAQ: KHC) Is In A Major Reversal

The Kraft Heinz Company is the second stock on our list to make a repeat appearance and for good reason. The company is in the midst of a major turnaround that has several more years to play out. We view the stock as a high-quality turn-around story emerging boldly from the dark times and trading at a deep value and high yield relative to the group.

Some of the important catalysts that have happened over the past year include the resolution of an investigation by the SEC into accounting practices by former executives. That settlement shuts the door on the past, so to speak, and leaves the new, leaner company, free to pursue a growth strategy. Part of that strategy was to sell off the natural cheese business, a deal that was recently approved and will provide ample capital to shore up the balance sheet and pay for growth.

Looking at The Kraft Heinz Company from the value perspective, the stock trades at only 12X the consensus for 2021 earnings and 13X the consensus for 2022 earnings making it a deep value any way you look at it. The broad market S&P 500 has been trading in the range of 21X to 22X its earnings while the highest-valued stocks in the Consumer Staples sector are trading closer to if not above 30X earnings.

Looking at The Kraft Heinz Company from the yield perspective, it is among the highest-yielding of the Consumer Staples stocks as well. The stock has been yielding above 4.25% for the last few months and we see the payout holding steady if not the yield. The company hasn't made any dividend increases in years and we aren't expecting one soon but we do see a return to increases at some point in time. What we also see is a multiple expansion in tandem with revenue growth from continuing operations, revenue growth from acquisitions, and balance sheet improvement, and for that to begin in early 2022.

In our view, shares of Kraft Heinz could rise as much as 170% over the next few years and that is not counting the dividend or any share repurchases that may arise. The best news, for long-term oriented traders, is the company registered a secondary offering that has shares down at the lowest level since the reversal began. The offering is not dilutive and does not benefit the company. The sale was made by a large shareholder and does nothing to alter the outlook.

Canada Goose (NYSE: GOOS) Is A Comfortable Growth Stock

Canada Goose is the first of our picks in the consumer discretionary sector and one we think will provide solid gains long into the future. The company is not only a top-tier brand but is also a leading ESG company setting the standards for others to follow. ESG aside, the company has been working hard over the past few years to not only grow the brand but to shift more towards DTC and eCommerce and those efforts are paying off nicely.

Unlike others in the retail space, Canada Goose gave no mention of supply chain hurdles in its Q3 2021 report but instead mentioned a "unique supply chain flexibility" that has it set up to outperform in 2022.

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