This year has been a fantastic one for stock market investors. All of the major indexes have advanced over 20%, far surpassing the historical average of just less than half that pace. But three of our Motley Fool investors believe they've found stocks that -- while they've enjoyed a profitable 2017 -- are still just getting started.
This bank is up 31% and management still thinks it's cheap
Matt Frankel (Bank of America): The financial sector has been one of the top performers in the 2017 market rally, and Bank of America has been one of the big standouts. Not only is the bank up by 31% this year, but it's up by more than 160% since bottoming out in February 2016.
Despite this performance, Bank of America still looks attractive from a long-term perspective. For one thing, the recent gains are more than justified by the bank's performance. Revenue has steadily risen and expenses are down thanks to the bank embracing new mobile and online technologies. The bank has become much more efficient, and even more importantly, is producing consistent profitability that is beginning to approach the industry benchmarks for return on equity and return on assets.
In addition, economic catalysts could add billions to the bank's profits in the coming years. Bank of America's effective tax rate is above 30%, so it could be a major beneficiary of tax reform. Plus, the Federal Reserve has started to raise interest rates, and is expected to continue to do so for another few years, which should lead to margin expansion for banks.
Finally, consider that Bank of America recently added $5 billion to its current-year buyback authorization, bringing the total amount of stock it plans to buy back between July 1, 2017, and June 30, 2018, to $17 billion, more than triple last year's amount. The aggressive buybacks are a solid indication that management still considers the stock a compelling value, even after the big rise in price.
A solid play on continuing growth in China
Brian Stoffel (Tencent): So far this year, Tencent has already doubled. But I still think we could be in the early innings for a Chinese megapower. For those unfamiliar, Tencent has a number of businesses that are very popular in the Middle Kingdom. It is the largest gaming company in the world, the owner of WeChat (the most popular app in China), and a major source of advertising inventory for Chinese companies.
With a market cap near $500 billion, you'd think that the days of heady growth would be coming to an end. But you'd be wrong -- sales increased 61% last quarter. And while all three of the segments mentioned above performed well, there's a hidden kicker for investors: Tencent actively invests seed money in promising new start-ups.
These investments include some bigger names you are probably familiar with: The company owns 5% of Tesla, 18% of JD.com -- the "Amazon of China" -- and 21% of the leading car-buying platform in China, Bitauto.
The network effects of WeChat and popular multiplayer gaming sites provide an enviable moat, while these "other" investments provide opportunities for Tencent to noticeably move the revenue needle forward.
A surging shoe company
Tim Green (Skechers): Skechers isn't a very exciting company. It sells not-very-exciting shoes, but the stock has been anything but boring in 2017. Thanks mostly to a surge following its third-quarter report in October, Skechers stock is up about 55% year to date. And based on its recent results and valuation, the rally may not be over.
The growth story for Skechers revolves around its international business. Its U.S. business is doing fine, with wholesale revenue up 1.4% year over year in the third quarter, but the international business is booming. International wholesale revenue soared 25.7% in the third quarter, and the global retail business posted 3.1% comparable sales growth. This growth, along with a tax benefit, led to a 40% jump in earnings per share.
Analysts expect Skechers to produce $1.71 per share in earnings this year, putting the price-to-earnings ratio at about 22. If you back out the net cash on Skechers' balance sheet, which totaled $719 million at the end of the third quarter, this ratio falls to about 19.6. That's not an unreasonable price to pay for double-digit earnings growth, assuming Skechers keeps firing on all cylinders.
Skechers stock may not soar another 50% next year, but it's not too late to buy the stock.