2025 Stock Market Outlook
We would like to thank all who attended our 2025 Stock Market Outlook webinar with John Buckingham and wanted to offer a follow-up for questions during the Q&A session we were unable to get to in the allotted time.
In case you missed the webinar, a complete replay is available for Members and Clients in the Special Reports section of the Member Portal.
Question: Alexandria Real Estate Equities (ARE) – I’ve seen that supply outweighs demand in that Life Science REIT area. Do you hold the same view? If so, do you think the dynamics are adequately priced-in given that the price 15%+ YTD decline?
Answer: It is a risk for ARE that supply continues to outpace demand in the near term, but we believe global demographic and health trends, bolstered by substantial funding from established corporations, venture capital, governments and philanthropic research, will support solid long-term growth rates in the life sciences real estate space. Thanks to ARE’s tenant quality and diversification, management projects full-year 2024 FFO between $9.45 to $9.49 per share, with occupancy levels of 95%. While the near-term outlook for FFO growth is flat, we continue to like the experienced management team, solid reputation and balance sheet, not to mention the 5.1% dividend yield.
Question: What are your thoughts on CVS Health (CVS) and health insurance companies?
Answer: Health insurance companies, UnitedHealth Group in particular, made big news this past week for all of the wrong reasons. We don’t own UnitedHealth at present (it has a middling score and expensive valuation compared to some peers), but we do presently recommend Elevance (ELV), formerly called Anthem. It is one of the largest managed care organizations in the U.S. with offerings in the commercial (both large and small employers), Medicare, Medicaid and individual markets. Through its affiliated companies, Elevance serves nearly 115 million people.
There are plenty of valid criticisms of ELV and its peers, and the industry could improve in many respects. However, at the end of the day, ELV needs to take in more money than it pays out every year to keep the lights on, and there are certain capital requirements that the insurer must maintain to function. Therefore, claim management is a critical part of the business, even though there are countless horror stories where the insurer got it wrong, sometimes with catastrophic consequences. Believe it or not, Elevance has struggled this year as it works to manage costs and prop up margins, but we think the current media storm will eventually subside (perhaps resulting in some positive outcomes). The EPS figure is expected to grow to $35 in 2025 and $40 in 2026, which would put the ‘26 P/E ratio near 10. Shares yield a modest 1.7% and the balance sheet is strong.
Related to CVS, even as operational challenges (like rising costs tied to delayed surgeries among older adults) and the tragic murder of United Health CEO Brian Thompson have created near-term headwinds for health insurers, we find that the sector has historically proven resilient and that it still boasts significant long-term growth potential. CVS Health stands out as an undervalued player, with considerable pessimism reflected in the stock trading at a single-digit P/E ratio.
In the latest quarter, Health Services revenue reached $44.1 billion, with adjusted operating income growing 17% year-over-year. Same-store pharmacy sales increased nearly 20%, and prescription volumes rose 9%, benefiting from higher demand and improved purchasing economics.
We think the recent hiring of former UnitedHealth CEO Steve Nelson as Aetna’s president is a solid move. CVS anticipates Medicare Advantage membership growth, improved pricing in individual exchanges, and cost-saving initiatives to bolster results by 2025.
Following the release of Q3 results, the Pharmacy Benefit Manager (PBM) and owner of Aetna revised its cash flow and EPS guidance downward due to near-term pressures. Still, the company generates substantial cash flow, supporting a 5% dividend yield with room to improve the interconnectivity of its health services and insurance assets to improve its competitive advantage.
Of course, we have to be patient with CVS as even Washington has piled on the company with bipartisan legislation just introduced to separate PBMs from pharmacy ownership within three years. The clock is about to strike midnight on the current Congress, but time will tell if the DC hostility toward healthcare businesses continues in the new year. For its part, CVS has responded that its PBM business “reimburses independent pharmacies at higher levels than CVS Pharmacy.” The company added, “Any policies that would limit our ability to negotiate with drugmakers and pharmacies would ultimately increase the cost of medicine in the United States, and in many cases, serve as a handout to the pharmaceutical industry.”
Question: Do you think the potential takeovers of Walgreens Boots Alliance (WBA) and The Hershey Company are the beginning of a trend for undervalued companies especially with the incoming administration?
Answer: Every transaction is different. While some deals might be approved in the incoming Trump administration that historically would have been rejected, we aren’t convinced that the Biden regulators were all bad. After all, the Justice Department saved our Tapestry Holdings (TPR) from a train-wreck of an acquisition with Capri Holdings and on December 10, a federal judge blocked the Kroger (KR) + Albertsons deal on antitrust grounds. Shares of our normally low-beta Kroger rose 5% even as a Judge ruled the deal would have harmed consumers in locales where competition is thin or thinning.
Omnicom (OMC), a major marketing firm that’s currently recommended, offered $13 billion to buy U.S. rival Interpublic. The deal, if it goes through, would end a string of unsuccessful tie-ups dating back more than a decade under CEO John Wren. We suspect regulators will approve the deal (whether the approvals need to come from the Biden or Trump administrations), especially as big tech companies have permanently changed the marketing landscape and have taken away power from legacy marketing companies like OMC, Interpublic and Publicis.
Hershey is not a currently recommended stock, but it made news this week for Mondelez’s approach. Approximately 80% of the voting stock is held by the Hershey Trust, which has repeatedly rebuffed and voted against corporate actions over the decades. In our view, the transaction’s ability to close depends almost entirely on the Hershey Trust, rather than on regulators.
Given the perception of an easier regulatory climate, along with many businesses trading at inexpensive valuations, we would expect a pick-up in M&A activity in 2025.
Question: What impact cryptocurrency investing have in the coming years?
Answer: We would like to offer our Investment Insight on this topic. It is available here: https://theprudentspeculator.com/blog/special-reports/cryptocurrency-investing/
Question: I believe several cybersecurity companies, though not traditionally classified as value stocks, offer compelling growth opportunities. What is your outlook for cybersecurity companies look in 2025 and beyond?
Answer: We aren’t down on other cybersecurity stocks, but we have a particular affinity for Gen Digital (GEN). GEN scores well in our Value-based quantitative framework, it has potential to grow earnings and revenue over the coming years (thanks, in part, to its Avast! acquisition), and there’s room for multiple expansion. GEN shares also yield 1.7%. Other cybersecurity stocks are not undervalued enough (yet!) to garner our interest.
Question: Given that “Power & Energize the U.S.” is a theme in your Special Report, there don’t seem to be many traditional utilities (WEC, NEE, AEP, SO and the like) in your portfolios. Can you explain why not?
Answer: The primary constraint regarding many of the utilities in our universe is valuation. Even as we increasingly endeavor to improve our qualitative analysis for a particular holding, industry or sector, valuation remains our north star. Indeed, the S&P Utilities index trades nearly 25% above its long-term average price-to-book and price-to-earnings ratios. With limited upside in our view, this would make most stocks in the sector primarily income-oriented investments, whose attractiveness has diminished relative to benchmark government bond yields presently over 4%.
Question: How are the proposed tariffs going to impact stocks?
Answer: We think that as presented, sweeping and high-rate tariffs would be damaging to the U.S. economy in general, especially as the levy is paid by companies and individuals on the U.S. side of the equation. It would be inflationary; likely strongly so. Based on what we experienced in the Trump 45 Administration, we expect tariffs to be implemented on a targeted basis at lower-than-headline rates as to avoid far-reaching consequences. This would simultaneously check the box on the campaign promise and spare U.S. consumers from another rapid rise in prices for goods.
