Should Investors Focus on Individual Stocks in 2015?

Investment StrategyMy Investment Strategy for 2015

The one thing that the bears have going for them is that eventually, they will be proven right. The stock market has risen tremendously over the last few years, breaking out of its previous cycle, which I view as 12 full years of recovery from the technology bubble and financial crisis.

With the main stock market indices having gone up unusually fast, it’s important now to detach expectations for the “market” and take a closer look at single positions and portfolio risk. Simply put, investors need to focus on individual stocks in 2015 and consider the amount of risk they can take.

All potential outcomes are possible with stocks near record-highs; a material price correction (10% to 20%) could happen at any time on any catalyst, and it would be healthy for the longer-run trend.

Corporate earnings should be pretty good over the next two quarters, padded by the low cost of capital and, to a lesser degree, weaker oil prices (save for the energy sector). But I do believe that the expectation of reasonably good earnings is already priced into share prices.

What to Focus On When Choosing Stocks

After two strong years of stock market gains, dividend income remains a very important component of total expected return in portfolios. Even if you don’t require dividend income but are looking for capital gains, don’t rule out dividend reinvestment as a stock market strategy for longer-term holdings; it works well over time and, in many cases, at lower investment risk. Individual stocks to watch in 2015 for this particular investment strategy include 3M Company (MMM), Kinder Morgan, Inc. (KMI), Microsoft Corporation (MSFT), PepsiCo, Inc. (PEP), Union Pacific Corporation (UNP), and Johnson & Johnson (JNJ).

Good indicators for overall stock market direction include the Dow Jones Transportation Average (confirmation of trend), the NASDAQ Biotechnology Index (speculative fervor), and the amount of initial public offerings (institutional investor sentiment). But as I mentioned earlier, the stock market shouldn’t be the main focus for investors this year—individual stocks should be. So the most important guide for equity investors in 2015 is what underlying businesses say about their operations.

With economic stagnation in other mature economies, the stronger U.S. dollar is going to have an effect on corporate reporting, especially if/when the Federal Reserve moves short-term rates higher.

The first three quarters of 2014 saw large U.S. corporations produce good earnings on modest sales growth. Overall earnings expectations for the fourth quarter of 2014 have come down, but a great deal of this has to do with the energy sector specifically.

With reduced expectations for the stock market this year, I still view the prospects for rising dividends in individual stocks a plus, especially considering the strength of large-cap balance sheets. (See “Business Cycle to Favor Companies Like Microsoft in 2015?”)

Corporate reporting in the most recent quarter was quite optimistic for this fiscal year. For a number of quarters now, countless large-cap businesses have been able to increase their selling prices without affecting demand. But good corporate results won’t necessarily make the stock market go up this year; it’s already done so in anticipation. And that is precisely why investors need to focus on what individual stocks are saying in 2015 and consider risk before buying any investment.