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Best Stocks

To Own In 2022

WRITTEN BY THOMAS HUGHES

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.

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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.

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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-doubledigit 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.

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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.

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