Ticker Take: a weekly newsletter on investing.

A recap of the week.

How to invest in the businesses powering AI?

Electricity demand is rising and utility investors are taking notice.  Shares in that sector are outperforming the market and strategist David Nelson is buying in, based on an emerging trend.

“The one thing the artificial intelligence theme is lacking is power to run it,” Nelson told me this week.  “Data centers are going up everywhere and the demand for power over the next 5-10 years will be off the charts.”

Nelson has an ETF he likes to play the utility theme.  Find out more about it and tons of other investment ideas in our picks of the week section at the bottom of the newsletter.

Where does the stock market go from here?

U.S. stocks reached new all-time highs this past week, leaving the S&P 500 up nearly 12% this year.

So – where do we go from here? Well, nobody knows, of course, but one of the more standout calls of the week came from BMO’s Brian Belski, who raised his target on the S&P, suggesting it can rally another 5 to 6 percent this year.  His thinking is fairly straight forward.  He notes earnings have been solid and, that the market’s view on interest rates is finally coming more into line with that of the Fed.  

On top of all of that, he notes that fighting momentum can be a losing battle.  Another bull — Oppenheimer’s John Stoltzfus — said as much to me in an interview (he sees another 4% upside for stocks).

By comparison, the current S&P targets from the teams at JP Morgan and Morgan Stanley would suggest we are set up for a miserable finish.  But again, those are firms that have so far struggled to make their case. 

With that said, if we review the strategy calls from 21 shops on Wall Street – which Bloomberg has done – the bullish and bearish views net out to a year end S&P target of just below 5100.  

While that might suggest stocks will end the year lower, there are some other considerations…

Stock Market Pullbacks Can Lead To Gains 

The S&P 500 quick return to its record high comes after its recent pullback.  That decline, by the way, never exceeded 6%.  And history would suggest that’s a good thing.

CFRA strategist Sam Stovall noted that in 34 pullbacks (declines between 5% and 9.9%) since 1990, on average, the index then rallied more than 8.5% over 3.5 months.

How solid a bet has the stock market been over 40 years?

Warren Buffett has often recommended to investors that, if they want solid long term performance, they should keep buying a low cost index based on the S&P through thick and thin.  

That got us curious about how often the S&P 500 has been a winning bet for investors.  And for all the thought that goes into picking one stock over another, it’s remarkable how consistently just going with the S&P has been a solid choice.  We crunched the annualized total returns for the S&P - which includes dividends - and found over the 40 years that ended in 2023, the index rose in 33 of those years.  

That’s more than 80 percent of the time.  When you net it all out, that’s an annual average return of more than 11%.  So if this year’s gains holds, that would in many ways just be the s&p delivering its clockwork-like returns.

I was asked on TikTok to share the comparable numbers for the TSX and promised to do so in this newsletter…

In the past 40 years, the Canadian stock market has risen 28 times — so that’s 70% of the time — certainly not a bad track record.

Return of the meme stock investors 

I’m sure you saw the ups and downs with GameStop, AMC, BlackBerry and others this week.

I caught up with Jaime Rogozinski, founder of the popular Reddit forum, WallStreetBets.

While many are quick to dismiss the meme frenzy, Rogozinski suggests doing so is a mistake.

“The last time around there was a lot of talk of… people are bored, people are at home with stimulus checks. This is a one time kind of situation,” he told me in our interview.

“Now, it’s becoming clear to me that this is a permanent mindset this generation has, with their attitude towards the stock market.  This is retail investor behavior.  And if you add the crypto world to the retail world of stock trading, it’s a gigantic worldwide movement”

His point being…even if you’re not into the meme scene, you should understand it.

Wall Street’s favorite Dow Jones stocks

One of the big headlines of the week was the Dow Jones Industrial Average hitting 40,000 for the first time. The last time the index crossed a major milestone was November of 2020, when it reached 30,000 for the first time.  If you’re keeping score, that’s a gain of more than 30 percent in roughly 3.5 years.  We don’t talk too much about the Dow, since its influence in the broader market has lessened over the years.  But it is still a good sampling of blue chip names.  And that got us thinking about which of those stocks get the highest marks from investors.

Before we dive into that, let’s highlight which stocks had the best performance in this run up from 30,000 to 40,000.  Over that period, the top performers were Caterpillar, American Express, Microsoft, Goldman Sachs, Chevron, Merck, JP Morgan, Apple, Travelers and United Health. 

Now, when you look at Dow stocks that are currently recommended as buys by at least 70 percent of the analysts who cover them, you get a list of a dozen stocks.  That group – from highest ranked to lowest – is made up of Amazon, Microsoft, Walmart, Merck, United Health, Visa, Coca-Cola, Salesforce, Disney, Mcdonald’s, JP Morgan, and Goldman Sachs.

We then decided to look within that group of 12 names to see which stocks have the highest stock upside over the next year.  That assessment is based on the average 12 month target price among the analysts who cover these Dow stocks.

 When we crunched those numbers, we found just four names that are seen as having at least 15 percent upside.  Disney, which is in a turnaround, is seen as having the highest upside.  Amazon is a close second, but as the top ranked stock, it carries a strong one two punch of being highly recommended with estimated upside that exceeds the majority of Dow stocks.  Salesforce is also on that list, as is Microsoft – which, like Amazon, is a very liked stock that is also seen as having good upside from here.

Wall Street estimates for stock upside over 12 months:

Disney: +22%

Amazon: +20%

Salesforce: +19%

Microsoft: +15%

Cannabis CEO reaction to Biden’s big announcement 

Cannabis stocks were on the move this week, after U.S. President Joe Biden announced the government will treat marijuana as a less dangerous drug.

While there are plenty of moving parts, Curaleaf CEO Matt Darin called it an important milestone when we spoke about the announcement.

Darin said Curaleaf’s strategy will not change due to the rescheduling news, but it's now even more attainable. He also noted that if the business is no longer subject to onerous tax penalties, it could save the company more than $150 million n 2024 taxes.

Curaleaf’s stock has already had a big move this year, but the company has won over a lot of analysts.  More than 80% of the street has a buy rating on the stock, which trades in Canada, with the average 12 month target suggesting the shares could rally more than 30%.

(Note: always take analyst calls with a grain of salt)

Buffett’s Big Holdings 

New regulatory filings provided us with an update on Berkshire Hathaway’s big stock holdings. The update is a reminder Buffett has some large investments that – even when trimmed – are still massive holdings.  That makes sense, as Buffett and Berkshire are more of a buy-and-hold shop than anything else.

Let’ review Berkshire’s top 10 stock holdings.

At the top of the list is Apple.  Berkshire sold a bunch of Apple stock recently, but even with that move, it remains Berkshire’s largest equity holding, accounting for roughly 40 percent of the firm’s stock portfolio.  Berkshire first started buying Apple shares in 2016 and that stake is currently worth about $150 billion. Long time holdings Bank of America, American Express and Coca-Cola hold weighty spots in the oracle’s portfolio.  And while Berkshire reduced its stake in energy giant Chevron, that is still a huge hold too.  On the energy front, Cccidental Petroleum has become an increasingly large position for Buffett. And after Kraft Heinz, Moody’s and Japan’s Mitsubishi Corp, a new name in the top holdings is Chubb, an insurance company that our friend Adam Johnson had recommended recently.  

Chubb is one of the world’s largest publicly traded property and casualty insurers.  And for Johnson, it’s trading at a reasonable valuation, while also growing its earnings. 

Notably, it has a low combined ratio, which means it is very good at managing expenses and losses, with a strong ability to limit how much it pays out in claims. It’s a “boring, but good business,” according to johnson.

Here’s the top holdings breakdown for Berkshire:

Apple

Bank of America

American Express

Coca-Cola

Chevron 

Occidental Petroleum

Kraft Heinz

Moody’s

Mitsubishi Corp

Chubb

Manulife’s Big Breakout 

Manulife has been on a roll.  The insurance giant and asset manager is seeing notable traction in its business, after a decade of challenges, coming out of the financial crisis.  The company’s current CEO – Roy Gori – stepped into the job in 2017, after helping to grow Manulife’s Asian operations.  And as we saw with the company’s latest results, Asia has been one of the driving forces behind the business of late.  But there have also been transformative deals – shifting away from lower return re-insurance assets and using that capital to execute some very shareholder friendly moves, like buying back stock.  All of these developments have been noticed by investors, with Manulife’s shares  -- which under performed for years – now becoming one of the best performing names in the Canadian financial sector, with the stock at its highest level in roughly 15 years.  

For Gori, it was all part of the plan.  I sat down with him for an interview this week and he suggested there is more momentum to come.  And despite the stock’s run-up, more than two thirds of the analysts who cover the company are currently recommend the shares.

What’s next for Bitcoin?

I caught up this week with the billionaire entrepreneur Mike Novogratz.  His company, Galaxy Digital, is right in the center of the crypto economy and as a Wall Street veteran, he often shares helpful context on digital currency trends.

His current view is that Bitcoin for now will be stuck in a range between $55,000 and $75,000.

“Bitcoin always needs a narrative,” he told me.

“We’re still in a cycle where all of crypto is about a narrative. And if you think of Bitcoin as digital gold, there are always two narratives — one is the macro and the other is the adoption.”

Bitcoin, of course, has already benefited this year from the adoption narrative, after the massive success surrounding the launch of spot Bitcoin ETFs this year.

Now, in Novogratz’s view, it’s all about when the Fed ultimately pivots towards lower rates and/or big developments on the regulatory front.  Outside of those things happening soon, he sees sideways trading.

Blame sanctions for sticky inflation?

I spoke this week with economist Jeff Rubin, who tackled the geopolitical impact on inflation in his new book, A Map of The New Normal.

Rubin notes that today, a quarter of all the countries in the world are subject to some form of sanctions, affecting nearly a third of global GDP.

He also highlights that in the United States, sanctions — whether it’s those directed at Russia, China, or others — are largely bipartisan, suggesting to him they are the new normal.

A deepening divide with nations that have historically been relied upon for exports — coupled with the theme of “freind-shoring” — indicates to Rubin we’ve entered an era of higher prices for Western consumers. 

It is undoubtedly an important, long-term trend to watch.

AI takeaways from Google’s big event?

At Google’s big developer event this past week, Alphabet tried to steal some of the AI spotlight away from the likes of Meta and Microsoft.

We asked our friend Jim Anderson of Beacon about what caught his attention.  Here were his three biggest takeaways… 

1) Pointing your phone’s camera at something and using your voice to ask a question about it. They call that “multi-modal AI”—a terrible name, but an excellent capability.

2) Using natural language to query your photo library, which is great for those of us who have tens of thousands of pictures and will never get around to organizing them.

3) Bringing AI right into Gmail, Google Docs, Sheets, and Google Drive. This brings Google much closer to par with what Microsoft is doing with its Office Suite of tools.

Is Splunk Cisco’s Not-So-Secret Weapon?

Cisco investors reacted to the company’s latest results in fairly lackluster fashion.  

Indeed, the company has struggled to sell more networking equipment to its traditional customers, as many of them have yet to fully install gear they’ve already purchased from Cisco.

The stock is not highly recommended by analysts.

However, arguably overlooked during the latest update was the company’s early benefits from its $28 billion acquisition of Splunk.

That deal opens the door for Cisco to generate more predictable subscription revenue.

Couple that with the company’s commitment to shareholder friendly allocations of capital and it would seem like a unique story to watch.

Uber prepares for the robotaxi wars 

Uber is expanding, launching a shuttle bus service to and from airports, concert venues and sports stadiums.  Meanwhile, the company is teaming up with Costco on its delivery platform, Uber Eats.  Up until now, Costco same day delivery had only been available via Uber’s rival, Instacart. 

It’s another well received move by the company, which isn’t just competing with the likes of Instacart, DoorDash and Lyft.

As we’ve talked about before, Tesla’s robotaxi push will — if successful — potentially pressure Uber’s traditional business.

So any steps Uber can take to solidify its business today are being closely monitored.

Uber remains one of the most recommended stocks among Wall Street analysts.

Which companies will have big growth in free cash flow?

They say cash is king and for investors, a good measure of a company’s cash picture is free cash flow.  The more free cash flow a company is generating, the more optionality it has, when it comes to doing everything from paying down debt, to dishing out dividends or taking steps to grow the business.  Speaking of growth, technology companies are known for growing their free cash flow at an impressive rate.  And so we decided to make a list of some of the companies expected to see the biggest free cash flow growth in the next five years.  We looked at the 50 largest tech companies by market cap in North America.  And we should point out virtually all of them are poised for some solid momentum.  How do we know?  Well, we don’t know for sure.  But Bloomberg surveys analyst estimates for where free cash flow will be in five years and we’re basing our analysis on that.  

Now, since the growth is solid across the board, we decided to focus on what appear to be the fastest growing players, when it comes to free cash flow.  And to be clear, these are not the companies that will have the highest overall free cash flow in five years – just the fastest growth in percentage terms.  So we limited our list to companies that are expected to grow free cash flow by at least 100 percent.  And we also screened out any stocks that are not recommended by a majority of analysts who cover them. With that said, here’s our list of a dozen companies…

Estimated free cash flow growth over next five years:

AMD: +1,173%

Shopify: +450%

Amazon: +332%

Uber: +277%

Nvidia: +191%

Crowdstrike: +184%

Oracle: +179%

ServiceNow: +175%

Cadence Design Systems: +168%

Alphabet: +122%

Synopsys: +110%

Netflix: +100%

(based on average analyst estimates)

Investments from 10 years ago that are now worth $1 million.

As some of you know, I sometimes like to assess how far an investment can climb over the course of the decade if you hit it right.  And had you been early on a few themes we now talk quite a bit about – AI, weight loss drugs, and the rise of crypto currencies – you could be sitting on some big profits.  We wanted to look at some investments from 10 years ago, which today would be worth $1 million. Here’s how it nets out…

Nvidia: $5,500

Bitcoin: $7,000

Super Micro Computer: $23,000

AMD: $27,000

Broadcom: $52,000

Tesla: $75,000

Eli Lilly: $80,000

Amazon: $82,000

Netflix: $85,000

Microsoft: $100,000

Apple: $120,000

S&P 500: $375,000

TSX: $700,000

Can anything stop WingStop?

Shares of WingStop have surged more than 50% this year.  At a time when consumers are feeling cash strapped, chicken offers a tasty trade down from pricier meat options.

Some analysts are cooling on WingStop after its run-up, but Wedbush analyst Nick Setyan sees more room to run. His one year target price on the stock is $425, which is higher than most.

Other restaurant stocks he likes include Cava Group, Chipotle, Domino’s Pizza and Texas Roadhouse.

How does art perform as an investment?

I had a good chat this week with Robert Heffel of Heffel Fine Art Auction House.

For those who have enough capital to invest in art, he argued it’s a great long term hold.

We wanted to review the data and found some interesting stats from Citigroup.

Art as a category enjoyed annualized returns of more than 8% between 1985 and 2020, according to Citi.  That average performance topped commodities, real estate, investment grade bonds and most definitely cash.

Former NBA star Baron Davis on investing in yourself 

Baron Davis may be best know for his accomplishments on the basketball court.  But his entrepreneurial moves are just as impressive.  I caught up this week with Davis, who is also the host of the investment-themed show, Going Public.

Davis recalled how he became an early investor in Vitamin Water, a business that was eventually sold to Coca-Cola for more than $4 billion.

He was still in the NBA at the time and had already taken business matters into his hands, by becoming his own agent. 

“My marketing guy at Sprite was leaving to go to Vitamin Water,” Davis told me.

“I asked him why he would leave a big company to go to a small company. For me, it was an opportunity to sign with a startup. I took a chance on myself to learn. I thought it’d be a cool way to do an internship.  And it worked out pretty well.”

Stock Picks of The Week 

JoAnne Feeney, Advisors Capital Management: Nvidia, AMD, Broadcom, Microsoft, Alphabet, TJX Companies, Target, McDonald’s, Lennar, Home Depot, Williams-Sonoma, Rtx, AbbVie

Liz Miller, Summit Place Financial: Fortune Brands, United Health 

Paul Hickey, Bespoke Investment Group: Celsius, RH

Neela White, Blue Wing Advisory Group: Dollarama, Chartwell, Home Depot 

Michele Schneider, Market Gauge: Symbotic, Novo Nordisk, Invesco CurrencyShares Swiss Franc Trust, Palo Alto Networks, United States Natural Gas Fund LP, Coinbase

Martin Pelletier, Trivest Wealth, Wellington-Altus Private Counsel: Cenovus, Baytex 

Brianne Gardner, Velocity Investment Partners: TFI International, Alimentation Couche Tard, JP Morgan

David Nelson, Belpointe Asset Management: Virtus Reaves Utilities ETF, Leidos Holdings 

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Talk to you next week.  Happy Trading!