Go for (defensive) growth
There’s nothing wrong with buying high multiple stocks if the underlying companies are set up for earnings growth. But not all growth stories are equally steady, according to Jonathan Hirtle of Hirtle Callaghan, which manages $20 billion in assets.
In our interview this week, he singled out companies such as Mastercard and Waste Management as examples of companies that — unlike chip companies — are growing, but whose businesses are less cyclical.
You can find all of his stock picks this week, along with plenty of others from pros I spoke to this week, at the bottom of the newsletter. Happy reading!
What classifies as a “quality” stock?
I also spoke this week with JP Morgan Asset Management strategist Jack Manley, who recommended investors lean into quality stocks — saying, look for companies with reasonable valuations, strong balance sheets and earnings growth. So, we went digging for some names.
We started by reviewing the S&P Quality Index, which did some of our work for us. It tracks high quality stocks in the S&P 500, based on return on equity and financial leverage. Now, there are more than 100 names in that index, so we wanted to limit our list to names that are recommended by at least half the analysts who cover these stocks.
We also limited our names to stocks that have a price to earnings ratio that is below the S&P 500 average. And finally, we looked for stocks that were on track for at least 5 percent earnings growth expected in the current fiscal year. That whittled down our initial list of 109 companies to 12. They are:
Cigna, Coca-Cola, LKQ Corp, Ralph Lauren, Johnson & Johnson, Tapestry, First Solar, EOG Resources, Comcast, Centene, Cencora and Incyte Corp
Companies with tons of cash
Last weekend, Warren Buffett gathered with the Berkshire Hathaway faithful for the company’s annual meeting. Among the many topics on the agenda – Berkshire’s growing cash pile. As of the end of the first quarter, it had risen to a record $189 billion. And Buffett would not be surprised to see that number top $200 billion by the end of the second quarter. That cash grows as the Berkshire businesses continue to deliver profits, while higher interest rates are adding to the money pile. Buffett has long said he would like to use the funds to buy a great business, but just hasn’t found something compelling as of yet. So in the meantime, Berkshire remains one the most prominent, cash rich companies. That also got us thinking about which other names have more cash than anyone can truly imagine. and outside of the banks – many of whom are required by law to hold big amounts of capital – the cash kings is really a story tied to the tech sector.
Apple – which of course just announced a record stock buyback and added to its divided plan – has a huge amount of cash…more than $160 billion as of last quarter. Meanwhile, Alphabet, Amazon, Microsoft and Meta have all amassed enormous amounts of cash. Beyond using some of that money for their AI aspirations, we are increasingly seeing some of these firms follow in Apple’s footsteps with shareholder friendly moves. Alphabet and Meta, for example, have recently joined the dividend club.
For the specifics on the cash, here’s the breakdown…
Berkshire Hathaway: $189 billion
Apple: $162 billion
Alphabet: $108 billion
Amazon: $85 billion
Microsoft: $80 billion
Meta: $58 billion
Stock buybacks fuel energy shares
I had a good conversation with energy investor Eric Nuttal of Ninepoint Partners, who has been encouraging Canadian oil companies to commit to a base dividend over the long term, so they can attract more investors.
But, as Nuttal noted in our interview, given that his team’s analysis suggests the sector stocks are, on average, trading at 30 to 50 percent discounts, he believes companies should be committing cash flow towards buybacks until the discounts are diminished, at which point dividends can be considered more seriously.
And since 2022 — when Nuttal’s philosophy started to be adopted by players in the industry — there has been some fairly compelling evidence that buybacks have been a big benefit to investors.
Ninepoint provided us with data on buyback activity since 2022 — highlighting 15 exploration and production names that have purchased at least 5 percent of their stock since then. 11 of those 15 stocks have outperformed the TSX energy sector’s 45% advance over that time.
And, if we look at the stock performance of all the stocks in that buyback group since 2022 and then zero in on the six companies that have bought back roughly 15 percent of their stock or more, four of those six — Imperial Oil, Enerplus, MEG and ARC - have seen their stock prices rise more than 100 percent since the start of 2022.
I’ve listed the buyback breakdown below, along with stock performance over the same stretch.
E&P stock buybacks since 2022:
(% of float - courtesy of Ninepoint Partners)
Imperial Oil: 21%
Advantage Energy: 19.8%
Enerplus: +17.7%
Parex Resources: 15.9%
MEG: 14.5%
ARC Resources: 14.5%
Nuvista Energy: 13.2%
Suncor: 12.1%
Canadian Natural Resources: 10.7%
Crescent Point: 9.8%
Athabasca Oil: 9.7%
Cenovus: 8.2%
Baytex Energy: 7.5%
Vermilion Energy: 6.1%
Whitecap Resources: 5.9%
E&P stock gains since 2022:
Athabasca Oil: +306%
MEG Energy: +171%
ARC Resources: +124%
Imperial Oil +110%
Enerplus +107%
Canadian Natural Resources: +98%
Cenovus: +84%
Nuvista: +83%
Crescent Point: +78%
Suncor: +70%
Advantage Energy: +47%
Whitecap Resources: +37%
Baytex Energy: +30%
Parex: +10%
Vermilion: +4%
Tim Cook…the forever CEO?
In the world of business leadership, the spotlight generally shines brightest on a few names. And since taking over for Steve Jobs back in 2011, Apple boss Tim Cook has been one of corporate America’s brightest stars. Despite having big shoes to fill, Cook has been a top ranked leader with investors – introducing new product categories like the smartwatch, pushing into other businesses like streaming video and more recently taking a bold attempt to go mainstream with mixed reality headsets. As for the iPhone, his execution to ensure it has become one of the most important products in the world has made him a very wealthy man. And that gets us to the man himself. Cook is now 63 and has served as CEO far longer than the average Fortune 500 boss. As Bloomberg’s Mark Gurman reported this week, this would seem like a logical time for Cook to prepare for his next chapter. But Cook hasn’t made many changes to Apple’s executive team, which includes a number of people that have been at the company since the Jobs era. Outside of the exit of design guru Jonny Ive, most of the inner circle remains.
Bloomberg has been investigating whether there is a true succession plan at all. Sources told Bloomberg if Cook stepped down soon, COO Jeff Williams would be a natural choice. But he’s only two years younger than Cook and there is a general thinking Apple’s board would want someone who is ready to commit to at least a decade of leadership.
One of the names Bloomberg surfaced in its story is John Ternus, Apple’s hardware engineering chief, who is not yet 50 and is well liked inside the company and could be seen as a choice for more stability over the long run. Whether he’d be ready to tackle some of the pressing issues Apple is facing – regulatory matters, keeping the company relevant as the iPhone matures, managing the internal focus away from cars to AI – remains to be seen. Cook himself has been fairly quiet on the matter, outside of discussing in an interview with – of all people – the singer Duo Lipa during a November podcast. The takeway from that conversation was that there were not strong reasons to think change is imminent. And in speaking with someone close to Cook, Bloomberg shared this source quote – “If Trump or Biden can be President at 80, Tim Cook can be CEO of Apple for many more years.”
The Shopify Selloff
Shopify shares took a big hit this week, largely on concerns about slowing sales growth and weaker profit margins. Upon closer inspection, though, the investor temper tantrum may have been misguided.
It is true that Shopify’s second quarter forecast calls for “high teens” growth, which would be down from the more than 20% revenue growth Shopify has consistently reported over the past two years. And there are suggestions competition from Temu and Shein is heating up.
But as for the profit margins, those are expected to be impacted in part by higher marketing costs, which President Harley Finkelstein argued will pay for themselves over the next year and a half.
In addition, Shopify has increasingly learned how to dial back on costs if needed. Case in point: the about-face on building up a logistics business to complement its e-commerce platform. That u-turn was costly in the short term, but analysts are generally in agreement that Shopify’s cash flows will greatly improve as a result of those actions.
Also overlooked, arguably, was the company’s commentary on how it’s implementing AI into its operations. Whether it’s additional tools merchants can use or increased ways through which it can communicate with its merchants, Shopify concluded that it’s enabling the company to be more productive without adding headcount.
Just how fast has Tesla grown?
This year, we’ve seen a dramatic shift in thinking around the appetite for electric vehicles. That has led to underperformance for stocks such as Tesla and outperformance for traditional players, such as GM. But if ultimately, the determining factor for that discussion is sales – in other words, the amount of revenue these companies are generating from vehicles sold – it is worth noting that over the past decade, revenue growth for Tesla and a few others has far and away exceeded that of most traditional automakers.
We decided to look at how revenue has risen over the last 10 years. And since we are now well into 2024, we included the average analyst estimates for revenue in this fiscal year. Keep in mind, those estimates have been adjusted by analysts to reflect for the current demand around both traditional and electric vehicles. When you factor that in, here’s what we found, in terms of the growth.
Tesla was easily the fastest growing company of the past decade. China’s BYD has often been in the headlines and it has seen a notable surge itself, but nothing close to Tesla. Interestingly, Ferarri and Porsche are some of the other top revenue gainers over the past decade, which perhaps speaks to the resilience of their businesses, regardless of economic conditions. Now, keep in mind, percentages can often reflect the fact that revenue growth is coming off a lower base. And that is largely true for the less traditional auto players.
But when you look at five of the lowest revenue growth companies over the past decade, it highlights that Detroit giants such as Ford and GM have really struggled to show meaningful sales momentum over the long term. And so, beyond the next couple of years – which may be tougher for the EV market – if you buy into the view that we’ll see more of a shift towards autonomous vehicles and perhaps more people shifting away from driving because of things like robotaxis, one has to ask which companies are poised for the greatest revenue growth over the next decade?
Here’s the revenue growth from the past decade:
Tesla: +3,076%
BYD: +1,242%
Volvo: +216%
Ferrari: +137%
Porsche: +136%
Stellantis: +99%
BMW: +96%
Hyundai: +90%
Subaru: +86%
Mazda: +81%
Toyota: +72%
Honda: +71%
Volkswagen: +61%
Renault: +33%
Nissan: +22%
Ford: +20%
Mercedes Benz: +18%
GM: +12%
Can Tesla turnaround after its stock slump?
Wedbush analyst Dan Ives think so. He sees Tesla getting to $275 per share.
“Any types of these sell-offs have been golden opportunities,” he told me in an interview this week.
Mind you, Ives expects it could be a rocky ride. But as growth in China returns, as FSD takes hold, and as Tesla unveils its more affordable vehicle, he sees market share gains on the horizon.
Kevin O’Leary’s 5% rule
I caught up with Kevin O’Leary this week, who used his experience in buying Tesla shares to highlight his 5% rule.
O’Leary’s general investing approach is diversification, which he can often achieve with ETFs. He never likes to have one stock represent more than 5% of his portfolio. He also tries to avoid any one sector representing more than 20% of his portfolio.
“The biggest mistake I see in portfolios is massive concentration in one position,” O’Leary told me.
And he explained why it happens.
“It’s not human nature to sell your winners,” he said.
So when his son got a job at Tesla, it put his 5% rule to the test.
His son had encouraged him to buy Tesla shares, which went on to have a massive run.
“Every time it hit 5%, I sold it down to 5%,” O’Leary told me.
“Tesla’s stock did nothing but go up for years and I kept it at 5%. I got all my capital back and I had zero cost base. And when it did have its decline, I didn’t suffer any losses because I stayed to the mantra.”
Investing lessons from billionaire Michael Lee-Chin
One of the most exciting things about business is that it can be life changing for those who seize the opportunity. And this week, I interviewed someone who symbolizes what is possible in the world of entrepreneurship. Early in his career, Portland Holdings Chairman Michael Lee-Chin saw a growing need for wealth management in Canada. His disciplined approach in business and investing earned him billionaire status. And he continues to think long term — whether it’s on the subject of how an aging population impacts health care or, how the world’s need for reliable energy sources comes at a time when nations are committing to a more sustainable future. In fact, those two energy industry realities have played a role in his growing focus on the nuclear power sector. He’s been building a team to make big investments in that area.
So if you’re on the fence about investing in nuclear, know that one of the smartest Canadian investors is doing just that.
I also thought I’d share Lee-Chin’s incredibly simple, but deeply profound investment philosophy around the 3 P’s — predicting the future, crafting a plan based on those predictions, and persisting through the challenges.
Speaking of long term trends…
I spoke with Bloomberg Intelligence strategist Gillian Wolff, who published a great report on some of the longer term trends getting investor attention.
She flagged Vistra and Constellation Energy as companies that have benefited from his growing theme of elevated climate risk, which has also benefited transition metals players, such aSunrise Energy Metals (Australia), Taseko Mines, and CMOC Group.
And the category of international “modern” defense companies, names that have been beating the global market in the past couple of years include the likes of Intuitive Machines, Hanwha Aerospace (South Korea) and Rheinmetall (Germany).
Can the big gainers keep climbing?
In a bull market, it’s not uncommon to see some eye popping returns. And in the past year, the list of stocks that have rallied 100% or more is hardly short. When a stock has doubled, investors wondering about holding such winners —or FOMO investors wondering if there’s upside left — undoubtedly face a tough choice.
And while the analysts are not always the best gauge of future success, we decided to look at which of those high fliers still have juice in the tank, according to Wall Street. In screening a long list of stocks in multiple countries, we landed on a list of 30 stocks that are up at least 100% since May of last year. From that group, we found 17 names that, on average, analysts believe can climb at least another 5% from their current levels. Since that may not be enticing enough for you, we decided to limit our list to stocks that analysts believe can climb more than 10 percent from their current levels. That shed a few more names from our list, including the likes of Meta, GE, and Celestica.
Here are the 11 names that made our final list:
Super Micro Computer
Western Digital
Broadcom
Nvidia
Coinbase
Marathon Digital
Spotify
KKR
PDD Holdings
Crowdstrike
MDA Ltd
Bonus: what’s the value today of $10,000 invested 15 years ago?
Nvidia: $4,003,474
United Rentals: $1,358,230
Netflix: $1,060,538
Domino’s Pizza: $596,835
Lululemon: $588,267
Crocs: $526,728
Amazon: $481,954
Chipotle: $432,532
Apple: $412,275
Salesforce: $270,979
Mastercard: $256,442
Microsoft: $207,370
U-Haul: $208,162
Sketchers: $204,773
Google: $174,120
Costco: $167,809
Visa: $165,142
Starbucks: $111,435
Stock Picks of The Week
Art Hogan, B. Riley Wealth: Apple, Chevron, Pfizer
JJ Kinahan, IG North America: GE, Newmont, Meta
Adam Johnson, Bullseye Brief: Chubb, Nvidia
Jonathan Corpina, Meridian Equity Partners
Brenda O’Connor Juanas, UBS: Gold (sees $2,500 oz by year end)
Jonathan Hirtle, Hirtle Callaghan & Co: Visa, Mastercard, Moody’s, S&P, FICO, Waste Management
A final note to loyal readers…
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Have a great week!
Thank you for providing the info!
Hey Jon. Your videos are amazing. Keep doing them.