Over the last decade, investors have become accustomed to low interest rates.
Inflation is no longer the threat, they say. Deflation is the threat. During the pandemic, the Federal Reserve pushed rates to zero to keep the economy afloat. Investors who bet on the Fed prospered.
But all good things come to an end. As the economy recovers, the Fed will accept higher inflation. This means rising market interest rates, and rising mortgage rates hitting the housing market.
Young investors may not know where to go in this kind of environment. Time to ask your dad or, more likely, your granddad, what he did during the 1970s.
During that period, hard assets were precious. Much of the Houston skyline was built during the 1970s. I watched it rise from my Rice dorm room. Many of the new skyscrapers were for hot new banks, who could sell money for more than it cost. Companies whose demand was price-inelastic prospered.
It’s unlikely we’ll see double-digit inflation this time. Technology is making deflation too strong. But even a small rise could have a big impact. What happens to housing prices when mortgages cost even 5%?
Recently I looked over the market, looking for opportunities in this new theoretical age. Here is what I found.
- Blackrock (NYSE:BLK)
- JPMorgan Chase (NYSE:JPM)
- First Solar (NASDAQ:FSLR)
- Boeing (NYSE:BA)
- General Motors (NYSE:GM)
- Facebook (NASDAQ:FB)
Stocks to Buy: Blackrock (BLK)
In a high-inflation environment, protecting wealth becomes paramount. No company does that as well or as cheaply as Blackrock.
I called this “the best investment of the 21st century” in 2017. It still is. Blackrock shares are up 84% since my 2017 story came out. They open Dec. 8 at $703, a market cap of $108 billion, with a pricey (for the banking sector) trailing price-earnings ratio of 23.
It’s fully justified.
Blackrock isn’t a bank. It’s an investment advisor, helping institutions invest across a broad range of asset classes, public and private. It’s best known for its exchange-traded funds, iShares, which had about $7.4 trillion in assets under management at the end of last year.
Think of Blackrock as the original fintech. Blackrock runs money inexpensively thanks to its portfolio management system, Aladdin. It has spun out other software — consider iRetire, a retirement planning tool, or Aladdin Climate, which can assess the climate risks of investments. Last month Blackrock bought Aperio for $1.05 billion, which helps wealth managers handle multiple tax-advantaged accounts for rich families.
Right now, Blackrock sells most of its services through financial advisors. But if inflation rises expect more of its services to be sold the way it sells iShares, directly to investors. It won’t make you rich, as it would have if you had gotten in early in this century. Its aim is to keep you rich, or at least comfortable. While critics focus on the ultra-wealthy, millions of upper middle-class people have stock gains that now offer gold-plated retirements. If, that is, we can keep the money.
Blackstone’s job is to help us keep it.
JPMorgan Chase (JPM)
As trading opened Dec. 8, shares in JPMorgan Chase still cost over 12% less than at the start of the year.
At $122 each, that’s a market cap of $370 billion. Shares have a modest trailing p/e ratio of 16, and the 90-cent-per-share dividend still yields nearly 3%. This makes the country’s biggest bank a good idea for conservative investors. If things continue as they are, you have the dividend. If inflation gives money a price, your gains could be substantial.
JPMorgan Chase managed to beat analyst estimates for its third quarter. Net income was over $9.4 billion, $2.92 per share, but revenue was $29.9 billion, slightly down from a year earlier.
What’s working at JPMorgan Chase right now is the investment bank. Traders expect a 20% jump in their bonuses. Merger advisors are being told not to take a long Christmas holiday. The bank is hiring wealth managers by the score, with Mandarin skills preferred. Other salaries are being frozen.
On the commercial banking side, JPMorgan is seeking bargains in fintech. It has created a new service to get money to merchants before settlements. There’s new hardware to compete with Paypal (NASDAQ:PYPL) and Square (NYSE:SQ).
The virus represents a huge transfer of wealth from the middle class to the wealthy. The election results mean that won’t be reversed. JPMorgan has made $1 billion this year just trading and storing gold for its clients.
Investment banking remains healthy. Commercial banking should come back as interest rates rise and margins for money improve. But big banks no longer control the financial system, as they did as recently as 2008. That’s why JPMorgan Chase stock remains cheap. Buy it for the dividend, and as a hedge against a shadow banking crisis. Just don’t expect fat returns.
First Solar (FSLR)
If you can sell something for less than rivals, you can do business.
That’s especially true in energy, where solar energy has become the cheap power.
Having covered First Solar for a decade, it was gratifying to see the solar panel stock finally grow up. First Solar opened Dec. 8 at $88.74 per share. It’s up 61% so far in 2020. It now sports a market cap of $9.5 billion, a trailing p/e of 43.
The cost of solar power has now fallen below that of alternatives, like building a natural gas plant. President Donald Trump’s China trade war has also kept cheaper Chinese panels off the U.S. market. First Solar wants to keep the tariffs, accusing the Chinese of “dumping” them.
Solar power is booming, even in Texas, where solar can augment the last decade’s wind boom. Solar power peaks in the afternoon, wind at night. A balanced approach maintains the grid and reduces the need for battery storage.
The risk with First Solar is its technology, which is nearing its efficiency limits.
First Solar makes thin film panels from cadmium telluride, rather than hard panels with silicon. The panels are perfect for utility-scale installations. The company said a year ago that production is sold out until the second half of 2021, during which it expects to install 6.5 GWatts of power.
But there’s more than one way to harvest the Sun. Solar fabrics, flexible sheets imprinted with nanoparticles, could make any surface a solar panel. Tesla (NASDAQ:TSLA) is already cutting installation costs with “solar shingles.” Building-Integrated Photovoltaics (BIPV) may make panels obsolete.
First Solar is not helpless in the face of these trends.
The company had $1.6 billion of cash at the end of September, against just $405 million of long-term debt. It has earned over $350 million in operating cash flow in the past two quarters. Its capital budget is just $100 million/quarter.
There’s a second trend for 2021 beyond inflation. A century ago, Warren Harding called it “a return to normalcy.”
Someday we will fly again.
In February 2019, a few months after a Lion Air 737-MAX crashed in Jakarta, killing 189, Boeing stock peaked at about $440 per share. The pandemic has cut Boeing’s shares in half. Shares were under $220 earlier this month. Through most of 2020, they’ve traded under $200. This past February shares were still trading around $340 each.
So with the pandemic’s end in sight, analysts rate the stock a moderate buy. One has a price target of $306. But half remain on the fence.
It will take time for Boeing to fully recover. Boeing’s debt has nearly tripled this year, reaching $57 billion at the end of September. Revenue that peaked at over $100 billion in 2018 should be just over $60 billion this year. There has been $14 billion worth of negative operating cash flow so far in 2020.
Traders now are looking at the investment case as half full. Boeing has the cash to survive. The 737-MAX is once again cleared to fly. There is still an order backlog for over 3,000 jets. Delta Air Lines (NYSE:DAL), which didn’t have the 737-MAX in its fleet when the plane was grounded, is now hinting it might buy some.
Boeing recently issued a 20-year forecast, expecting China to buy 8,600 new planes by 2040. That’s 7% more than predicted before the pandemic. That’s a prize worth $1.4 trillion.
Boeing’s military unit remains strong, and not just in the U.S. Boeing is America’s second-largest military contractor, although that still represents less than one-third of the business. Military and space revenue was down just 2% in the most recent earnings report. The government is still paying Boeing’s space bills, with its Starliner expected to launch astronauts next year.
When the 737-MAX scandal began, Boeing was the unquestioned aviation leader. Now it has lost ground to Airbus (OTCMKTS:EADSY), the Chinese, and SpaceX. The stock price reflects that. Its why bargain hunters are going for it in a big way.
General Motors (GM)
International Business Machines (NYSE:IBM) was a great investment through the 1970s. It had a monopoly on mainframes and used the profits to invest in new areas like the PC.
General Motors is now trying the same thing. In this case it has a big share of the market for gas-powered SUVs and pick-ups. Its plan is to use those profits to get into electric cars.
The catalyst for its recent rise was a Nov. 8 earnings announcement, showing the turn is possible. This showed non-GAAP net income of $5.3 billion, $2.83 per share when diluted and adjusted, on revenue of $35.5 billion. Operating cash flow was $9.9 billion, more than double 2019’s figure. That means there’s plenty of cash to manage GM’s long-term debts of $83 billion and maintain its pivot toward electric vehicles.
CEO Mary Barra plans to spend an average of $5.4 billion per year releasing 30 electrics by 2025, representing 40% of its production. The efficiency of electrics means it no longer has to fight over emissions standards.
GM is also seizing new opportunities created by data. GM will sell auto insurance through its OnStar system, which collects data on a car’s use. OnStar was originally pitched as a safety feature, a way to connect with operators during a breakdown. The use-based policies will debut in Arizona, basing prices not just on miles driven but on data about how the miles are driven.
Analysts now see two companies at GM. One is an electric vehicle start-up hiring thousands of programmers, big enough to sell batteries to other, smaller players. The other is the company still selling gas-powered trucks and SUVs.
You can see GM as a glass half-full or a glass half-empty.
The pivot toward electrics is boosting the stock price. But its market cap remains below that of Nio (NYSE:NIO), the Chinese electric vehicle start-up.
The bet is that Trump-era cars continue to spin-off cash to fund a Biden-era makeover. Barra insists other lines of business, like selling GM’s technology to rivals, can make GM a growth stock again.
There are two reasons to speculate on GM today. Barra may bring back the dividend that was cancelled early in 2020. Once the electrics are rolling, she might also jettison the older company, creating capital gains.
Both scenarios are speculative, but there are no gains without risk.
If there is one real-estate-based IPO you might buy for the new environment, it’s AirBnB. The company hadn’t officially come public as this was written, but it will be listed on the NASDAQ under ABNB.
Buying the IPO off the S-1 might be premature, with it now looking for a valuation of around $42 billion. Airbnb says it will sell 51.9 million shares later this month at $56-$60 each. But Facebook fell from its IPO price of $35 and stayed there for some time. It’s now worth over $280. AirBnB did a 2017 funding that valued it at $31 billion.
According to the S-1, AirBnB is a highly seasonal business. Profitable during the summer, it had a loss of $674 million for all of 2019, and nearly $700 million for the first nine months of 2020. This came despite cutting marketing by half and administrative costs by 20%, creating a restructuring charge of $137 million. During the worst of the panic revenue was down 70%. Still, the company had almost $4.5 billion in cash at the end of September, with $3.2 billion in debt convertible into stock.
As with Uber (NYSE:UBER), which spent years below its IPO price but is now worth $53 per share, Airbnb carries regulatory risks. Cities want to limit how much of their housing is under the company’s virtual control. At the same time, AirBnB wants its own protections, from Google’s Travel and Vacation Rental service.
The bullish case for AirBnB is that it could become more valuable than Booking.Com (NASDAQ:BKNG), which has a market cap of $86 billion. Most of its listings are still from individual owners, not corporations. Its new “experiences” service, people hiring themselves out as tour guides, could become a $1.4 trillion market, employing millions of people. That’s almost as much as the $1.8 trillion that could come from short-term rentals.
Everybody hates Facebook.
But shares are up 40% in 2020, opening Dec. 8 at about $286.01 each. The company, founded in 2004, is now worth more than General Electric (NYSE:GE), Exxon Mobil (NYSE:XOM), Intel (NASDAQ:INTC), AT&T (NYSE:T) and IBM put together.
Facebook’s opponents still have no idea what it is. Facebook is a free, global phone company. Billions of people who had no connection to the outside world at the turn of this century now have smartphones, wireless internet, and Facebook accounts.
It’s about to get bigger.
The reason is Diem. Diem will issue a cryptocurrency — technically a stable coin backed by real currency, called the Diem Dollar. It will let users trade goods and services, using this currency, over Facebook’s WhatsApp. Accounts will be held in a “digital wallet” called Novi.
Facebook has more control over, and a bigger equity stake in, Diem than it did in its predecessor, Libra. That’s because it doesn’t have those pesky banking partners. Along with Kustomer, a customer service tool it recently bought for $1 billion, anyone can use Diem, WhatsApp, and Kustomer, to create a digital marketplace, practically free.
My comparison with Alibaba is deliberate. Until China halted Ant’s IPO last month, Alibaba’s market cap had climbed above that of Facebook, powered by Ant. Facebook is now about $100 billion ahead.
Just as regulators don’t understand Facebook as a phone company, they don’t understand Diem as a bank.
By moving transactions in the form of cryptocurrency, Diem eliminates settlement charges faced by Visa (NYSE:V) and other processors. The difference may not mean much to an American buying a $100 Christmas present. But it means everything to an Indian farmer who makes 36,000 rupee, about $487, per year.
Winning the business of that Indian farmer may also not sound like much. But there are 150 million of them. There are billions more people, in cities throughout the developing world, who make just as little. But their financial power, added together, is mighty. Facebook won’t let China and Alibaba take it without a fight.
Do you really want to stop them?
At the time of publication, Dana Blankenhorn had long positions in BABA and INTC.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.