It would be a bit too much hyperbole to say that 2016 was an incredible year for the stock market. Still, the S&P 500's total return of 12.25% over the past year is nothing to shake a stick at. To some investors, the last several years of strong gains in the market, coupled with a inordinately high valuation across the board -- the cyclically adjusted price-to-earnings ratio for the S&P 500 Index stands at 26.1 -- suggest that there may not be a whole lot of gains left to be had.
That may be true of the broader market, but there are still a fair number of companies that could be looking forward to 2017. We asked several of our contributors to each name a company they think has lots of room to run, and their responses were: music-streaming service Pandora Media (NYSE:P), offshore-rig owner Transocean (NYSE:RIG), gold miner Goldcorp (NYSE:GG), Bank of Internet Federal Bank parent BofI Holding (NYSE:AX), and oil and gas pipeline company MPLX (NYSE:MPLX). Here's a quick rundown of why investors may want to consider these stocks in 2017.
This stock should be music to investors' ears
Steve Symington (Pandora Media): With shares of Pandora Media already up 28% over the past year as of this writing, it might be tempting to stay away from the music-streaming specialist today. But I think Pandora has positioned itself well to continue delivering market-beating returns in 2017.
Shares most recently jumped on Jan. 12, 2017, after Pandora announced it would exceed its previous guidance for fourth-quarter 2016 revenue and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). In a press release, Pandora founder and CEO Tim Westergren lauded an acceleration in the company's core ad business -- an encouraging development, given persistent weakness in the advertising market over Pandora's past two quarters, higher revenue per thousand listening hours ("RPMs"), and continued improvements in bottom-line profitability.
To be sure, Pandora spent the majority of 2016 investing hundreds of millions of dollars in scaling its infrastructure and building new lines of business, notably including the launch of its revamped $4.99-per-month, ad-free Pandora Plus subscription service this past September. By the end of December 2016, Pandora Plus had already generated over 375,000 net new subscribers. And that's not to mention the impending introduction of the Pandora Premium on-demand option later this quarter.
"Now, with all the elements of our strategy in place," Westergren added, "we are in the best position possible to expand our listener base, drive engagement and deliver significant value to all of our stakeholders."
For investors willing to pick up shares even after the pop, I think Pandora stock is a winner that will keep on winning this year.
The forgotten part of the energy market
Tyler Crowe (Transocean): The oil and gas industry had a pretty great year in 2016. Rising oil prices coupled with increased drilling activity have piqued the interest of Wall Street again and have pushed up stock prices considerably. While there is still some room for the industry to run in 2017, there is one subset of the oil and gas industry that was left behind: offshore-rig stocks.
There was a reason for this, of course. Offshore developments are costly, long-tail developments. By contrast, shale drilling is a cheaper and faster-to-market option. Therefore, many producers are electing to dedicate more cash toward shale development, and shelving significant offshore projects for a later date.
This situation can't last forever. The natural decline of older reservoirs and increasing energy demand across the globe mean that we are still going to need to add significant production sources over at least the next decade, and shale probably won't be able to fill that need. Offshore will continue to play a significant role in the oil market, and rig owner Transocean has set itself up incredibly well to handle both short-term struggles and long-term demand in this industry.
With a massive fleet of high-specification rigs capable of drilling in either ultra-deep water or in harsh environments, Transocean has the assets that will be in demand. At the same time, it has shed about 30 of its older, less capable rigs that don't have much of a place in today's market, all while maintaining a reasonable balance sheet. The market hasn't really recognized this yet, and shares still trade at an absurd price-to-tangible-book ratio of 0.37. As the market realizes the need for Transocean's services, it has the potential to make this stock soar.
This gold stock could shine bright in 2017
Neha Chamaria (Goldcorp Inc.): I'll pick a bold, oops, gold stock today and urge you to watch Goldcorp this year. No, I'm not predicting where gold is headed, but the yellow metal thrives during uncertain times. While 2016 was fraught with unpredictable events, Trump's presidency could come with its fair share of uncertainty, and I second most of fellow Fool Sean Williams' reasons to be bullish about gold.
Goldcorp's stock could become a winner as the miner steps up its efforts to turn around its business. Its muted restructuring efforts kept the stock's gains in check last year, but that will likely change in 2017. In fact, Goldcorp has already got the ball rolling -- it just struck an agreement to sell its Los Filos mine in Mexico for $438 million this quarter. The miner plans to put other non-core assets on the block and use the proceeds to deleverage and invest in growth projects.
In an interview with Bloomberg, CEO David Garofalo also revealed plans to partner with other senior miners this year to codevelop big-budget projects. This isn't the first time that Goldcorp has considered partnerships, and the strategy has earlier paid off. The best example is its 40% stake in Pueblo Viejo, the remainder of which is owned by Barrick Gold. Today, Pueblo Viejo is among Goldcorp's top-producing and lowest-cost mines, with all-in sustaining costs of only $488 per ounce during the nine months ended Sept. 30, 2016. Goldcorp is already striving to cut costs by $250 million by 2018.
Today, Goldcorp is among the cheapest gold stocks, with a price-to-book-value ratio of below 1; combined with positive management moves, this could send the stock soaring in 2017.
This bank could be in for a great 2017
Jamal Carnette (BofI Holding): It's no surprise that analysts expect a strong 2017 from financials. Since the end of the Great Recession, banking stocks have underperformed the broader market, as a combination of low interest rates and heavier regulation has compressed banks' bottom lines. However, their post-election performance has seen financials (like the Financial Select Sector SPDR Fund) substantially narrow the gap, as investors hope both headwinds will ameliorate due to President-elect Donald Trump's policies:
One stock poised to outperform in this environment is BofI Holding Inc. The Internet-based bank will benefit along with the broader industry from repeals of Dodd-Frank and other regulations. Additionally, the yield curve has steepened in the wake of Donald Trump's victory. In particular, yields on lucrative 5- to 10-year maturities have increased more than shorter-term yields, which benefits banks' consumer-lending divisions and boosts net interest income:
In the short run, however, BofI may be a bigger beneficiary than other banks due to market expectations. With a P/E ratio of 15, BofI is slightly cheaper than the greater financial market (the Financial Select Sector SPDR Fund's P/E is 16), but BofI grew its year-on-year earnings per share at a 37% clip last fiscal year, so the stock appears undervalued in light of growth and a potentially favorable industry environment.
Another way that a reversal of negativity could provide a boost to the stock is a short squeeze. Currently BofI is one of the most shorted stocks in the Nasdaq, with approximately 40% of the float being sold short. My colleague Jason Hall goes into more detail on the reasons behind the bearishness, but the company has gained roughly 60% over the last year in the face of these rumors. If the company continues to perform, look for a repricing in its value metrics, boosted by short-sellers finally giving up on their bearish thesis.
A major transformation awaits
Matt DiLallo (MPLX): Midstream master limited partnership (MLP) MPLX slumped last year, ending down nearly 12%, due in part to uncertainty about the company's future. What had investors troubled was the timing of future asset drop-down transactions with parent company Marathon Petroleum (NYSE:MPC), as well as the outcome of a strategic review of the refiner's general-partner interest in the MLP. However, both companies recently provided clarity on the go-forward plan, which now serves as a near-term catalyst for units in 2017.
Initially, Marathon Oil intended to drop down assets producing $350 million of annual EBITDA in 2017 to MPLX. It had also planned to drop down the rest of its MLP-eligible assets -- contributing more than $1 billion of annual EBITDA -- by the end of 2019. However, earlier this year, the companies announced the acceleration of this plan. MPLX now expects to acquire assets producing $1.4 billion of annual EBITDA from Marathon by the end of this year. These transactions will substantially grow the company's cash flow, putting it in a position to deliver significant distribution growth.
In addition, Marathon plans to exchange its general-partner interest and incentive distribution rights for more units of its MLP. This transaction should lower the cost of capital for MPLX, because it will no longer need to pay those high fees to its parent, which is a path more MLPs are taking these days.
The net result of these actions will be a substantial increase in MPLX's size and scale, which will put it in a stronger position to drive sustainable future growth. It is a near-term catalyst that could cause MPLX to soar this year.