Investors who enjoyed 2019 fully invested will cheer over the market’s strong performance.
Year-to-date, the S&P 500 is up nearly 30%, erasing 2018’s year-end selling. The great returns, however, create another problem: it increases the risk of profit-taking. If this happens any time soon, investors who buy stocks at all-time highs will realize they overpaid.
If investors demand a margin of safety, they must buy stocks that still have value. The bigger the stock price discount to fair value, the more safety the stock holds.
So, with stocks priced in for sustained growth ahead, what are the seven stocks to buy before 2020? Take a look at these to get your New Year started the right way.
Stock to Buy Before 2020: Altria (MO)
Altria (NYSE:MO) spent most of the year on a prolonged downtrend. Elevated fears over the risks of e-cigarettes and vaping hammered the stock price to around a $40 low by October. Since then, the stock gained $10 in value — ahead of the health agency’s findings.
For much of the year, media reported that legitimate suppliers of flavored vaping products were a danger to its users. However, the reason is completely different — as illegal, THC-containing products resulted in a slew of recent lung injuries.
Markets punished Altria stock because the ban on flavored e-vaping lowered the value of Juul to $19 billion, down from $38 billion last year. This forced Altria to write down $4.5 billion in its investment in Juul. Today, with MO stock back in the $50 range, prospects look better for the cigarette supplier in 2020. After the Fed said it won’t raise interest rates any time soon, income investors are starving for dividend yield.
Altria stock pays a dividend that yields around 6.7%, and the stock itself is inexpensive with a forward price-earnings ratio (P/E) of 11 times. It already forecasts modest declines in sales of cigarettes. However, the drop is negligible, and will not affect Altria’s ability to pay its dividend.
Through its 45% investment in Cronos Group (NASDAQ:CRON), the firm gets to participate in the potential rebound in the cannabis sector. If cannabis stocks rebound in 2020, it will give MO stock a lift.
This scenario is not priced in its shares. In effect, conservative investors seeking income and indirect exposure to the speculative cannabis sector may hold MO stock instead.
AT&T (T)
AT&T (NYSE:T) fell as low as $37 in recent weeks after an analyst downgrade. That created an entry point for savvy investors, and even with the stock is trading close to the $39 range recently, income investors get a dividend that yields more than 5%.
Overall, the telecommunications giant has two positive catalysts ahead in 2020.
First, the 5G refresh could encourage its customers to upgrade their device — and to agree on a mobile contract plan that is more expensive. After all, the demand for low-latency mobile data access will only grow since 5G devices are capable of handling more speed. Also, the average revenue per user (ARPU) may rise in 2020. Ahead of those prospects, AT&T is already increasing its dividend by 2%.
Next, online content and strong demand for WarnerMedia movies are collectively the second positive catalyst for AT&T. New streaming service HBO Max will launch in May 2020, and cost $14.99 per month. This is far more expensive than Disney’s (NYSE:DIS) Disney+ or Apple’s (NASDAQ:AAPL) Apple TV+. However, HBO is betting that its loyal fans are willing to pay more for good, original and entertaining content.
Below: WarnerMedia’s theatrical product revenue in the last six quarters.
AT&T’s WarnerMedia acquisition may continue with more cost cutting, and this will lower its operating costs. Plus, the higher cash flow from the unit will allow the telecommunications firm to pay down its debt. Although the debt-equity ratio is around 1, cutting debt will par interest costs and improve shareholder value.
Wall Street has an average price target of $40 on AT&T stock. Conversely, a P/E Multiples model suggests that the stock has a fair value of around $50.
Ford (F)
Ford (NYSE:F) shares failed to reward its investors for the last few years. But at that time, it continued to pay a generous dividend that yields over 6%. Quarterly earnings are often mixed, as Europe and Asia keep pulling results lower.
Yet, things are looking brighter for Ford in 2020. The recently resolved U.S.-China trade war dispute — at least for Phase One — temporarily removes the macro uncertainties. And, Ford’s renewed ambitions in electric vehicles (EV) just might refresh the brand’s energy.
Ford announced the Mustang Mach-E on Nov. 18 amid criticism. People criticized the use of the Mustang name for the EV, but the Mustang naming is just a label. The crossover, electric SUV borrows many characteristics of the gas-powered muscle car. However, since no gas-powered Mustang SUV exists today, the branding may confuse consumers.
Key Ford executives were not sold on using the Mustang brand at first — but after seeing the early designs, they were sold on the idea. And why not? Using Ford’s most powerful brand will build awareness for the Mustang Mach-E. Already, the First Edition — which costs $61,000 — is sold out. Early adopters get better range and other distinguishing features, like red-colored calipers.
In late 2020, customers will get the Mach-E and may create a positive buzz for the electric car line-up. In the meantime, Ford will have to generate strong cash flows through sales of its refreshed Escape SUV and Ford Explorer. Additionally, the updated Lincoln SUV should lift full-year 2020 results, as well.
Walgreens Boots Alliance (WBA)
Of the two major drug store stocks, Walgreens (NASDAQ:WBA) is the laggard while CVS Health (NYSE:CVS) completed its rebound in 2019. Activist investors seeking to take Walgreens private may give WBA stock a lift in 2020. And, as investors wait, Walgreens stock pays a dividend that yields over 3%.
Walgreens stock fell in recent weeks as KKR (NYSE:KKR) reportedly could not get the financing to get the deal done. This should surprise no one: it wants to buyout Walgreens at $70 billion when the market capitalization is around $52 billion. Taking a step back, the privatization idea may prove too expensive for all parties involved, and KKR may find another way to extract value from this beaten-down stock.
Walgreens has high EBITDA and free cash flow that is sure to attract either another suitor or a partner for KKR. If that happens, then sometime in early 2020, the drug store may be taken private. Alternatively, the buyer could get funding in Europe or Japan — and by selling the non-core parts of the business, it could lower the net cash required to complete the deal done. The U.S. pharmacy could be merged with an insurer, enhancing the business value and the stock price.
In the fourth quarter, Walgreens reported an adjusted earnings per share (EPS) of $1.43, down 2.9% from last year. Adjusted EPS for fiscal year 2019 was $5.99. During the second half of the year, comparable sales improved, as did gross margins. So, the cost-cutting efforts are paying off — and this positions Walgreens to continue to grow its adjusted EPS in 2020.
Walgreens reported a $2.4 billion headwind that hurt its free cash flow. Yet, much of that is due to a tax payment, a one-time legal settlement and costs related to optimizing its Rite Aid (NYSE:RAD) store acquisitions. With those one-time items excluded, the drug store will likely report improving free cash flow in the next year. In a 5-year EBITDA Multiples model, Walgreens is worth over $70.
Western Digital Corporation (WDC)
Despite strong, long-term demand for storage, Western Digital (NASDAQ: WDC) shares are still well off their highs. The stock pays a dividend that yields ~3.5% and its forward P/E multiples are below 9 times. WDC’s two storage types will drive its profits higher.
First, traditional mechanical hard drives (or HDDs) will no longer play the primary
storage drives for desktop computers. Still, consumers need plenty of storage space as a backup to data stored on the cloud. And data centers will not stop its demand for massive storage, either. In 2020, WDC sees the demand environment improving, a trend it saw for a while now. Management noted that the market had too much flash demand, which hurt prices. And now that the demand-supply equilibrium is back, WDC is in a good position to grow the business in the next year.
In 2016, WDC acquired SanDisk. This raised its debt/equity profile back then. Still, it positioned WDC for growth in SSDs (solid-state drives), which is used where fast data access is needed. SSDs as primary drives are practically standard now. So, the slow rate of PC and notebook hardware upgrades will still lift WDC’s results.
In the last few weeks, WDC stock is up since its initial coverage on Dec. 2. Investors who missed the rally still have a chance to pick the stock before it moves higher. The firm has the right product line-up ahead. It is poised to grow its market share in NAND. But for now, margins in NAND are low so long as prices are unfavorable. On the bright side, the flash business and hard drive segment will continue to generate profits at the 30% gross margin or more.
Qualcomm (QCOM)
Up until earlier this year, uncertainties over its royalty revenue model hurt Qualcomm’s (NASDAQ:QCOM) stock. But, when Apple (NASDAQ:AAPL) and Qualcomm both agreed to drop all litigation, that put an end to the uncertainty. Although Qualcomm still has some outstanding litigation to deal with, investors may still bet on revenue growth accelerating in 2020.
Qualcomm unveiled a pair of new chips Snapdragon chips, dubbed 8c and 7c, which may power a PC. If the personal computer market faced a slowing demand for more than a decade, why get into this market? And, why reward QCOM stock with a higher share price? These chips have a pair of ARM Cortex-A76 performance core and six Cortex-A55 cores that are efficient. The 7c also has an LTE modem. By getting into PCs, Qualcomm builds expertise in the desktop space. So, if the smartphone market and PC market converge one day, Qualcomm is well-positioned to grow chip sales.
Strong Outlook
Qualcomm forecast 10% compounded annual growth rate (CAGR) for its Qualcomm CDMA Technologies unit. Even if CAGR falls below that, the stock still has a fair value of $94. This also implies that at a 10% CAGR, the stock is worth even more. Looking beyond 2020, the forecast for 5G phone sales doubling in 2021 is another reason to believe growth in the next few years will accelerate. Reuters reasoned that if Qualcomm sells 225 million 5G devices in 2020, its unit growth is 125% in 2021.
Intel Corporation (INTC)
Despite its mammoth size over Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC) is the underdog. Its desktop and mobile CPUs trail AMD, technologically speaking. Intel also faces supply constraints, probably due to low yield. On top of that, its manufacturing at 10nm is delayed. Still, Intel, with a modest 2% dividend yield, is a stock to hold throughout 2020.
The chip giant diversified away from the desktop chip market by announcing its acquisition of artificial intelligence chipmaker Habana Labs on Dec. 16. This will cost $2 billion. Intel said in its press release that “the combination strengthens Intel’s artificial intelligence (AI) portfolio and accelerates its efforts in the nascent, fast-growing AI silicon market, which Intel expects to be greater than $25 billion by 2024.”
After Intel’s strong run-up to 52-week highs this year, markets are poised to continue bidding the stock higher in 2020. Of course, this comes at a risk: Intel’s revenue from AI may not play out as it predicts. Conversely, the company’s acquisition of Mobileye is a $70 billion opportunity by 2030. Its expertise in computer vision fits nicely with Intel’s expertise in computing and connectivity solutions. Automobile companies keep pushing more technology in vehicles, so Intel is strategically positioned for growth in this market.
Strong Prospects for Both AMD and Intel
AMD fans will keep citing that Ryzen on the PC and EPYC on the server will take Intel’s market share. However, Intel still has a foothold in the original equipment manufacturing (OEM) space. Its revenue and profits will hold up in 2020 for now. Eventually, Intel will need to release faster, more efficient chips to prevent further market-share loss.
Chris Lau owns shares of F.
