Are you looking for stocks to buy during the novel coronavirus outbreak?
If so, the TrimTabs All Cap US Free-Cash Flow ETF (BATS:TTAC) seems like an excellent place to start. That’s because the actively-managed ETF invests in 100 companies from the Russell 3000 Index that have strong free cash flow growth, excellent balance sheets and are reducing their share counts.
It’s that last part, about reducing share count, that I’m not particularly crazy about. Over the past decade, excessive share repurchases have left many companies in a vulnerable position, struggling to find enough cash to ride out Covid-19.
Take airlines, for example. The top four airlines in the U.S. — Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL), Southwest Airlines (NYSE:LUV) and American Airlines (NASDAQ:AAL) — spent $43.7 billion on share repurchases since 2012.
Yet now they’re getting a massive bailout from the federal government.
It’s not enough for a business to grow its free cash flow over time. It’s not enough to have a fortress-like balance sheet. The current market environment has proved these statements to be true.
Taking that into consideration, here are seven stocks to buy from the TrimTabs All Cap US Free‐Cash‐Flow ETF:
- Facebook (NASDAQ:FB)
- Lululemon (NASDAQ:LULU)
- Monster Beverage (NASDAQ:MNST)
- Boston Beer (NYSE:SAM)
- MSCI (NYSE:MSCI)
- Zoetis (NYSE:ZTS)
- Apple (NASDAQ:AAPL)
A company has to know when to say no. When it comes to share repurchases, airlines clearly didn’t, and they’re back for more handouts.
Stocks to Buy: Facebook (FB)
The social media giant’s stock is nearly back to where it started the year. On Dec. 31, 2019, it was trading at $205.25.
After revenues and usage outperformed analyst expectations for earnings, FB stock closed May 1, 2020, at $202.57.
But what’s really got me excited about Facebook is the company’s recent $5.7 billion investment in Jio, the largest telecom company in India, owned by Reliance Industries, one of the country’s largest conglomerates.
Other business segments under Jio Platforms include video streaming, online shopping and news aggregation.
While Facebook gets a 9.9% stake in Jio Platforms, it is the ability to monetize the 400 million users of WhatsApp in India that should have most investors excited. Facebook has missed out on many of the growth countries for digital advertising. This investment gets it into the Indian market.
Mark Zuckerberg must be thrilled, and investors should be too.
Facebook increased free cash flow from $17.5 billion in 2017 to $21.2 billion in 2019, suggesting a compound annual growth rate (CAGR) of 10.1%. As for its balance sheet, it finished its last fiscal year with $44.3 billion in net cash.
Much like Facebook, Lululemon has regained most of the ground it lost in the mid-March crash. Now trading at $232, it’s only 15% off the all-time high of $266.20. As a result, you’re seeing more investment articles being written about its overstretched valuation.
One such naysayer is InvestorPlace’s Dana Blankenhorn, who believes that no retailer is worth 10 times sales during a pandemic. I must admit he’s got a point.
However, long before this pandemic started, LULU worked its tail off to get its e-commerce business to a place where it could compete with the best in the world, including Nike (NYSE:NKE).
At the end of March, Lululemon reported its fiscal 2019 results. Its direct-to-consumer, e-commerce business increased by 35% during the year to $1.14 billion. DTC now accounts for almost 29% of the company’s overall sales. I can recall saying a few years ago that retailers had to generate at least 10% of their sales online to be worth their salt. Lululemon’s worth a lot of salt.
Though we’re in the middle of a pandemic, everything is relative. If I were forced to own one retail stock at this challenging time, it would be Lululemon. That’s because investors are looking beyond the pandemic to see who’ll be left standing.
Lululemon increased its free cash flow over the past two years from $330 million in 2017 to $390 million in 2019, a compound annual growth rate of 8.7%. As for its balance sheet, it finished its last fiscal year with $350 million in net cash.
Monster Beverage (MNST)
Of all the picks from the TrimTabs portfolio, Monster is probably the toughest one to call on. Not because it isn’t a fantastic company — CEO Rodney Sacks has run the company for more than 30 years — but because of the convoluted relationship it has with Coca-Cola (NYSE:KO).
Not only is Coke Monster’s distribution partner, it also owns 19.4% of the company. To make matters worse, Coke launched its own energy drink line in January. KO was able to do so because the agreement between the two companies said that Coca-Cola could only start a competing brand if it had the Coca-Cola name on the can.
Well, it does. It’s called Coca-Cola Energy. I’m sure this is a small comfort for MNST stockholders.
On the one hand, Monster holds 40% of the U.S. energy drink market. Convenience and grocery stores love stocking their products. However, they also like having Coke’s products on the shelves. As Sacks stated in January, there’s only so much shelf space:
“The coolers aren’t rubber. They can’t expand. If you’re going to put Coke Energy in, what comes out? Is it a reduction of Monster?”
However, many retailers, such as Walmart (NYSE:WMT), are stocking Coke energy drinks with other soda-type carbonated beverages and away from the energy-drink section. Monster should continue to be okay.
Monster increased its free cash flow over the past two years from $890 million in 2017 to $1 billion in 2019, a compound annual growth rate of 6%. As for its balance sheet, it finished the last fiscal year with $1.3 billion in net cash.
Boston Beer (SAM)
It’s hard to believe it’s been more than eight years since I recommended investors avoid Molson Coors (NYSE:TAP) and instead buy shares of Boston Beer, the makers of Sam Adams beer, Twisted Tea hard iced tea, Angry Orchard hard cider, and Truly spiked sparkling water.
Since my November 2011 article, SAM stock is up 386% compared to 12% for Molson Coors. I might be getting pummeled in the short-term due to the coronavirus, but long-term, I still know how to pick ‘em.
Of course, a lot’s changed over the past eight years, both in terms of the craft beer market (it’s exploded) and the range of products Boston Beer offers.
Back in 2011, only the beers and hard iced tea existed. It launched the first of many Angry Orchard hard ciders in 2012, and then Truly spiked sparkling water in 2016. It’s no wonder Boston Beer has passed Molson Coors over the years. If the latter’s introduced anything worthwhile since 2011, I sure haven’t heard about it.
InvestorPlace’s Matt McCall recently discussed the short- and long-term trends that will keep Boston Beer growing. Analysts expect it to increase sales by 21% in 2020 and 16% in 2021 with earnings following along.
Boston Beer saw free cash flow over the past two years fall from $100 million in 2017 to $90 million in 2019, for a CAGR of -5.1%. As for its balance sheet, the company finished the last fiscal year with $40 million in net debt.
That might not seem like much to boast about, but compared to Molson Coors, who finished its last fiscal year with $8.6 billion in net debt, Boston Beer’s in a much better place.
If you take a look at 2020’s top-performing stocks, you’ll see companies like Zoom (NASDAQ:ZM), Teladoc Health (NYSE:TDOC) and Moderna (NASDAQ:MRNA) on the list. You wouldn’t expect to see MSCI in the mix.
Yet according to Finviz.com, of 662 companies with a market cap greater than $10 billion, MSCI stock is 24th in year-to-date performance through April 29. That’s right, a company that specializes in indexes is leading the charge in 2020.
MSCI reported first-quarter earnings on April 28. It beat the Zacks Consensus Estimate by 22 cents, delivering $1.90 a share. Compared to last year, earnings increased by 23%. On the top line, it missed by a hair, generating $416.8 million in sales in the first quarter, 0.95% lower than the estimate, but 12% higher than last year.
If you want to talk about performance, MSCI has an annualized total return over the past five years of 40.5%, almost five times better than the Morningstar U.S. Market Index.
MSCI’s free cash flow over the past two years jumped from $360 million in 2017 to $660 million in 2019, a compound annual growth rate of 35.4%%. As for its balance sheet, it finished its last fiscal year with $1.7 billion in net debt.
Of all the stocks from TrimTabs’ holdings, MSCI should be at the top of your list.
I’m a pet owner and as a result I tend to pay attention to animal-related businesses. Zoetis is the world’s largest animal health company. It is one of 11 healthcare companies held by TTAC, boasting the largest weighting of those 11 holdings.
Zoetis generates approximately half its revenue from companion animals like cats and dogs. The other half is from production animals such as pigs, cattle and the like. As a drug manufacturer, the company’s products include vaccines, anti-infectives, diagnostic tests and other products.
On April 30, Zoetis launched its latest product: Pet Insurance. Sold by its Pumpkin Insurance Services subsidiary, the company is moving to meet an underserved market in the U.S. Per Pumpkin CEO Alex Douzet:
“Pet insurance is being vastly underutilized by pet owners in America today. With Pumpkin, we are enabling pet parents to proactively prioritize the health of their pets and make the best health decisions for their animals — so we can help ensure our fur children live their longest and healthiest lives.”
According to Zoetis, only 2% of pet owners currently have any kind of insurance for their cats and dogs. During times of financial stress, as we’re currently experiencing, knowing you’ll be able to get your pet the care they need is reassuring.
Cynical investors might think Zoetis is only doing this to make more money, and they’d probably be right. But ultimately, happy pet owners make better customers than sad ones, so its a win-win situation.
Zoetis’ free cash flow over the past two years jumped from $1.12 billion in 2017 to $1.34 billion in 2019, a compound annual growth rate of 9.4%%. As for its balance sheet, the company finished its last fiscal year with $4.7 billion in net debt.
Apple remains one of the world’s biggest generators of free cash flow. That allows it to continue paying dividends and buying back stock at a time when most companies have had to cut those practices altogether.
MarketWatch recently discussed the privileged position Apple finds itself in, suggesting that it would add $100 billion to its share repurchase program when it reported second-quarter earnings while also increasing its quarterly dividend.
“Apple sits on a net-cash balance of about $100 billion and has a goal of becoming net-cash neutral ‘over time’ which analysts believe will allow it to plug away with shareholder returns even as the coronavirus crisis threatens more disruptions to its business. That’s a luxury many companies don’t have in this environment,” said MarketWatch contributor Emily Bary.
Evercore analyst Amit Daryanani believes Apple’s historically done an excellent job buying back its stock. In fiscal 2019, Apple paid an average of $190 a share for its stock. AAPL stock finished the fiscal year around $220, a 16% return on investment. Down about 6% year to date, the company’s performance in last year’s buybacks is sitting at 52%.
I’ve never been a fan of share repurchases, but when you do them as successfully as Apple does, I’m on board. Apple’s business is hurting at the moment, with all of its stores closed. Wisely, it’s saved for a rainy day. Not many can say that.
Apple’s free cash flow over the past two years jumped from $50.8 billion in 2017 to $58.9 billion in 2019, a compound annual growth rate of 7.7%%. As for its balance sheet, it finished its last fiscal year with $7.5 billion in net debt.
Apple should also be at the top of your list.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.