Summary
- The S&P 500 is set to double bottom or worse by year-end in my opinion.
- If I were going to build a focused S&P 500 ETF these are the stocks that I would include.
- The last time we got a chance to buy many of these at fair value or discounts was in spring 2020.
- I include what I believe gives these companies hidden value and growth.
This Stocks Of The Week covers the Q3 2022 Plug & Play Stocks list. Today, I will focus on S&P 500 stocks that I am looking to add on a double bottom or worse in the S&P 500. I am ranking based on a combination of expected total return over the next five years and safety. The VSLs have been updated.
Before I get started, I used Stock Rover to help with screening, sorting data and doing comparisons. If you do your own bottom up stock research, I think you owe it to yourself and your portfolio to have Stock Rover. It was very good when I started using it a few years ago, it’s become the best fundamental data screening and comparison tool on the web as far as I can find (and I look often). This weekend Stock Rover is doing a 25% discount. Click here to learn “why Stock Rover” and get a vital tool for being a great investor.
Gotta Have A MANBAG
Apple (AAPL) beat the S&P 500 by 227% the past five years. It has barely beaten the past two years. I expect it to handily beat the market with a massive margin of safety due to…
- expansion into emerging markets.
- more subscription based revenues for streaming, games and iCloud.
- Apple Pay and business services growth.
- Integration into smart homes and EVs.
- growing dividend yield attracting more investors.
AAPL Buy Zone = $132 to $94
Microsoft (MSFT) beat the S&P 500 by 195% the past five years. It has performed roughly in line the past two years. I expect another wave of huge outperformance based on a fortress balance sheet and…
- cloud growth, AI adoption & edge computing.
- virtual reality, video games and the metaverse.
- business solutions using Power Platform, Dynamics 365 and advanced industrial digitalization.
- growing dividend yield attracting more investors.
MSFT Buy Zone = $227 to $186
Amazon (AMZN) beat the S&P 500 by 87% the past five years during a period of high capex and business expansion. I believe it will harvest earnings the next five years by…
- cloud growth, AI adoption & edge computing.
- disrupting even more industries including automotive and homes.
- global expansion.
- eventual spinoff of AWS which would create another massive S&P 500 company and unlock billions in value for shareholders.
AMZN Buy Zone = $123 to $103
Alphabet (GOOG) beat the S&P 500 by 59% the past five years despite legal challenges and heavy R&D spending. I expect even better performance the next five years due to…
- cloud growth, AI adoption & edge computing.
- Integration into smart homes, smart cities and EVs.
- Further monetization of YouTube and gaming.
- business solutions as supply chains move.
- expanded defense and space revenues
GOOG Buy Zone = $101 to $91
Berkshire Hathaway (BRK.B) slightly trailed the S&P 500 the past 5 years, but with lower volatility probably due to its extremely strong balance sheet that might be strongest in the world. I expect it to outperform for the following reasons:
- Still massive cash hoard allows them to buy back shares on dips in price.
- Successor managers have been slowly tilting the portfolio towards tech with some emerging markets exposure.
- Buffett is leaving them with several investments including Japanese brokerages that will benefit from Asia growth.
- Occidental is likely to be taken over and milked for free cash flow as the end of the oil age accelerates. That is, Occidental’s conventional reserves do not require much capex and the company will get great tax breaks by being a leader in carbon capture.
BRK.B Buy Zone = $292 to $262
Nvidia (NVDA) beat the S&P 500 by 150% the past 5 years. I expect it to handily beat the index again because of the following:
- It’s the must own stock for the development of AI on chip.
- Dozens of companies working on autonomous driving are using Nvidia technology.
- Edge computing is a huge growth opportunity for its GPUs in data centers.
- Their GPUs will get massive growth from growth in virtual reality, augmented reality and metaverse.
- It is a high beta stock (1.62 – see below) so will do well from near a bear market bottom.
NVDA Buy Zone = $126 to $95
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Make a note that my top 4 stocks comprise 38% of the Invesco QQQ ETF (QQQ). In addition, Nvidia (NVDA) is another roughly 3.2.% of QQQ.
While all of the stocks above could be double positions on their own if you wanted a concentrated approach, I think most people ought to simply have a core position in QQQ and a full or double position in Berkshire Hathaway (BRK.B) to complete what I have deemed the MANBAG stock basket of:
- Microsoft
- Apple
- Nvidia
- Berkshire Hathaway
- Amazon
- Google/Alphabet
These are the 6 must own stocks in my opinion, regardless of whether you are a growth or dividend investor. These are the leaders in the American economy. Own them.
- For 5 figure portfolios, generally you should own full to double positions in QQQ (12-24% for ETFs) and BRK.B (3-8% for stocks).
- For 6-8 figure portfolios I recommend owning full positions in QQQ, a full or double position in BRK.B, as well as, half to full positions in MSFT, AAPL, NVDA, AMZN & GOOG.
High Beta Growth Basket
The following are stocks with high beta. What does that mean?
Beta is a measure of a stock’s volatility compared to the S&P 500 (in my data). The S&P 500 has a beta of 1. So, stocks with beta below 1 have less volatility than the index and those with beta above 1 have more volatility than the index.
Why would we want more volatility stocks? Glad you asked.
When the stock market goes up, these stocks tend to go up more. So, after a major correction is exactly when you want to add volatility or beta. This is a rinse and repeat thing. What I just said has held true for a longer than a century.
Here are stocks with high volatility that have typically been big winners after a broad stock market correction.
Freeport McMoran (FCX) has a 3-year beta vs the S&P 500 of 1.56. In other words, 56% more volatile. We want to capture that volatility from near the bottom of the bear market. In addition, Freeport’s business is essential in the 4th Industrial Revolution and Decarbonization themes because we need its copper and other valuable metals.
FCX Buy Zone = $25 to $16
Warner Brothers Discovery (WBD)
The merger of Warner Brothers which includes HBO and Discovery gives this new entity a wide slate of programming, movies, news [CNN] and sports [TNT & TBS]. It already has broad penetration globally and that is expanding as streaming reaches more places via 5G (another potential winner with ASTS). The company is cutting expenses by over $3b in just the next year and releasing movies to theatres again to get that source of revenue before going to streaming. So, this is another company in that magic growing revenues while cutting expenses sweet spot. The adjusted 5-year beta is 1.36, but far higher since a big hedge fund inspired run-up in early 2021 that was followed by a crash. I think the stock is dramatically undervalued and could reach $200 billion from the current $30 billion.
WBD Buy Zone = $20 to $14
Enphase (ENPH) and SolarEdge (SEDG) have betas of 1.66 and 1.42 respectively. Both have outperformed the stock market the past 5 years and I expect that to continue as the clean energy revolution accelerates globally. These companies were in a duopoly in solar inverters and energy storage management (think software and systems), but are now facing some competition from companies like Generac (GNRC) – which I would also buy cheap enough. Both Enphase and SolarEdge are top holdings in our clean energy ETFs so I plan to take half positions if the price is right.
ENPH Buy Zone = $140 to $94
SEDG Buy Zone = $230 to $157
Caesars Entertainment (CZR)
I am intimately aware of Caesars operations as Platinum/Diamond level member of their rewards system. I’ve seen a lot of their operations from the inside due to a couple good connections. The company is likely to sell a bit more real estate to shrink their debt load and their online business has a long runway in the United States and globally. It has historically done very, very well out of recessions. I missed it in 2020, I won’t miss it next time
CZR Buy Zone = $46 to $30
Micron (MU)
Micron operates in an oligopoly (with Samsung and SK Hynix) in the $95b/year DRAM (dynamic random access memory) which has roughly 9% CAGR. That market has been cyclical and is slumping now, offering rare opportunity. With expansion of edge computing, growth rate could surprise to the upside. Because of it’s relatively low price and big upside, I’m very likely to own MU soon (along with INTC which is also easy to fit in portfolios). If I can get MU in the $30s I’ll consider it a “redo” gift.
MU Buy Zone $46 to $36
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Another note. Semiconductors are a huge part of both the 4th Industrial Revolution and Decarbonization. It would be easy to add several more semiconductor companies. I plan to buy the iShares Semiconductor ETF (SOXX) which includes among top holdings Nvidia (8%+), Intel (7%+), Lam Research (4%+) and Micron (3%+) research in its top 15 holdings. I plan to take only starter and half positions in Intel and Micron from near bottom fishing prices. I’ve already taken the starter in Intel. From there I will opportunistically swing trade a bit, but mainly look for position trades well into the future.
Dividend Darlings With Upside
These stocks have dividend yields above the S&P 500, as well as, likelihood of higher growth. These are the types of stocks you collect income on while you wait for them to double, triple or more. All of these pay dividends above the S&P 500 average.
Ford (F)
Perhaps my favorite dual play on the 4th Industrial Revolution and Decarbonization. In addition, it’s a hidden play on real estate. Due to EVs taking half the floor space as ICE vehicles, Ford will have a lot of real estate to sell, repurpose for other 4th Industrial Revolution industry or use for joint ventures. I believe Ford can reach around a half trillion market cap by decade end. It’s currently at $60 billion. It yields about 3%.
F Buy Zone = $16 to $12
Intel (INTC)
Maybe the best dividend and growth play on the market. Intel is a leader in a vital industry, has an investment grade balance sheet, is now being subsidized by the government and is breaking into contract manufacturing which has been dominated by Taiwan Semiconductor (TSM) which has soared in the past decade. It is suggesting it will buyback shares once their Ohio megaplant is done being built in 2 years. It yields about 4.5% now.
INTC Buy Zone = $34 to $28
Kinder Morgan (KMI)
Kinder Morgan is the number one natural gas pipeline company in the U.S. and carbon transport company. It is also a backdoor play on hydrogen for later in the decade. The float has gradually been soaked up by Richard Kinder and other institutional investors, but there are enough shares available for any company (Berkshire Hathaway maybe?) that might want to take them over. Very limited downside and a 6%+ dividend.
KMI Buy Zone = $16 to $14.
VICI (VICI)
VICI is a REIT in the gambling and hospitality space. Like Caesars above, VICI is an exceptional company that just keeps getting stronger. It did not suffer unpaid rents during Covid and its renters (mainly MGM and Caesars) are virtually all very recession proof. The real estate end of growing gambling revenues. Currently at a 4.4% dividend yield.
VICI Buy Zone = $27 to $23
Paramount (PARA)
Paramount, which owns CBS and a host of other networks, is a global entertainment powerhouse that recently had shares bought by Berkshire Hathaway. With its global assets I expect greater penetration and strategic asset sales driving revenues up and debt down. I think its dramatically undervalued and could have put it in the Deep Value category below as it is down to bottom fishing prices. It pays a 4.2% dividend yield.
PARA Buy Zone = $32 to $24
Comcast (CMCSA)
Comcast is another cash machine in the hated streaming and broader communications spaces. It has global assets which can be managed strategically and the ability to cut expenses as global penetration grows. It also seems to be a good candidate to takeover Netflix and fold it in with Universal. In such a deal, Netflix could add to Universal Studios with shows like Stranger Things, while Peacock and NBC would give Netflix an instant library, news and sports. I think that combination would be accretive quickly given Netflix high subscriptions and Peacock’s low subscriptions. It seems to be a very synergistic match. Comcast also seems like it could be interested in Roku as it has its own hardware already and could add content to the Roku channel. We’ll see. Comcast pays a 3% dividend yield now.
CMCSA Buy Zone = $35 to $28
AT&T (T)
AT&T just keeps getting stronger, but nobody notices. After selling off Warner Entertainment the company is lower debt and has a more predictable slow growth model. It has huge pricing power in fiber which is growing and capex is flattening as the 5G buildout completes. The lower debt, low payout ratio around 50% and falling capex make the dividend secure in my opinion. The wildcard is that ASTS SpaceMobile might enable AT&T to go global and add the potential for billions of new customers. It’s worth collecting the dividend to see if lightning strikes and AT&T can double or triple their revenues in the next decade. The dividend yield is 6.5%.
T Buy Zone = $20 to $17
Closing Investing Thoughts
Because most accounts I manage are six figures, I believe most will be split about 1/4 ETFs and 3/4 stocks. The MANBAG stocks will be represented primarily from holdings within (QQQ) and a holding in Berkshire Hathaway (BRK.B), though I’d love to get at least starters in (AAPL), (AMZN), (GOOG) and (MSFT).
Semiconductors will likely be from (SOXX), (INTC) [starter] and (MU).
I doubt I get a chance to buy (ENPH) and (SEDG) (though one can hope), so my exposure is likely to be via clean energy ETFs (PBW) and (QCLN).
I’m likely to end up with positions in (FCX) & (CZR) in beta. I already own (WBD [full]).
I already own dividend stocks (F) [full], (T) [full], (KMI) [half], (PARA) [full with puts included] and (CMCSA) [half when including puts likely to be assigned]. I’m on the hunt for (VICI).
