Valuations have certainly come down considerably. Corporate profits are likely to continue to grow rapidly relative to the norm, though not as well as in 2018. Dividend yields are very competitive, especially with the recent retreat in interest rates and because the data don't [call for] additional hikes. I think rates will remain at very low levels.
What's the pivotal issue concerning the market?
It's all about what's been priced in. If you've priced in a recession and we get just mediocre growth, that's good. A decent chance of a recession has been priced in; so if we don't have a recession — and I don't see one happening — then stocks will go significantly higher.
What do you perceive about investor behavior right now?
If anything, I see investors being far too pessimistic about stocks. As I've said, I believe the stock market has already discounted a modest recession — and I just don't see the bad news coming to fruition. But even if there were a modest recession — and, again, I'm not predicting one — I think stocks would be higher. There's a 75% or 80% chance the economy will be much better than people have built into their model. Stocks, therefore, are looking very attractive.
Many people aren't in the market now because of 2018's terrible Q4. What does that signify?
There's a lot of money that's scared, nervous and parked in safer assets. That's another reason to be optimistic about 2019. If China and the U.S. "make nice" on trade or somehow Donny [President Donald Trump] and Congress get along, it could lead to an even bigger rally.
What are your top stock picks for this year, in alphabetical order?
Apple (AAPL) — Of late, Apple has been a dog. It lost a third of its value from three months ago till the present. I'm of course aware that there's concern about a tariff war and Apple's business in China and that Apple had a big revenue warning out last week — which caused us to reduce our target price. But we think Apple is worth more than $200 a share because earnings expectations are still for growth going forward. The company has a fantastic balance sheet loaded with cash, a very inexpensive valuation that's discounted substantially — its P/E will be going down to the 10 to 11 range. It has a dividend yield of 2%.
But what about all the negative buzz regarding the iPhone?
Apple is more than just the iPhone. There's still plenty of growth potential for the company — and you don't have to pay for it. That's the amazing thing. This is a consumer electronics giant that should be trading for much higher valuation. It's been trading at a discount to the market. Long term, I think it can grow faster than the market.
Cummins (CMI) — A maker of diesel and natural gas engines. As global commerce has emerged from the Great Recession, there's been strong demand for trucking, and we don't see that going away anytime soon. Cummins is trading for a P/E ratio of 9; it has a dividend yield of 3.3%. Earnings are expected to continue to grow. They sell around the world and [enjoy] strong demand in the U.S. International business will fluctuate, but we see growth overseas, especially in emerging economies as they continue to move up the economic "food chain."
FedEx (FDX) — Shares plunged [in December 2018], stoked in part by renewed fears that growth of Amazon's cargo-plane fleet would steal significant portions of business from the company. We think the threat from Amazon is unfounded. Amazon doesn't fly any [of its own] planes; it buys capacity from Air Transport International. FedEx has a fleet of more than 650 planes. So Amazon's growing from 40 to 50 planes is just a drop in the bucket. Further, I don't see drones soon replacing FedEx delivery guys! We like FedEx's strong balance sheet, modest dividend yield and its position as an industry leader. Our target price is now $321.
International Paper (IP) — A maker of packaging materials, such as corrugated boxes. Printing has fallen, but the company's box [business] has risen substantially. This has more than offset the drop in paper sales. We live in a world where everybody is ordering from Amazon and other online merchants. The stuff has to [be shipped] in a box, and International Paper makes boxes. So this is a pick-and-shovel play on e-commerce, which is the company's growth catalyst. The stock is trading for a single-digit P/E ratio — less than 8 times forward earnings. At over 4.5%, the yield is big. They're still making $5 a share and are likely to make more than that in the next several years.
J. M. Smucker (SJM) — Food stocks have been absolutely crushed even though they're supposed to be defensive. But Smucker would be a great name to own whether or not you think there's a recession coming. They make more than just jams and jellies: coffee, peanut butter, juices, pet food [etc.]. Today, Smucker is trading at a P/E ratio below 12. Historically, it's traded for more than 16. Because it's lost more than a quarter of its value and is trading well below its historical metrics, Smucker is a recipe — pun intended — for success. It has a dividend yield of 3.5%.
JPMorgan Chase (JPM) — There's been concern about the shrinking spreads between lending and what's being paid to attract money. However, JPMorgan continues to churn out massive profits year after year. They have what Jamie Dimon [chair-CEO] likes to call a "fortress balance sheet." The nice thing is that, generally, as interest rates rise, the amount of money financial companies can make goes up. JPMorgan is trading at 10 times estimated earnings, which we consider to be very low for a premier financial player. The dividend yield fell to 3% this year.
MDC Holdings (MDC) — A relatively small homebuilder that's in nine states but including [populous] California, Arizona and Florida. The company has remained very profitable. And [over the years] it has paid a very generous dividend yield. I like having exposure to the housing industry: I like this company because it has very conservative management and a commitment to the dividend; the yield now is about 4%. The stock is trading for around 8 times earnings. Yes, the rising interest rate has impacted the ability to get mortgages, and mortgage rates have increased. But on the other side of the coin, the economy is strong, wage growth is increasing and consumer confidence is certainly elevated.
Walt Disney (DIS) — The quality of Disney assets and its ability to take a character created for a movie and monetize it via theme parks, Broadway shows and merchandising is incredible. This is a machine that will continue to churn out substantial profits and much greater market growth as we go forward. Right now, it's trading for a P/E ratio of 15, which is well below its historical average in the 18 range. The dividend yield is 1.6%. We'd like that to be higher; but with Disney, we're able to buy a blue-chip company that's on sale.
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Value investor John Buckingham. 
