Ticker Take: a weekly newsletter on investing.
Recap of the week.
Can robotaxis turn the tide for Tesla?
If you’re watching the chess match between Tesla bears and Elon Musk, I hope you caught Musk’s latest move.
Tesla’s stock, of course, has lost roughly a third of its value this year.
There are worries around weakening demand for electric vehicles.
But on Friday, Musk posted on X that Tesla’s robotaxi will be unveiled on August 8th.
In recent weeks, Tesla rolled out the latest version of its self driving software.
Robotaxis are expected to be an important part of that self-driving story — perhaps one of the most important storylines to watch in the next decade.
After all, if generative AI can transform industries — and many investors who are boldly predicting that — isn’t it possible Telsa’s AI will transform the auto industry?
Maybe the investor question shouldn’t be how many electric vehicles will Tesla sell.
Maybe the question should be which company will have the most self driving vehicles on the road in a decade.
And, if you’re willing to ask that question, you should be comfortable asking whether people will own cars at all.
I know it still sounds futuristic, but RBC Capital Markets Tom Narayan has laid out an exceptionally logical long term roadmap when I spoke with him.
“We think what will ultimately happen is you will have a purpose built vehicle without steering wheels, without pedals — no driver’s seat actually,” Narayan told me in a recent interview. “The cars Tesla sells today are important in building the business they have, obviously generating the cash flows to subsidize a lot of the software and R&D. But in the future, I don’t think we’ll have as many of these cars just for private consumers. It will a completely different vehicle design.”
Narayan added that the rise of Uber has already laid the groundwork for the robotaxi transition.
“You’re paying $1.75 per mile to do an Uber and it only costs about $0.33 to own operate a robotaxi fleet,” Narayan added. “So people are willing to pay a lot more for the convenience and the safety of not owning their own car. That’s why we think there’s so much value here.”
Will Nvidia keep climbing?
If we had to pick a single story to summarize 2024 so far, it would arguably be Nvidia. The AI chip leader saw its shares gain more than 80% in the first quarter, thanks to remarkable growth in its business. Sales for AI chips used in servers are expected to remain robust in the current quarter. Of course, after the run up we’ve seen in the shares, many are wondering how much upside is left in the tank.
Since nobody knows the future, let’s answer that question using analyst views. There are a whopping 74 analysts currently covering Nvidia on Wall Street. 60 of them – or 90% -- have buy ratings. None are recommending selling the shares, which is rare to see among analyst calls. As for the 12 month price target, the average call sits at around $980. That would suggest there is stll upside, albeit more modest than what we’ve seen. The return potential based on $980 is around 14 percent. For what it’s worth, there are 25 analyst shops – including Goldman Sachs, Wedbush, Mizuho, Citi, Oppenheimer, HSBC and Keybanc that believe Nvidia can push through $1,000 per share. We shall see!
What happens to stocks after a big first quarter?
While the big run-up we saw in the first quarter left some now expecting a pullback, one interesting stat on that first quarter advance is that the 10% gain put Q1 in a rare group of just 14 years since 1936 with such strong performance between January and March. And in 12 of the past 13 examples, the S&P 500 added to those gains by the end of the year.
Meanwhile, the TSX is coming off a near 6% advance in the first quarter. Looking back at the past four years where the Q1 advance was at least 5% – 2021, 2019, 2014 and 2011 – the TSX added to its gains over the course of the year in 3 out of 4 examples.
Big companies with low valuations.
We took a closer look at big companies with low valuations, as measured by their price to free cash flow ratios. Since free cash flow measures how much money a company has in its coffers to spend, it’s generally a helpful guide in determining the health of a business. And when you measure it against a stock’s performance, you can make an assessment on valuation.
Generally speaking, a price to free cash flow ratio below 10 is seen as one that values a stock much more fairly than other names in the market. We looked at some U.S. listed companies with market caps of more than 50 billion dollars and it screened these names: Verizon, American Express, Schwab, AT&T, Bristol-Myers Suibb, CVS Health, Marathon Petroleum, Altria, Occidental Petroleum, Valero Energy, Capital One, Ford, MetLife, AIG, Travelers and GM.
Meanwhile, when we widen out the list by lowering the market cap hurdle, it highlights all of these names: Vistra Corp, WR Berkley, Royalty Pharma, Bunge, Fidelity National Info Services,
Ovintiv, Reinsurance Group of America, HF Sinclair, Unum Group, TD Synnex, Tenet Healthcare, Rithm Capital, Axis Capital, MGIC, ADT, Kinetik, Onemain Holdings, Mueller Industries, Essent Group, PVH, Beacon Roofing, Mattel, Annaly Capital, American Airlines, Old Republic International, Chord Energy, UFP Industries, Voya Financial, Jazz Pharmaceuticals, and Berry Global.
On the TSX, we looked at companies with similar price to free cash flow ratios – not the same level of market caps, but we narrowed our list to somewhat larger Canadian firms. That surfaced a lot of companies tied to the insurance industry — Manulife, Sun Life, Great West Lifeco and Power Corp, for example. George Weston made the list, as did Brookfield Infrastructure and Tourmaline Oil. Widening out the list a bit would also add Parkland and Tamarack Valley Energy.
Standout names for stock buybacks.
We have a lot of guests who like to talk about stock buybacks. The concept here is simple. If company’s have access to capital that they can put towards buying back shares, that can help improve their per share performance on the bottom line – simply due to the fact that there are fewer shares outstanding. Outside of commitments to dividends, this is arguably one of the most commonly cited measures companies take to show they are being shareholder friendly.
But which companies get top marks on their stock buyback programs?
In both the U.S. and Canada, there are indexes which track buyback activity.
Let’s start stateside, with the S&P 500 Buyback Index, which tracks the top 100 stocks with the highest buyback ratios among S&P names. That doesn’t mean they buy back the most stock of any company per se, but pound for pound, these companies have shown a notable commitment versus other companies.
Once we looked at that, we measured the companies that, over the past 12 months, have essentially reduced their outstanding stock by the most. And then, with the top stocks on that list, we selected only the ones that have buy recommendations from more than 50% of the analysts who cover them. In other words, they are buy rated by a majority of the street.
Against that backdrop, here are the top 5 names that we screened in the U.S. - Gen Digital, which is a cybersecurity play. Ralph Lauren made the cut, as did Tapestry, which operates the Coach and Kate Spade brands. Coterra Energy out of Houston also made the list, as did St. Louis based Emerson Electric.
We also went through this same exercise for the Canadian market. There is a TSX Buyback Index, which measures the top 50 stocks with the highest buyback ratio. Again, within that group, we then looked at the companies that had committed the most towards buybacks in the past year. And then we screened for stocks on that list that are recommended by a majority of analysts.
Our top five on that list included Kinross Gold, Primaris — a REIT focused on properties including shopping centers, Gibson Energy, Dundee Precious Metals, and Mattr, which is the energy and infrastructure technology company formerly known as Shawcor.
Some of the top dividend growers in Canada.
We wanted to put together a list of companies that already have a commitment to dividends that are expected to keep growing those dividends in a meaningful way. So we looked at a list of TSX companies with a dividend yield that at least matches the index average, at around 3 percent. We then looked at companies that are projected to grow their dividends by at least 10 percent over the next 3 years. That list includes a couple of banks – CIBC and National Bank. Brookfield Asset Management also makes the cut, as do Mullen Group and Labrador Iron Ore Royalty. Overall, analysts are a bit mixed on these stocks. A majority of analysts recommend buying Mullen Group right now, but none of the others currently have a majority of buy ratings.
If we give a bit of flexibility on the pool of companies and expand it to include stocks that have at least a 2 percent dividend yield (but who are also expected to grow their dividends by 10 percent or more in the next 3 years), other names that populate the list include: GoEasy, Element Fleet Management, Vermillion Energy, Open Text, and Gildan Activewear.
What are some popular Latin American stocks?
I received an inquiry from a TikTok user about popular Latin American stocks.
Looking at the top five largest weighted stocks in the iShares Latin America 40 ETF, the two most popular names among analysts are Mexican cement giant Cemex and Brazilian financial services player Itaú Unibanco.
Both have buy recommendations from more than 80% of the analysts who cover them.
Selling your stocks vs staying the course.
Brian Levitt, a Global Market Strategist at Invesco, shared an interesting case study with us this week.
He painted a picture of an individual starting their career in 1998, maximizing investments in their retirement plan up until mid-march 2020, when the COVID pandemic emerged.
At the time, this model portfolio would have been worth $732,500, a dramatic drop from $996,630 in February of that year.
If, at that time, the individual had sold everything and transferred the balance to cash, then the current balance would be $875,801, or 9.3% below the pre-COVID high.
If they had switched to cash then reallocate to equities — and stayed out of the market for the remainder of 2020 and all of 2021, only to restore their full equity position in 2022 — the current balance would be $907,639, or 6.1% below the pre-COVID high.
If they had just stayed invested, their current balance would be over $1.7 million, or 1.7 times the balance on Feb. 19, 2020.
Some food for thought!
What would $10,000 invested a decade ago be worth today?
Speaking of staying invested, here are some eye popping returns had you invested $10,000 in these names 10 years ago. Note these returns are based on stock appreciation, rather than total return.
Nvidia: $1,872,511
AMD: $427,118
Broadcom: $214,412
ServiceNow: $142,766
Constellation Software: $138,690
Palo Alto Networks: $134,036
Eli Lilly: $129,772
Netflix: $127,642
Cintas: $116,33
Tesla: $114,833
Amazon: $113,165
ASML: $108,875
Microsoft: $105,144
Applied Materials: $104,710
Hermes: $96,166
Crocs: $91,156
Apple: $90,704
Facebook: $90,624
Intuit: $85,288
United Rentals: $77,695
Adobe: $76,445
Intuitive Surgical: $71,365
Take-Two Interactive: $71,346
Mastercard: $66,893
Lululemon: $67,131
Domino’s Pizza: $64,378
Costco: $63,352
Wix .com: $59,473
Novo Nordisk: $56,478
Google: $55,636
Visa: $53,419
Salesforce: $53,013
Chipotle: $52,755
Stock picks of the week.
Did you know the instant scratch lottery ticket market is a global oligopoly, with three players controlling the business? They are SciGames, IGT, and Pollard.
Pollard, which has a very profitable charitable gaming business, is one of our guest stock picks of the week. You can find it below, along with some other names.
Adam Johnson, Bullseye Brief: Blackstone, Marvell Technology
Kim Inglis, Raymond James: J&J, Health Care Select Sector SPDR ETF, Dynamic Active Canadian Dividend ETF
Shane Obata, Middlefield Capital: Alphabet, Micron, Taiwan Semiconductor
Colin Stewart, JC Clark: MDA, Pollard Banknote
Corrado Russo, Hazelview: Chartwell REIT, CBRE, Ingenia Communities, Japan Hotel REIT
Brian Belski, BMO Capital Markets: Boyd Group, Kinaxis, DoorDash, First Citizens
Martin Pelletier, Wellington-Altus: Brookfield Infrastructure, Tamarack Valley, Baytex Energy