Almost nothing went the way it was supposed to in 2016. And yet, though many investors were wrong about the U.K.’s Brexit vote and the American presidential election, few ended up disappointed by their portfolios. Just before Thanksgiving, all four major U.S. stock market indexes closed at record highs—the first time that’s happened since 1999. If the year taught investors anything, it’s not to bet on predictions. As John Toohey, head of equities at USAA Investments (usaa), says of the unexpected outcomes, “You sort of question, ‘Is the market right, are the polls right, on anything?’ ”
One prediction, at least, seems safe: Post-election euphoria won’t mean stocks are without risk. With an aging bull market in the U.S. nearing the end of its seventh year at press time, it’s difficult to find safety in cheap stocks; even formerly stodgy dividend payers now trade at dangerously expensive valuations. “You have to have a radically maverick portfolio to have a shot at a classic target of 5% real [annual] returns,” says Research Affiliates CEO Rob Arnott.
While top portfolio managers see a lot of promise in 2017, they’re pinning their most bullish hopes on mysteries that only time will unravel. Will President Trump roll back regulations, from Dodd-Frank to the Affordable Care Act? Will France or Italy take Britain’s lead and exit the European Union? Will oil continue its rally? Most important, will the U.S. economy finally get the jump-start it has been waiting for since the financial crisis? As ClearBridge Investments managing director Margaret Vitrano says, “I hate talking politics, but you kind of have to now as you’re thinking about 2017.”
With that in mind, Fortune has canvassed the industry’s top stock pickers to find the companies they’re betting will rise even if nothing goes as expected in 2017. Some are familiar, some you won’t have heard of, but they’ve all got potential for impressive growth, no matter what shocks the new year might bring.
RISING INTEREST RATES
Unlocking the vault for shareholders
Most banks’ profit margins should rise with interest rates, but some stocks will get a bigger jolt than others.
Call it the Janet Yellen head fake. When the Federal Reserve hiked interest rates in December 2015 for the first time in nearly a decade, Wall Street expected it to be the beginning of a trend. But since then the Fed has done little beyond generate a strong sense of déjà vu: At press time, Fed policymakers were strongly hinting they would implement another December rate hike. Still, while long-term bond interest rates have recently drifted up—with investors expecting higher inflation and federal deficit expansion under a Trump administration—rates remain at historic lows. “We’re really just back to where long-term interest rates were at the beginning of this year,” says Ed Perks, CIO of Franklin Templeton Equity Group.
The companies with the most skin in the game are banks, whose profit margins generally improve as rates rise—and whose stocks have recently soared in anticipation. Perks singles out Bank of America (bac) as “a clear beneficiary.” It will collect at least twice as much from rising rates as its peers largely because it has the biggest stockpile of deposits—nearly $450 billion—on which it doesn’t pay out interest (e.g., checking accounts). If the Fed hikes rates by one percentage point in 2017, Bank of America expects to collect an additional $5.3 billion.
In recent years investors have punished Citigroup (c), assuming that heavy regulation will doom it to lower, utility-like returns—but without giving the company credit for being less risky, says Bill Nygren, manager of the $14.8 billion Oakmark Fund. Case in point: Citi immediately tripled its dividend after passing the Fed’s latest stress test. “If … investors start to value Citigroup like it’s an electric utility, it should trade at a much higher stock price,” Nygren says.
A NEW SPENDING BOOM
Exuberance again in the U.S.
These companies could benefit from confident consumers and federal stimulus spending.
Europe’s troubles certainly haven’t helped Fiat Chrysler (fcau); the Italian carmaker gets the majority of its European sales from its beleaguered mother country. Of course, Fiat also makes Jeep. Fiat acquired Chrysler in 2014 after the American automaker emerged from bankruptcy. Today its truck and minivan sales in the U.S. are still growing, and with expectations that revived world economic growth is on the horizon, it is also poised to sell more cars and SUVs in emerging markets such as China, says Oakmark's Bill Nygren. Fiat’s stock trades at just four times 2017 estimated earnings, a sign that investors are underestimating the nearly 30% earnings growth that Nygren expects next year.
Closer to home, a pickup in the U.S. economy, combined with renewed calls for greater infrastructure investment, bodes well for companies like Pentair (pnr), a water-equipment maker, says Todd Ahlsten, manager of the $14.4 billion Parnassus Core Equity Fund. After the emergency in Flint, Mich., highlighted the consequences of underinvestment in water infrastructure, Congress is moving to fund upgrades for the nation’s pipes. “We think there’s going to be a long-term supercycle of water investment that supersedes any economic cycle,” Ahlsten says. That may not boost revenue next year at Pentair, which focuses on filtering and pumping water for residential and industrial customers. But Ahlsten expects Pentair to grow earnings 15% in 2017, thanks to aggressive cost cutting. Beyond that, he thinks Pentair could achieve earnings growth of as much as 10% annually. And if Trump signs a big-league infrastructure spending package? “That would be an additional bonus.”
This is part of Fortune’s 2017 Investor’s Guide feature, “The 21 Best Stocks to Buy Before Donald Trump Becomes President." For the rest of the picks (including two funds) in other sectors, click on the links below:
A version of this article appears in the December 15, 2016 issue of Fortune with the headline "Stocks to Keep a Nest Egg Growing."