The ongoing saga between Reddit’s sub-group, Wall Street Bets, and the billionaire hedge funds short-selling stocks is barely over. It is only the beginning if regulators and the government allow free markets to continue to determine safe stocks. And why should they restrict anything? Retail investors like you and me simply buy GameStop (NASDAQ:GME) and hold forever. In doing so, as long as demand for the stock exceeds supply, GME stock will hold or rise in value. Short-sellers will end up losing more money as this happens. These bearish traders should not have been allowed to take an over 120% short float on the stock. That is how the short-selling mechanism works.
By that extension, option puts and buyers on margin will further amplify the rally in GME stock. This will force the short-sellers to sell their other long positions to cover the rising costs. As the battle between the Reddit bull gang and institutional continues, widely held stocks may fall.
What are the seven stocks that are safe for Reddit’s WSB bull gang? The stocks to consider should have a large float and a big market capitalization. A high short-float position will help the stock rise on short-covering. The last metric is a bonus. Seldom do companies with a large market cap have a high short float, too. The seven stocks are:
- Rocket (NYSE:RKT)
- International Business Machines (NYSE:IBM)
- Alibaba Group (NYSE:BABA)
- 3M Company (NYSE:MMM)
- Johnson & Johnson (NYSE:JNJ)
- Coca-Cola (NYSE:KO)
- Cloudflare (NYSE:NET)
Rocket (RKT)
Rocket, a mortgage finance services firm, is a multi-billion company by market capitalization. The short float is around 37%. Aside from a short-squeeze lifting the stock, the company has strong fundamentals.
Rocket posted revenue growth of 163.3% year-on-year to $4.74 billion. Non-GAAP EPS topped $1.21. When high-flying software stocks are losing money but rising in value, Rocket is getting overlooked by value investors. The company has strong client loyalty and has more opportunities ahead to help them refinance. As interest rates stay at low levels, customers will buy other products like auto or personal loans.
Eventually, interest rates will rise. It may take one or two years for higher rates. When that happens, Rocket collects the related monthly payments. Volatility in rates will spur mortgage refinancing. This will fuel higher demand for the company’s products and services.
International Business Machines (IBM)
IBM is stumbling on its own so Redditors and hedge funds are unlikely to bother trading this stock. Its well-known struggles are hurting IBM’s stock price. Add the dividend that yields around 5.5% and investors have a retirement stock to consider.
In the fourth quarter, IBM posted non-GAAP earnings per share of $2.07. Revenue fell a disappointing 6.5% to $20.37 billion. Its adjusted gross margin of 52.5% beat estimates, giving investors some hope. The company is spinning off its legacy business to focus on cloud and AI services. The pivot to the faster-growing areas of technology will pay off.
IBM stock has a strong quality score and margin of safety.
In the table, IBM has a margin of safety of 35%. The company has a high-quality score compared to its peers.
Investors willing to hold IBM stock for the long-term will need to wait for the turn-around to play out. In that time, shareholders collect a steady dividend. This payout also deters bears from betting against the stock. It will also keep IBM out of volatility as speculators trade other stocks instead.
Alibaba Group (BABA)
Alibaba is the Amazon.com (NASDAQ:AMZN) of China. Its market capitalization will eventually approach the $1 trillion mark. The Chinese government’s crackdown on Ant Financial led to speculation on co-founder Jack Ma’s disappearance. He reappeared recently.
The uncertainties around BABA stock and Chinese regulations will keep investors preoccupied for a while. Investors may accumulate shares of the e-commerce firm. In mid-January, the Wall Street Journal reported that Alibaba stock was among dozens of companies that will not be banned from the U.S. market exchanges. Removing that uncertainty will eliminate another headwind for shares.
Alibaba is pushing ahead in the cloud services sector. For example, it has a new partnership with Saudi Telecom Company. Worth $500 million over five years, Alibaba Cloud will set up an office in Riyadh. It will provide services and training for STC.
On Wall Street, the average price target on Alibaba is $327 (per Tipranks). This target is likely too low. The fair value likely assumes a discount rate of 12% in a 5-year discounted cash flow growth exit model.
| Metrics | Range | Conclusion |
| Discount Rate | 12.5% – 10.0% | 12.00% |
| Perpetuity Growth Rate | 3.5% – 4.5% | 4.00% |
| Fair Value | $295.74 – $456.08 | $325.61 |
Readers may forecast a lower level of uncertainty by lowering the discount rate and increasing the growth rate. That would translate to a higher fair value.
3M Company (MMM)
As a protective gear maker against the novel coronavirus, bearish hedge funds will not bet against 3M. The company also posted modest year-on-year revenue growth. It also paid down $800 million of its debt in the last quarter.
In Q4, 3M reported sales growing by 5.8%. Covid-19 respirator sales accounted for $280 million in revenue. So, its safety and industrial segment posted the best performance increase. Revenue grew by 12.7%. Revenue growth from consumers topped 10.6% YOY.
The company forecasts EPS of $9.20 to $9.70 a share in the fiscal year 2021. It also forecasts sales growth in the 5% to 8% range.
By distributing 2 billion respirators globally and helping drug companies develop and manufacture vaccines, 3M is helping the world in the fight against the coronavirus. At a price-to-earnings in the 20 times range, MMM stock could dip. Together with a dividend that yields more than 3%, 3M shares are appealing for investors.
In a neutral scenario where revenue grows by only 1% annually, 3M stock is worth almost $200 a share. This 5-year DCF EBITDA Exit model applies an 8% discount rate.
Johnson & Johnson (JNJ)
Recently, Johnson & Johnson dipped after posting a 66% effectiveness for its Covid-19-19 vaccine. The low efficacy rate spooked investors. Yet patient investors should not write off JNJ’s prospects this year.
JNJ posted an efficacy rate of 72% in the U.S. and a 57% rate in South Africa. The results suggest that the vaccine will not help people when the highly contagious variant is highest. Still, the vaccine had an 85% effectiveness in preventing severe disease. JNJ said that the efficacy increased over time. After day 49, participants reported no cases of infection.
JNJ’s vaccine is a one-shot dosage. That gives the product an advantage over the mRNA-based ones. Former Food and Drug Administration Commissioner Dr. Scott Gottlieb wrote, “We now have 3 highly effective vaccines. This vaccine showed sustained (and increasing!) immune protection over time, perhaps from a robust early induction of memory immune cells (CD4 and CD8). The protection was strong and durable.”
Coca-Cola (KO)
Besides offering a cool sweet beverage, Coca-Cola’s dip recently should not go unnoticed. Analysts downgraded KO stock recently. This created an entry point for value investors.
In November 2020, the Internal Revenue Service won a case against Coca-Cola, leaving it on the hook for a $1.8 billion tax bill. At the end of last year, though, Coca-Cola announced a 2,200 job cut. The workforce restructuring is a response to the pandemic. It will incur a severance cost of $350 million to $550 million.
The company also had to adjust for a net sales decline of 9% in the third quarter.
KO stock is better than the industry and S&P 500 on quality.
KO has a strong quality score. Margins will improve this year as sales bounce back. More recently, rising operating costs and lower revenue forced the firm to cut down its portfolio of product offerings. For example, it stopped producing Tab and Odwalla.
Cloudflare (NET)
Popular sites like Reddit will need cloud-based hosting to support the growing traffic. Cloudflare posted revenue growing 54.5% Y/Y to $114.2 million. Its gross profit of $87.2 million is a sharp increase from $57.9 million last year.
Working from home is unlikely to ease anytime soon. The vaccine will bring life back to some normalcy. But companies do not need to bring their workers back to the physical office. After investing in Zoom (NASDAQ:ZM) and Cloudflare-powered solutions, companies are supporting remote work for the long-term period.
Cloudflare posted many milestones in the third quarter. It reported crossing 100,000 paying customers. It released more than a dozen new products and features, driving demand and upgrades. As CEO Matthew Prince said, the “world has never needed the Internet more than it has over the last nine months.” Increasing demand for a secure, reliable, and high-performing internet will lift Cloudflare’s growth this year.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
