The 2018 Guide to Wealth 10 Ways to Lock in Profits in 2018
I’m Shah Gilani, and I’m no stranger to helping other people make money.
After years as one of the most successful traders with a seat on the Chicago Board of Exchange, I went on to become a seasoned veteran of investment banks and trading houses. In my work as a hedge fund manager, I perfected my techniques of identifying the best opportunities in the markets and using precise strategies to capitalize on substantial profits.
Now, I help my readers make money by teaching them how to use the same techniques. I want to do everything to make sure you’re tapped into the most profit potential in 2018.
Making money in 2018 will be as easy as reaching out your hand and grabbing it. There are too many things going well in the markets for that to not be true.
Now, that’s not to say that there won’t be a change in the wind here and there. There will be headwinds that will slow the rally, some hot stocks will see their propellers sputter and die, and there will be moments when you’ll worry your parachute won’t open.
But in the grand scheme of things, momentum is an unstoppable force that will not be ignored. The factors that are adding to the momentum are greater than the factors that would slow it.
Recognizing the major investing themes that are ready to go and riding their momentum is the only way to go in 2018.
Here’s what is moving stocks in 2018, and how to capitalize on these foresights…
The Trend Is Your Friend
While there’s major money to be made by correctly picking winners and losers, that can be the hardest thing to do with stocks.
The easiest, smartest, and most financially rewarding way to play stocks and markets is by riding trends.
That’s because trends tend to have longevity, and various momentum boosters can drive them faster and further in the direction they’re going. We see this with stocks that have been trending up since March 2009, including the momentum boost in 2017 that few investors saw coming – or believed – even as markets reached higher highs again and again.
As a result, investor sentiment is at all-time highs.
Market volatility, as measured by the VIX, has been scraping historic lows for the past 12 months.
Correlation between sectors and asset classes, which flash warning signs when high, has been noticeably low. Over the last three months, correlation fell to 18% between S&P sectors; that’s close to the lowest figures on record, according to research by Credit Suisse.
And economic and equity growth has been global.
The confluence of these positives for markets should continue to propel stocks higher in 2018.
The 2018 Tax Cut Boost
On top of all the positives and momentum-driving factors propelling stocks higher, prospects for corporate tax cuts are only partially baked in.
Stocks will get a substantial boost in 2018 from enacted tax cuts.
Analysts estimate that the earnings per share (EPS) for the S&P 500, projected to be $141 in 2018, will get an additional $10 per share boost if the top statutory rate is reduced from 35% to 21%.
More importantly, big tech stocks that are leading benchmarks, ETFs, and all passive investment funds higher will be repatriating hundreds of billions of dollars from overseas accounts into the United States when the one-time, 15.5% repatriation tax rate draws hundreds of billions of dollars back home.
Some of that repatriated cash will go into R&D, and a lot more will go toward acquisitions. But tens of billions, per company, will go toward special dividends and massive share buyback programs, dwarfing all else. This will further boost the share prices of the biggest momentum stocks fueling indexes and passive investing funds higher.
There are more than a few stocks that are going to benefit from these trends. I expect a lot of merger and acquisition activity in 2018, especially in media, specifically for content and to generate scale.
My favorite media companies right now are…
AMC Networks Inc. (AMCX)
AMC has cable television brands, domestically and internationally, that work well together, but they would work even better if split up and parceled out to other media giants. Its direct broadcast satellite assets are lucrative and currently being eyeballed by several companies. AMCX is cheap, trading at an 11 price-earnings (PE) multiple. The company throws off plenty of cash flow, which also makes it interesting to private equity shops. I expect AMCX to rise substantially in 2018.
Viacom Inc. (VIAB)
Viacom operates as a media brand worldwide. It creates television programs, motion pictures, short-form content, applications, games, consumer products, social media experiences, and other entertainment content. It’s loaded with assets, and its stock is cheap – as in, very cheap. Coming off of its lows and sporting a 6.6 PE multiple makes it dirt cheap. You could get paid a dividend yielding 2.6% just to sit on this company. The company has over $11 billion in debt, but a staggering almost $6 billion in levered free cash flow. Viacom is going to be on several menus in 2018 (including mine) because it’s worth at least 50% more than its trading for – and closer to 100% more if broken up and sold piecemeal.
Discovery Communications Series A (DISCA)
Discovery Communications is loaded with top-name network brands, far too many to list here. It also has a robust education set of businesses that extend beyond network offerings. DISCA is another cheap company trading at an 11 PE. Like Viacom, it has good cash flow and even better profit margins at 17%, currently the best in the TV networks business. Discovery’s stock is cheap, too. It has come off its lows at $16 and just broke out above $22, and it will probably be heading into the $30 to $40 range. If there’s an offer for DISCA up there, we’ll see a huge return on this stock in 2018.
Earnings Fuel Stock Gains
Double-digit earnings growth in the S&P 500 drove stocks higher in 2017 and should continue to fuel their rise in 2018.
When fourth-quarter 2017 earnings start coming out in mid-January, they’re likely to be even better than the Q3, which saw an across-the-board earnings growth of almost 11%.
U.S. companies included in broad indexes averaged 6.4% earnings growth in Q3, but the overall growth rate jumped to double digits in benchmarks because of spectacular earnings growth at tech companies. According to FactSet, tech stocks averaged 20% earnings growth in Q3.
Analysts expect earnings in Q4 to be even better, as baseline conditions remain favorable, and companies typically have robust sales in Q4 driven by weather, holidays, and year-end contract signings.
Earnings globally are growing at near-record rates. EPS in a 20,000-stock global index maintained by FactSet averaged $9.69 in the third quarter of 2017. That’s up 19% year over year. The market cap of the 20,000 companies has risen by $24.7 trillion in 2017; that increase is more than the entire index was valued at in 2009. Two big winners were financials, which averaged 8% earnings growth, and electronic tech stocks, which saw 30% earnings growth across global markets.
Companies with earnings growth momentum will continue to lead markets higher in 2018.
I have two favorite earnings growth juggernauts. Both companies play perfectly into the 2018 narrative, feeding off tax cuts, global growth, and especially growing customer bases.
Amazon.com Inc. (AMZN)
The other sleeping giant that’s woken up to the amazement of the world is Amazon. The company got blasted for how expensive its stock was when it wasn’t making any profits. Well, it is now. Earnings at AMZN have nowhere to go but up. Unless AMZN is broken up in an antitrust crusade (not likely under a Republican administration), it’s only going to expand its reach, earnings, and profitability. Amazon is the trillion-pound gorilla in the room.
Facebook Inc. (FB)
Facebook now has over 2 billion users. Think about that reach. As FB grows, it’s going to channel all kinds of services. Specifically, I believe healthcare is going to make FB unstoppable and a trillion-dollar company, as well as selling ads by the tens of billions. There’s no stopping FB. It is, in my opinion, the sleeper that’s going to overtake almost everyone.
Both stocks should see strong moves in 2018, each in the neighborhood of 30% to 50% upside.
Banks Flush with Capital
When CVS Health Corp. (CVS) announced its intention to buy Aetna Inc. (AET) for more than $69 billion in early December, Goldman Sachs and Barclays each committed to pony up $20 billion in cash towards bridge financing to close the deal and get in on selling bonds as part of the permanent financing the deal requires.
It used to be that only JPMorgan Chase & Co. (JPM) was big enough to plunk down $20 billion or more to facilitate a deal. With Goldman and Barclays proving there are more flush banks out there, deals and mergers like CVS’ won’t face any financing impediments in 2018.
Replacing bridge money with permanent financing is all about selling debt securities. Whether debt financing facilitates M&A deals, refinances existing debt or expansion plans, or generates cash for buybacks, there’s a healthy appetite globally for debt securities from investment grade to junk.
Financially flush big banks have the ample resources to facilitate economic and market growth in 2018.
JPMorgan Chase & Co. (JPM)
If you want a big bank that weathers everything it manages to foul up on its own, manages all its regulators and international regulars, and is the biggest bank in the United States (by assets and earnings this year), this is it. JPM knows how to make money, and it’s poised to have an excellent 2018. Interest rate hikes are fattening its net interest margins, which we’ll see more of in 2018, and loan demand and deal-making are going to ratchet up globally this year. JPM’s not going to miss a beat on any front. A trending global economy and what should prove to be a more volatile year for commodities and currencies will add to JPM’s trading profits. The stock should advance handsomely in 2018, by at least 30%.
Customers Bancorp Inc. (CUBI)
On the small end of banking, I like little CUBI. This little bank’s stock is cheap right now. But, it’s well-positioned for a pop in 2018. It generates good cash flow and is seeing its margins improve. It’s been left for dead, but there are some surprises ahead for CUBI if it makes itself more attractive in the market. I’m playing this little bank as an acquisition target. It’s cheap and would give larger Pennsylvania, along with other regional banks, access to its profitable markets. CUBI could easily rise 30% on its own, but much more if it’s to be acquired.
The cheap U.S. dollar has been helping domestic exporters and companies with overseas earnings.
Strong global growth has propped up foreign currencies, including the Japanese yen, the Chinese yuan, the Swill franc, and the euro. As these currencies rose in value relative to the U.S. dollar over the past two years, exports out of the United States became cheaper, fueling sales and earnings gains for exporters.
At the same time, overseas earnings of U.S. companies, especially big tech companies, get a boost when sales made in foreign currencies are translated into cheaper dollars in quarterly earnings reports.
Given global growth, less reliance on petrodollars, the ascent of the euro, yen, and yuan, an undervalued U.S. dollar should continue to support exports and earnings growth in 2018.
Microsoft Corp. (MSFT)
When it comes to global growth and taking advantage of currency exchange rates, I love Microsoft. MSFT and ORCL are huge global players, and they’re only getting bigger and more profitable. MSFT’s stock is on a tear, and that’s coming from me, who has been a fan since it broke out of the mid $20s. I remember telling Stuart Varney, who owns the stock, at Fox Business Network that it was going to $50 back when it hit $29. And when it got to $45, I told him I was changing my price target to $80. Well, it’s more than that now. And it’s going to keep rising; it has momentum behind its cloud business, its great new hardware products, and the enterprise software that companies around the world love. MSFT’s heading to $100, but I think it has a lot more ahead of it. In 2018, it could get to $125 or more.
Momentum as a Three-Letter Acronym
The most powerful force driving upward market momentum is more buying of the stocks and indexes that are going higher.
That’s happening at an unprecedented rate thanks to exchange-traded funds (ETFs).
Index ETFs, driving the passive index investing trend, saw record inflows in 2017.
Sponsors have been introducing new funds at a regular clip, with most of them holding at least some of the top-performing stocks of the past 12 to 18 months. Those top-performing stocks have been driving the benchmark indexes they’re a part of, the ETFs that hold them, and they are hedge fund and institutional desk favorites.
Index funds, index mutual funds, and index ETFs now hold 17% of all the shares of companies in the S&P 500, according to FactSet.
As long as markets, measured by benchmark indexes, continue to rise, investors will keep pouring money into index funds, fueling what looks like a perpetual momentum machine.
There are major narratives I am expecting in 2018. If the U.S. GDP expands, if wages start rising, if consumers keep spending the way they’re spending this holiday season, the tax cuts will add to everyone’s bottom line and add to the momentum the market’s enjoying.
Because of so many passive investors buying so many index funds, the market sector in 2018 that’s going to benefit most will be U.S. small-cap growth stocks.
iShares Russell 2000 Growth ETF (IWO)
This is the best ETF to ride that trend. IWO enjoyed a great 2017, like all the indexed ETFs. If everything goes according to the narratives, small-cap growth should lead all other benchmarks in 2018. How high IWO can go will be a function of momentum in 2018, and that means it could revolutionize your portfolio.
Is There Anything Standing in Our Way?
Upward momentum in U.S. equity markets has been additionally supported by improving economic conditions domestically.
The unemployment rate, at 4.1%, remains steady at 17-year lows. Unexpectedly strong employment gains late in the year, coming on the heels of two devastating hurricanes, indicates further positive momentum in hiring.
Wage growth, at 2.5%, is finally showing signs of picking up.
Inflation, measured by the price consumption expenditure (PCE) deflator, remains well below 2%.
Overall economic growth, as measured by GDP, has been above 3% for the past two quarters and is expected to rise to 3.5% to 4% in Q4 of this year.
Positive momentum driving the economy higher should drive equities a lot higher in 2018.
My equity forecast for 2018, if all the positive momentum remain intact, is for the S&P to end the year at 3050, up 15%, and I expect the Dow Jones Industrial Average to end 2018 north of 28,000.
That’s if all the momentum levers (that are being pulled to near perfection today) continue to operate in 2018.
Because there’s always something out there that can go bump in the night, and with all the good everyone expects in 2018, any little bump that surprises investors can manifest its own momentum slipstream, so it makes sense to have on a macro-disruptor play.
CBOE Volatility Index (VIX)
For that, I like playing a spike in the VIX. The way to do that is by buying cheap calls on the VIX (I like the 18 to 20 strike price range, two to three months out. As those calls get close to expiration, I’d roll them out another couple of months and keep rolling them out as each comes close to expiration. That way, if some bump turns into a black hole, you’ll at least make a ton on your VIX calls.