Shah Gilani's 2018 Capital Wave Forecast, Part One

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.

There are a confluence of positives for markets that should continue to propel stocks higher in 2018.

Here's how to play 2018 markets to your advantage...

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 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%.

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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 towards acquisitions. But tens of billions, per company, will go towards 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...

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AMC Networks Inc. (Nasdaq: AMCX) has cable television brands, domestically and internationally, that work well together but 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 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. (Nasdaq: VIAB) 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 price/earnings 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 it's trading for, and closer to 100% more if it was broken up and sold piecemeal.

Discovery Communications Inc. (Nasdaq: DISCA) 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 looks like it's about to break out above $22, and 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 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. Earnings per share 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.

Facebook Inc. (Nasdaq: FB) 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.

The other sleeping giant that's woken up to the amazement of the world is Amazon.com Inc. (Nasdaq: AMZN). 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. Both stocks should see strong moves in 2018, both in the neighborhood of 30% to 50% upside.

Here's What to Look for Next

I'll be back soon with part two of my Capital Wave Forecast for 2018. I'll cover the effects of flush banks in mergers and acquisitions, how the U.S. dollar will fuel overseas earnings, and the closest way to profit from pure momentum.

And, of course, I'll give you a peek into six more plays that I'll be looking at in 2018.

For part two of Shah’s Capital Wave Forecast, click here.

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The post Shah Gilani's 2018 Capital Wave Forecast, Part One appeared first on Wall Street Insights & Indictments.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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