Why the bull market will stay alive in 2022 — plus 8 cheap stocks for your money now

High level summary: Expect 5%-6% gains for the S&P 500 SPX, -1.94% this year, though Federal Reserve missteps on rate hikes could bring some selloffs. Value may outperform growth, where popular tech and electric vehicle names still seem overvalued. For more on this — and the eight reopening plays, banks and turnarounds these analysts favor — read on. 

Value stocks over growth

Stock market outlook: The rolling U.S. market corrections last year made a lot of investors worried about inflation and Fed policy, and those concerns linger. But John Buckingham, editor of The Prudent Speculator, isn’t too worried about the stock market in 2022 because he expects economic growth to hang in there. “Historically, miserable stock performance has coincided with an earnings recession. So, if there is no expectation of an earnings recession, I don’t see how you can be bearish,” he says.

Buckingham expects global growth and solid earnings gains to push the S&P 500 up 6% this year. But value stocks should do much better, he predicts, since they tend to outperform in a rising interest rate environment with higher inflation. He expects the Russell 3000 Value Index to gain 9%-11%. 

Buckingham cautions that parts of the U.S. market are risky because they are overvalued. He cites popular growth stocks such as Amazon.com AMZN, -1.89% and NVIDIA NVDA, -5.76%, as well as electric vehicle (EV) producers including Rivian Automotive RIVN, -11.22% and Tesla TSLA, -5.35%. Then there is the Omicron wild card. A broad lockdown in the U.S. would delay the recovery. But so far it doesn’t look like this will happen given that the variant seems relatively mild. 

Favorite stocks: Here’s an important proviso. Like the other two newsletter writers below, Buckingham encourages investors to own a broadly diversified portfolio to reduce risk. But he’s OK with singling out a few that could be among your holdings, depending on what else you own. 

First, he says, consider General Motors GM, -4.56%, as stealth EV play. Depending on the day, EV companies can be worth more than General Motors, notes Buckingham, referring to the outsized market values of Rivian and Tesla. “That’s insane, in my view,” he says. After all, GM is developing electric vehicles, too, and has a known track record in mass-producing and marketing cars. Yet the stock trades at just 10 times earnings. “They have plenty of upside potential,” Buckingham says of GM. 

Next, consider the reopening play Zimmer Biomet ZBH, -0.33%, which sells medical devices, including implants used in joint and spine surgery. COVID-19 has patients and hospitals postponing elective surgeries. But if the pandemic’s variants continue to be less virulent, then elective surgeries can be expected to pick up again. So would demand for Zimmer’s implants and medical devices. Meanwhile, the stock looks cheap, trading recently at 16 times earnings compared to its historical range of 22-28. 

Another reopening play to consider: Walt Disney Co. DIS, -0.35%. The stock is down significantly on concerns about theme park and movie theater attendance. If COVID-19 worries recede, these concerns will diminish and investors likely will bid up the stock again. Meanwhile, Disney holds a powerhouse of film characters it can continue to monetize via toy sales, Broadway shows and theme-park tie-ins. 

Stock yield reveals bargains

Stock market outlook: Inflation will continue to be an issue throughout 2022, driven in part by high energy prices. This will force the Fed to play catch up on interest rate hikes. That could be bad news for the U.S. stock market. “The Fed has a track record of always being late to the party,” says Kelly Wright, managing editor of Investment Quality Trends. “Then it over compensates, and it throws the market into spasms.” Wright says there’s even a risk the Fed might create a recession in 2022: “If we have a flat year…for the stock market, it will be a victory.” 

Another challenge is that the market looks overvalued. Consider the market valuation intelligence we can glean from Wright’s stock selection system. To identify timely entries and exits in dividend yield stocks, Wright looks for historically high- and low yields. Historically high yields occur when a stock sells off a lot. (Yields rise when stocks fall.) The low-water marks for yields happen when a stock rallies hard. Over time, stock price moves tend to be bracketed by historically high and low yields. You can use the same valuation analysis for the stock market, overall. It is not reassuring.

Consider the Dow Jones Industrial Average DJIA, -1.07%. Historically, the Dow is “overvalued” when it rises enough so that its yield falls to 2%. The Dow’s yield is currently well below that, at 1.77%. The Dow would have to fall 12% just to get back to its normal historical “overvalued” yield of 2%. The Dow would have to tumble 50% to get to its historically undervalued yield level of 4%. “Our system is saying this is a high-risk period for stocks,” concludes Wright. 

Favorite stocks: Barring a recession, banks may do well because they benefit from rising rates — as long as the yield curve stays upward sloping. In that scenario, rising rates mean they can earn more on loans (loan interest rates are linked the long end of the yield curve) compared to what banks pay on deposits (the short end). Despite this bullish outlook, some bank stocks still look inexpensive, by Wright’s system. 

For example, First Merchants’s FRME, -0.18% repetitive high yield (indicating its stock has fallen enough to be undervalued) has been 2.6%. The stock trades around that level now. “Their economic value is significantly higher than their market value,” says Wright. Shares won’t be overvalued, based on its history, until the stock rises enough so that the yield falls to 1.5%. This suggests a move to $77 for the stock is possible; it closed on Jan. 4 at $43.32. Also consider Arrow Financial AROW, +0.14%. The shares historically have been overvalued when the stock is so strong that its yield falls to 2.35%. The current dividend yield is well above that at 2.9%, suggesting the stock could have to move to $50 from around $36 now, before the shares appear overvalued. 

In healthcare, consider Merck MRK, +2.43%. Its stock looks more reasonably priced now, following a 14% decline since November. Merck looks historically undervalued when its yield rises to 4%, and it’s pretty close, with a dividend yield of 3.6%. It’s not overvalued until the stock rises enough to push the yield down to 2.35%. This implies a move up to $117 could happen. The stock recently changed hands at around $77. Merck stock may benefit from sales of its COVID-19 pill, molnupiravir, which was recently approved by the Food and Drug Administration. It also has blockbuster drugs like Keytruda for cancer, and a rich pipeline of more therapies on the way.

Turnaround candidates

Stock market outlook: “We don’t think the economy is going to into a recession,” says Bruce Kaser, chief analyst at the Cabot Turnaround Letter. Earnings will put in nice 8%-10% growth this year, he says. That’s the good news. But solid earnings growth may be offset by downward pressure on valuation multiples caused by Fed hikes and rising interest rates. Another headwind: The decline in fiscal stimulus out of Washington, D.C. The upshot, Kaser says, will be 5% gains for the S&P 500. 

Favorite stocks: As the name of his stock letter suggests, Kaser likes “turnrounds,” meaning companies whose fortunes may be improving because of a change in leadership or strategy. One to consider is Nokia NOK, -1.76%, where turnaround efforts are starting to pay off. Sales and profitability are picking up as Nokia now sells 5G networking equipment. This makes it a play on a big-picture trend — a major upgrade in wireless networks. 

Next, Kaser likes TreeHouse Foods THS, +0.59%, which makes the house-brand food and beverages you see in grocery stores. The company struggled because it made too many acquisitions, says Kaser, and it took on too much debt to make the buyouts. Last spring, activist hedge fund Jana Partners took a stake in TreeHouse. It boosted the position in the third quarter of 2021. Jana, which has a history of shaking things up in the food sector, has nominated two board members. TreeHouse now says it is “exploring strategic alternatives,” including the sale of part of its basic meal-prep ingredients business to focus on its higher growth snacks and beverages division. 

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned AMZN and TSLA. Brush has suggested AMZN, NVDA, TSLA, GM, ZBH, DIS, FRME and MRK in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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