2019 has been an outstanding year for the markets. Through Dec. 20, the S&P 500 climbed an incredible 27% year to date. In the same time frame, the Dow jumped 22% and the Nasdaq popped an incredible 33%.
A blind squirrel could have found success in the market this year. Throw a dart, and 20% returns were in the bag.
Unfortunately, it won't be that easy in 2020.
While a passive investing approach was successful in 2019, the skilled "stock pickers" will be the winners in the coming year.
Investors would be unwise to assume a rising tide will continue to lift all boats.
Value investors have underperformed not just last year, but for the last few years. But in 2020, value investors will likely be rewarded as the market churns.
Already, we see wealthy investors selling large portions of their stocks in favor of cash.
That's an unwise strategy.
Conditions are perfect for those seeking value stocks.
The question is which stocks will deliver super performance at a time of peak valuations.
It will not be as easy as 2019, but double-digit returns are possible in 2020.
It's not unreasonable to think the major averages will hit their historical average returns of 6% to 8% for the year. But we want to do better than that.
Those owning the right stocks should be able to double those numbers at least.
The key is something I adhere to passionately. Own stocks with growing earnings that greatly exceed their earnings multiples.
The best source for identifying those types of stocks is the Money Morning Stock VQScore™ system.
Just in time for the new year, here are my five favorite stocks to buy for 2020...
Top Stocks to Buy for 2020, No. 5
Phase one of a new trade deal with China is complete. Soon the fracas will be a distant memory. Sure, the damage has been done, especially within the steel sector, but now investors can focus on the fundamentals.
Analysts expect steel fabricator Allegheny Technologies Inc. (NYSE: ATI) to grow profits by 41% in 2020. At current prices, shares trade for only 17 times current-year estimated earnings.
Despite the trade dispute and tariffs with China, Allegheny shares held up relatively well in 2019. Still, the stock lagged the market horribly last year, and it actually dropped 7% in 2019.
That will not happen again in 2020.
Top Stocks to Buy for 2020, No. 4
In searching for earnings growth at the cheapest price, technology is always a great place to look. Shares of Chinese Internet streaming content company YY Inc. (NASDAQ: YY) fit the bill perfectly.
The stock was a victim of the trade war and struggled in 2019. This despite analysts expecting the company to grow profits by 31% in 2020.
At current prices, shares trade for only 15 times 2019 estimated earnings. That multiple is below the average stock multiple in the market today. 2020 is going to be a banner year for investors in YY as earnings will likely exceed expectations given stronger economic growth in China and the rest of the globe.
Top Stocks to Buy for 2020, No. 3
Oftentimes, it pays to pick through the wreckage for value stocks. A stock in distress, assuming the future includes fixing the problems that led to the disaster, can be the biggest winner in the market.
Retail and distress have become synonymous. In 2019, shares of At Home Group Inc. (NYSE: HOME) plunged along with many other retail names. Year to date, HOME shares are down more than 70%.
But the fundamentals tell a different story.
Analysts expect At Home to grow profits next year by 13%. That's not huge by any stretch, but it is not the disaster investors believe at the moment. We can exploit that disbelief and buy the stock today trading for only 10 times 2019 estimated earnings. Now trading for near penny stock levels around $5 per share, this one could double in 2020 alone.
Top Stocks to Buy for 2020, No. 2
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It has been many, many years since I have been excited about owning airline stocks. The sector is notorious for disappointing investors. The brutal impact of competition has made operating efficiency a must. Extra fees for ancillary items have helped stem the tide.
Valuations in the airline space are now attractive. Shares of Mesa Air Group Inc. (NASDAQ: MESA) trade for a paltry five times current fiscal year estimated earnings.
Analysts expect Mesa Air to grow earnings by 27% from the current year to the next. Put a 10 multiple on the expected $2.13 per share, and you have a stock trading for $21 per share. With the stock under $10 today, you can see why the VQScore system has given MESA a stop score.
Top Stocks to Buy for 2020, No. 1
With the market at peak valuations, the focus here has been on exploiting valuations of companies' rapidly growing profits. Another point to consider is size. Owning a large-cap stock under the formula of low valuation and high earnings growth is a recipe for success.
In that regard, shares of General Motors Co. (NYSE: GM) are a must buy. Analysts expect GM to grow profits by 33% next year. At current prices, the stock trades for only eight times 2019 estimated earnings.
It is not often you get to buy a large American stalwart like GM at such attractive prices. Add in a 4% dividend yield and the combined return here, and you could be looking at double the market gains in 2020.
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