2016 began about as ugly as imaginable for investors, but it sure looks to be ending on a high note. After opening with the worst two-week losses in history to begin a year, all three major U.S. indexes are seemingly knocking on the door of new all-time highs every day. From top to bottom, stocks of nearly all industries and all sizes are taking part in the rally.
But as we head into 2017, talk of the stock market being "overvalued" or "overpriced" could begin ramping up, especially given the voracious post-election rally. While it's often best not to get caught up in this type of short-term thinking, it may nonetheless be the impetus needed for investors to take a closer look at large-cap stocks.
Large-caps, or as the category is traditionally defined, businesses with market valuations of $10 billion or more, have usually earned their large valuations because they have time-tested business models that can withstand fluctuations in the economy and stock market. Given their time-tested business models, large-cap stocks are also prime targets for income investors. With volatility and uncertainty about the continuation of this rally likely to persist into 2017, large-cap stocks could be the stabilizing force your portfolio needs.
Here are three large-cap stocks that could be worth buying in 2017.
Bank of America
Yes, national banking giant Bank of America (BAC 0.39%) has rallied 40% over the past three months, but that doesn't mean it's anywhere near finished.
The biggest catalyst as we move into 2017 is the strengthening economy and potential for further interest rate hikes by the Federal Reserve. Just a few days ago the Fed chose to increase interest rates by 25 basis points to 0.75%. For all intents and purposes, this is still well below the historical average for the federal funds rate. In a recent 10-Q filing, Bank of America estimated that if short- and long-term lending rates were to rise by 100 basis points, it would generate an extra $7.5 billion in net interest income. Of all the money center banks in America, it's by far the most levered to interest rate increases. If the Fed were to stick to its plan of raising lending rates three times in 2017, Bank of America could, in theory, have between $0.60 and $0.70 of additional annual EPS flowing to its bottom-line within the next two years.
In addition to an expected increase in interest-based income, Bank of America has done an exceptional job of reducing its expenses. One of the ways it'll likely do so in the years to come is by shuttering some of its nonessential branches as consumers move into the digital age. Mobile transactions are many times cheaper than in-person transactions, meaning Bank of America has levers it can pull on the expense side of the equation to increase its margins.
President-elect Trump may also be a positive "X-factor" for banks. Throughout his campaign, Trump had called for removing some of the stringent regulations in the banking industry, which for Bank of America would allow for improved flexibility and lower regulatory costs. Couple this with Bank of America finally putting its Great Recession-based mortgage woes in the rearview mirror, and we have what I believe could still be called a cheap bank stock.
For more conservative income-seekers, I'd suggest driving on over to Detroit's finest and giving General Motors (GM 1.28%) a closer look.
The biggest issues that have weighed on GM include pundits' expectation that auto sales in America will peak in the next year or two, the effect rising interest rates could have on auto sales, and the lingering effects of GM's record number of recalls in 2015. Recalls not only hammered GM's bottom-line, but in the near-term they have the potential to hurt its brand image.
On the bright side, General Motors remains a superstar in China, the world's largest auto market. Despite sluggish sales in the U.S., GM's retail sales in China are up 8.5% year-over-year to 3.44 million units. In particular, GM noted that Cadillac sales have grown by more than 50% for five straight months, with sales of Baojun and Buick also hitting all-time monthly highs. China's middle-class is still rapidly growing, meaning GM could see substantial retail sales growth in the years to come, even with China's GDP growth slowing a bit in recent years.
Also, investors may have overstated the customer loyalty issues caused by GM's millions of recalls. In fact, the 20th Annual Automotive Loyalty Awards from IHS Automotive awarded GM the title of brand that customers are most loyal to, unseating Ford's multi-year run at the top. What this suggests is that GM is having few issues crossing the generational gap and keeping consumers loyal to the brand. Repeat customers are more likely to upgrade to higher margin models as they age and move up the socioeconomic ladder, so this is good news for GM and its shareholders.
A minuscule valuation and healthy shareholder return policy is another reason to consider buying GM. After completing its $5 billion share repurchase program a quarter early, GM added an additional $4 billion to its repurchase program in January. What's more, after returning around $6 billion in dividends and share repurchases in 2015, GM upped its dividend in 2016 by another 6%. Even with GM near a 52-week high, it's still valued at less than seven times Wall Street's forecasted profit in 2017, and has a yield of 4%! Those are pedal to the metal numbers for income and value investors.
Teva Pharmaceuticals Industries
Another large-cap stock that I personally can't get enough of lately (it was recently added to my portfolio), and that I believe could be of benefit to investors in 2017 and beyond, is hybrid drug developer Teva Pharmaceutical (TEVA 0.40%).
If you were to look at Teva's 2016 chart, you'd think you were stuck in a Stephen King novel -- it's horrific. Teva has been plagued by slower product launches, which have resulted in modestly lowered full-year sales and profit guidance, and for years it's been fending off the imminent launch of generic Copaxone. Copaxone is an injectable treatment for relapse-remitting multiple sclerosis patients, and it's Teva's leading brand-name drug. As icing on the cake, its acquisition of Actavis from Allergan took longer and required more asset divestitures than expected to satisfy regulators.
While it's had some speed bumps, the future remains bright for Teva. The addition of Actavis vastly broadens Teva's generic drug portfolio, with the company expected to launch 1,500 products globally in 2017. Being the leading generic-drug manufacturer in the world may also give Teva more clout with insurers when it comes to drug pricing, which could help its margins. Furthermore, the combination should result in ample cost savings. By 2019, Teva expects to realize $1.4 billion in cost synergies from its Actavis deal.
Teva has also done wonders with Copaxone. It wound up tying up the launch of generic versions of Copaxone through legal means, while at the same time reformulating Copaxone to be used three times a week as opposed to injected every day with its original formulation. By doing this Teva should be able to retain a good number of its core customers and physicians since the new reformulation is more convenient for the patient. In other words, generic Copaxone entrants aren't a big concern anymore.
Even Teva's earnings warning can be taken with a grain of salt. Though some of its launches were delayed, and sales were softer than expected, at no point did Teva suggest it was because of competition. Teva's management merely guided Wall Street to expect a ramp up in sales in 2017/2018 as opposed to 2016/2017. Not a big deal if you're a long-term investor.
With a 3%+ dividend yield and single-digit forward P/E, Teva looks to be an attractive large-cap stock to consider in 2017.