The turnaround in the Nasdaq Stock Market happened sooner than I expected.
Each March, I write a column about the Nasdaq. A year ago, I wrote that Nasdaq stocks — flailing at the time because of President Donald Trump’s “Liberation Day” tariffs — probably would be a fertile buying ground within three months. The turning point actually came in three weeks, not three months.
Now, I think the Nasdaq Composite Index, which is down more than 4% this year through March 13, will close the year with a decent gain.
The Nasdaq has a dual personality. It is the home of most large technology stocks, and also some 3,000 small stocks.
Small stocks tend to be more domestic and less international — probably a good thing at the moment. And the big tech stocks remain the hub of innovation.
Uncertainty abounds. We are battling Iran and have a nasty trade tiff with China. The U.S. has tariffed — and offended — a large number of countries.
However, corporate profits are terrific, some U.S. taxes have been reduced, and interest rates will come down if the Federal Reserve chooses.
Hence, I predict a fairly normal year, with about a 10% gain for the Nasdaq.
Every March, I recommend a few Nasdaq stocks. Here are five for consideration.
Alphabet
Last year I didn’t include any technology members of the Magnificent Seven among my Nasdaq picks. But these seven ultra-popular stocks constitute about 52% of the Nasdaq Composite Index, even though the index contains about 3,300 stocks.
This year, I’ll recommend Alphabet Inc. (GOOGL), the parent of Google, You Tube, Waymo and Deep Mind. Its after-tax profit margin is more than 32%, and return on stockholders’ equity is about 36%. Though the stock is down about 4% this year, it has appreciated more than 700% in the past decade.
Ingredion
Based in Westchester, Ill., Ingredion Inc. (INGR) makes sweeteners, texturizers and other ingredients for food, beverages and animal nutrition.
One of its products is high fructose corn syrup, which Robert F. Kennedy Jr., the U.S. Secretary of Health, has called “poison” and vowed to eliminate. I don’t think that would be a crippling blow to Ingredion, as the product constitutes less than 10% of its revenue.
Ingredion shares sell for only 10 times earnings, a modest multiple.
Green Brick
I believe there is a lot of pent-up demand for single-family houses. A big obstacle to home purchases has been stiff mortgage rates. It’s iffy, but I think some relief on the mortgage front is fairly likely this year.
One homebuilder I like is Green Brick Partners Inc. (GRBK), which has hedge-fund manager David Einhorn as one of its biggest shareholders. The company carries less debt than many homebuilders, and the stock sells for about nine times earnings.
Farmers & Merchants
Farmers & Merchants Bancorp (FMCB) of Lodi, Calif., serves California’s Mid-Central Valley and parts of the San Francisco area. Many of its loans are agricultural. It has been profitable 24 years in a row.
This company has $14 in cash for every dollar of debt. Wall Street pays no attention to it, and the stock has been a sleepy performer. But I like it at eight times earnings and 1.2 times book value (corporate net worth per share).
Diamondback
I’m bringing back one pick from a year ago — Diamondback Energy Inc. (FANG), an oil-and-gas producer based in Midland, Texas. A year ago, the price of oil languished below $70 per barrel. Amid today’s Middle East turmoil, the price has jumped to about $100.
For the sake of argument, let’s say the United States is able to pry open the Strait of Hormuz, and that oil flows return to normal. Even then, I think lingering uncertainty would keep the price of oil north of $80 for the next year or two.
All of Diamondback’s oil and gas is produced in the U.S., most of it in Texas.
Performance
I recommend a few Nasdaq stocks each year, usually with good results. Not this time. The five stocks I recommended a year ago returned only 5.4% while the Nasdaq Composite Index racked up 24.9%.
A 34% loss in Amphastar Pharmaceuticals Inc. (AMPH) was largely responsible for the soggy performance. Diamondback Energy returned 22% and East West Bancorp 21%. Matson Inc. (MATX) advanced 17%, while Taylor Morrison Home Corp. inched up less than 1%.
Long-term, the picture looks better. My Nasdaq picks have averaged a 17.9% return over 19 years. That beats the S&P 500 at 13.2% and edges out the Nasdaq Composite at 16.5%.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Disclosure: I own Alphabet personally and for most of my clients. I own Diamondback for most clients.