2017 is just around the corner and City analysts are picking their top stocks for the 12 months ahead. As well as the stocks Im betting on for 2017, there are some companies I want to avoid next year as headwinds for these firmsgrow.
Indeed, I believe shares in Reckitt Benckiser (LSE: RB) will come under pressure next year as so-called bond proxy stocks continue to fall out of favour with investors.
Bond proxies are equities that have become an alternative to bonds as interest rates on bonds plunge into negative territory. Defensive companies such as Reckitt are prime proxies as their cash flows are considered safe, helping long-term dividend sustainability. However, as bond yields around the world are now pushing higher, these bond proxies are becoming less popular.
Its easy to see why. Yes, these are high-quality businesses, but the reach for yield has pushed their valuations up to record levels. Shares in Reckitt currently trade at a forward P/E of 22.9, down from last years 23.9 but still far above peer Unilevers 19.7. I expect Reckitts shares to fall next year as investors rebalance away from bond proxies back towards bonds.
Revenues falling
AstraZeneca (LSE: AZN)is another company Im avoiding for 2017. This year, Astras most successful drug Crestor came off patent, and the full extent of this patent expiry isnt yet known.
According to City consensus, Astras top line is expected to fall by 5.8% next year due to management inability to rekindle the companys pipeline growth. During the third quarter of this year, total product sales were down by 14% at $5bn, as Crestor and Nexium sales declined by 82% and 50% respectivelyin the US. For the quarter, the company reported a $1bn loss but earnings per share rose 4% to $0.80 thanks to a $453m tax benefit.
As Astras earnings continue to contract with falling sales, it may be wise to avoid the drug maker next year.
Profits evaporate
Finally, Rolls-Royce (LSE: RR) is a struggling engineer Im avoiding next year. It has plenty of problems. From falling marine sales as a result of the oil price collapse, to faulty engines delivered to one of its largest customers Emirates, Rolls-Royce is struggling to get things right. Whats more, a new accounting change, whereby the company cant immediately recognise revenue generated over the life of its engine service contracts immediately, will decimate profitability next year. Under the new accounting rules, Rolls 2015 profits would have been 900m lower than the 1.4bn reported. Its not entirely clear how this change will impact profitability next year, but its evident the company will take a big hit to earnings.
With profits set to tank and problems for the group brewing, Rolls might be one to avoid next year.
Make money, not mistakes
Arecent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% ayearover the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions.
To help you streamline your investment process,realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitledThe Worst Mistakes Investors Make.
The reportis a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits.Click hereto download your copytoday.
Rupert Hargreaves owns shares of Rolls-Royce. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca and Reckitt Benckiser. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.