Ticker Take: a weekly newsletter on investing.
A recap of the week.
Corrections Can Be Quick During Bull Runs
The stock market momentum has started to cool — sticky inflation, geopolitical jitters, and a lackluster start to earnings season have all been considerations.
Another factor? JonesTrading strategist Mike O’Rourke is watching the 10 year yield closely, in comparison to the S&P 500 earnings yield.
“It’s important because10 year treasuries are a risk free investment,” he told me in our interview this week. “If that yield is rising, in theory, people should vie for the safer asset, as opposed to the riskier one.”
But if those worries represent the worst of the uncertainty, history might suggest asking not how far the market may fall… but how long the downturn will last, if a downturn emerges?
Analysis from CFRA research found that in all 24 stock market corrections since World War II (with a correction being defined as a drop of between 10-20%), it took the S&P 500 only four months to recover all that was lost in the decline.
In addition, since 1990, the market got back to breakeven in only three months.
As CFRA’s Sam Stovall noted this week, “history once again reminds us that, for long-term investors, it has typically been better to buy than bail.”
An early look at Apple’s AI plans.
The stock market plays a number of roles, including serving as a a voting machine — especially in the short term, when people are trying to assess whether a company’s plans will actually pay off. This year, we’ve seen that storyline playing out with Apple. As one of the most valuable companies in the world, I’m not sure too many are worried about Apple making money for years to come. But the tech giant is seen as being at a crossroads of sorts.
Apple’s iPhone business and the services empire it has built around its hardware keeps the cash coming in. But in a world that constantly pushes towards the next big thing, Apple has, at times, seemed less innovative in the post-Steve Jobs years. Recent moves have left the Apple faithful wondering – would Steve have done it this way? I’m talking about the recent launch of the Vision Pro, which is a cool glimpse into our possible VR/AR future – but the hardware offering is not as sleek as some might have expected from the Cupertino, California company.
And then, there was the high profile decision to give up on its car plans after investing huge amounts of time and money in that possibility. Instead, the great new opportunity became AI. Obviously artificial intelligence possibilities – the promise of Generative AI – has captured the attention of investors this year. Apple has invested in AI over the years, but Nvidia and Microsoft have created clearer roadmaps to investors. Meanwhile, Apple is navigating a possible cool down in iPhone demand. As a result, Apple’s stock is underperforming some of its big tech rivals this year.
That brings us to the report this week about Apple’s plans to work AI into some of its key products. Bloomberg’s Mark Gurman has learned Apple is aiming to boost sluggish computer sales by overhauling its entire mac line with a new family of in-house processors. Those chips are designed to highlight artificial intelligence. While it’s an early look into Apple’s plans, we’ll need time to see how it plays out. Analysts at Bloomberg Intelligence reacted to the report by noting that while it might give Apple’s Mac segment a modest boost near year, it likely won’t offset near term weakness for the iPhone in markets like China. And remember the Mac unit makes up roughly 8 percent of Apple’s total revenue. So even a 10 percent jolt may “only” mean an additional $3 billion, compared to an iPhone revenue base of more than $200 billion.
Big Tech’s Fastest Growers
Overall, tech remains one of the most loved sectors for a simple reason – growth. In an environment where there is growth uncertainty, the biggest names stand out for their top line leadership. Of course, a lot of the biggest companies have already grown quite a bit. That got us wondering which big tech names are set for the biggest sales lift in the years ahead. So we took at look at the biggest tech companies in North America, sorted by market cap – a group of roughly 40 firms. We wanted to assess which of those firms will enjoy the biggest revenue gains over the next 5 years.
Bloomberg compiles analyst estimates for revenue over the long term. Here’s how the list looks, when you break it down for sales growth over the next five years:
Micron: +228%
Nvidia: +220%
Shopify: +159%
ServiceNow: +150%
AMD: +123%
Tesla: +122%
Broadcom: +106%
Microsoft: +102%
Uber: +101%
Meta: +75%
Adobe:+74%
Intuit: +73%
Intel: +72%
Amazon: +71%
Airbnb: +70%
Netflix: +65%
Salesforce: +63%
Oracle: +54%
Alphabet: +42%
Texas Instruments: +34%
Apple: +33%
Applied Materials: +31%
Lam Research: +30%
Qualcomm: +29%
IBM: +19%
Cisco: +7%
Return on Invested Capital (ROIC) Champs
You’ll often hear investors talk about companies that stand out, based on return on invested capital, or ROIC. In short, it measures how efficient companies are, when it comes to allocating capital towards profitable investments. In other words, is that business good at creating value with its investments. Now, these metrics can change from year to year. So, we decided to look at which companies in the S&P 500 have enjoyed the highest return on invested captial levels over the past five years. We wanted to narrow our list of stocks to companies that are already of a decent size – so we set the low end of the market cap bar at $10 billion. And we also wanted to circle stocks that are currently recommended as buys by more than half the analysts who cover them on Wall Street. Once we did that math, here are the names that made our list:
Domino’s Pizza
Mastercard
Apple
Autozone
Philip Morris
Home Depot
Accenture
O’Reilly Automotive
Applied Materials
Nvidia
KLA Corp
Lam Research
Enphase Energy
Align Technology
Ameriprise Financial
Qualcomm
Teradyne
Cadence Design Systems
Colgate-Palmolive
Autodesk
AMD
Profit Margin Muscle
We wanted to identify companies that carry a lot of profit power. And we decided to do so through the lens of high profit margins. And instead of looking for 20 or 30 percent profit margins, we looked for companies that are expected to generate profit margins of more than 50 percent this year.
We looked at companies in both the U.S. and Canada, with market caps of at least 2 billion dollars. And we also narrowed our list to find companies that are recommended by the majority of analysts who cover them. Here are the 10 names that made our list:
Nvidia
Visa
International Seaways
VICI Properties
Royalty Pharma
Liberty Broadband
Essent Group
Boardwalk REIT
Wheaton Precious Metals*
NMI Holdings
*Wheaton’s profit margins this year are estimated to be just below 50%
Which stocks could be next to join the S&P 500?
The S&P 500 is one of the stock market’s most exclusive clubs. And being invited into the index can be beneficial to a company’s stock. What determines which stocks depart and which names enter? Well, a key consideration is valuation – since the S&P is a market cap weighted index.
So, at the very least, the market cap has to reach a certain level. Now, keep in mind, the rapid growth in the market caps of big tech companies has boosted the threshold for entry.
S&P officials now require that threshold to be $15.8 billion – up from $14.5 billion last summer and more than triple the threshold for entry back in 2007.
Bloomberg Intelligence compiled a list of 10 companies that could be considered candidates for the S&P 500 in the next year. This is based on, yes, having market caps that meet the mark, but also other criteria including profitability. Stocks that made the list include:
Cheniere Energy
Carlisle Companies
Ferguson PLC
Emcor
Williams Sonoma
Relance Inc
CrowdStrike
GoDaddy
Workday
What kind of lift could these stocks get, if selected for inclusion? According to Bloomberg’s analysis, of the 192 companies that have been added to the index since 2013 – leaving out companies that joined due to M&A and spinoffs – the average returns for those stocks was 12 percent in the three months before the announcements. Super Micro was a relatively recent example of a big winner ahead of entry. By comparison, returns were the reverse for the 103 members deleted because their market cap fell below the threshold level. Those names on average were down 16 percent in the three months before the change.
The India Opportunity
The importance of investing in India came up on several occasions this week.
In our feature interview with Emerging Markets investing legend Mark Mobius, he made a strong case for increasing exposure to India.
It’s also getting increasing attention at one of the world’s most influential ETF players.
I had a conversation with Jay Jacobs, U.S. head of thematics and active equity ETFs for BlackRock.
Jay’s work played an important role in the success of the iShares spot Bitcoin ETF.
Beyond crypto and the AI trend, he notes BlackRock is also thinking about is how supply chains are changing.
“This is something that was accelerated by COVID 19 and is now being accelerated by a lot of public policy, like the inflation reduction act in the United States,” he told me.
As such, he’s focusing on countries that increasingly have stronger ties to the U.S. — including Mexico and India.
“This is a year where international stocks are going to play a larger role in people’s portfolios than they have in the past 10 years.”
Quote of the week: AI is our “steam engine” moment
Earlier this month, I spoke with RBC CEO Dave McKay. One of the things we discussed is the bank’s company-wide efforts to embrace the changes being brought about by AI.
JP Morgan CEO Jamie Dimon made his own headlines this week for saying artificial intelligence may be the biggest issue his bank is grappling with, likening its potential impact to that of the steam engine.
“We are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years,” Dimon said in his letter to investors. “Think the printing press, the steam engine, electricity, computing and the Internet, among others.”
JP Morgan is currently looking at more than 400 use cases for the technology inside its organization, in areas such as marketing, fraud and risk.
Movie of the week: Civil War
Alex Garland’s latest offering quickly set an opening weekend record for the studio behind the film, A24. Garland’s new film explores what could happen in the near future, should we continue down our divided path.
I previously spoke with Garland when he was making his directorial debut in 2014, with Ex Machina. That film, in many ways, felt ahead of its time, when you compare it to our dialogue today around AI or even the kinds of robots Tesla is now developing.
“Part of it was just to identify the very sophisticated AI systems which require data and where the data is harvested from, which is us,” Garland told me this week.
“It was a big topic of conversation with a lot of people. Really what I’m doing (in these films) is plugging into something other people are stating which I find interesting.”
Do you remember Tiger Woods’ first Masters victory?
With Tiger Woods making his 26th Masters appearance, I thought I’d highlight a few of the things that have entered our lives since he began his record breaking journey.
His first Masters win in 1997 was arguably one of the biggest moments in sports history.
For those who remember that moment, here’s a list of things that didn’t exist at the time:
iPhone
YouTube
TikTok
Android
Netflix
Wikipedia
Tesla
Uber
Airbnb
Bitcoin
PayPal
Skype
Zoom
Snapchat
MySpace
SpaceX
Spotify
iPod
The BlackBerry
Betting Big on GE
With the high profile split up of GE now complete, Belpointe Asset Management’s David Nelson now sees GE as the must own aerospace company.
“CEO Larry Culp has engineered one of the great turnarounds in modern corporate history. They come out of the split up with one of the best balance sheets out there. Little debt, lots of cash and an order book that goes to the horizon,” Nelson told me in an interview this week.
“Boeing forecasts that we will need 42,000 new aircraft over the next 20 years. That means we'll need at least 84,000 engines because they all have at least two. Engines don't last as long as the planes so we can all do the math. Yes, GE’s stock is expensive after the run-up, but you're going to have to find a way to get in.”
Here are some of the other picks of the week…
Stock picks of the week:
Jordan Zinberg, Bedford Park Capital: Goeasy, Enterprise Group, Topicus
David Nelson, Belpointe Asset Management: Cameco, GE
Bob Iaccino, Path Trading Partners: Walmart, Western Digital, Alphabet
Bond picks of the week:
Earl Davis, BMO Global Asset Management:
National Bank Bail-In Bond, 5.05% yield (NACN 4.982 03/18/27)
Ford Corporate Bonds, 4-year maturity, 5.45% yield (F 6.382 11/10/28)
Pembina Pipeline long dated bonds, 5.8% yield (PPLCN 4.49 12/10/51)