This week, while everyone else was trying to make a killing on Gamestop (NYSE:GME), I was tasked with looking at stocks to buy for the long term.
The hunt is on for stocks to buy that will deliver older investors income through the decade and younger investors capital gains. I saw the futility of trying to win the near-term game for myself over 20 years ago. I firmly believe that investors should use the one thing hedge funds and day traders don’t have — time — to win the game.
If you just bought and held stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) or Home Depot (NYSE:HD) through the first 20 years of this century, even starting with small, affordable positions, you’re now on easy street. Trading is a mug’s game. You get financial security slowly by investing in what works and trying to see big trends.
During the last decade, that big trend was the Cloud. Last year I identified three big stocks to buy for the coming decade. These are the end of oil, the Machine Internet, and DNA as a Programming Language.
We’re already seeing this future play out. Exxon Mobil (NYSE:XOM) is now worth less than Salesforce (NYSE:CRM). The promise of the Machine Internet is helping bring $100 billion in 5G license fees to the U.S. government alone. Moderna (NASDAQ:MRNA) became huge thanks to its vaccine targeting COVID-19 DNA.
If you understand technology’s themes and spread out your bets, you can make money this decade. When it comes to stocks to buy, ignore the news. Follow the trends.
- Beyond Meat (NASDAQ:BYND)
- American Tower (NYSE:AMT)
- AT&T (NYSE:T)
- Moderna (NASDAQ:MRNA)
- Amazon (NASDAQ:AMZN)
- Microsoft (NASDAQ:MSFT)
- Lowe’s (NYSE:LOW)
Beyond Meat is a long-term winner. We want to replace oil, but we also want to reduce the natural gas coming from cows. We’re concerned with their other impacts, like deforestation to create grassland. Vegetarians also have good hearts.
But in the short run, there’s too much of this good thing. Beyond was trading at 20 times its sales Jan. 28, after announcing a joint venture with Pepsico (NYSE:PEP) called The PLANeT Partnership. The idea is to combine Beyond’s plant-based proteins with Pepsi’s snack expertise. Pepsi can use the innovation. It makes Frito-Lay, Quaker Oats and Gatorade. Replacing carbs with protein makes dietary sense.
But what about Pepsico?
Adding plant-based protein, even as a powder, to common snack foods or flavored drinks could change their dietary profile without changing their taste much. Plant-based nacho cheese is already a thing. There are powders containing beef, pork, milk, and eggs on the market. The challenge is to get Beyond’s alternatives into products without compromising flavor, and at a price competitive with what Pepsi pays now.
That challenge can be met, and Pepsi would be a big winner in that case. All that’s happening is that the market is treating a long-term deal like a short-term trade. Beyond Meat may be worth $18 billion someday, but only when its sales are at least 4 times higher than they are. Wait for it to settle down before you buy.
Pepsi, on the other hand, can be bought today. You get a dividend near 3%, wait five years for the promise of the joint venture, and you win. The stock’s not bad even without Beyond Meat. With it, it’s even tastier. Just let it age, and when the dip comes for Beyond Meat, buy it.
American Tower: The Telecom Landlord Carries Value
While big 5G stocks to buy like AT&T, Verizon Communications (NYSE:VZ) and T-Mobile US (NASDAQ:TMUS) remain bargains because of their debt levels, their landlord, American Tower, is trading like an Internet stock.
The reason is clear. AMT has been taking over 20% of its revenue to the net income line and handing it back to shareholders. Over the last five years its dividend has more than doubled. So has the stock price.
The secret is that AMT is organized as a Real Estate Investment Trust (REIT). Those are the rules of a REIT. You build with debt and hand out profits in cash.
American Tower’s debt is cheap. Over the last six months it priced two debt issues, one for $2 billion, one for $1.75 billion. The $2 billion issue went off at prices from 1.3% to 3.1% — the latter is a 30-year note. The $1.75 billion came even cheaper, with $500 million of it, due in 2024, carrying a coupon of just 0.6%.
American Tower is also growing. In November it signed a deal to buy InSite Management Group, which manages about 3,000 sites, for $3.5 billion. Then on Jan. 14 it announced a $9.4 billion deal to buy Telxius Towers, which has 31,000 towers, from Spain’s Telefonica S.A. (OTCMKTS:TEFOF). The latter deal came with a $500 million commitment to build out 3,300 more sites in Germany and Brazil.
The deals highlighted the near-term risks of owning American Tower. If the lending window shuts, they have trouble. Over the last six months, as the interest cost of the U.S. 10-year note has nearly doubled from 0.59% to 1.09%, American Tower stock has sunk 14%.
The bet you’re placing with AMT today is that it can manage its towers and continue to draw premium rent for them, thus growing the dividend. The most recent dividend, announced in December, was $1.21/share. The previous dividend, announced in September, was $1.14/share.
The current yield on AMT at 2.04%. But buying a dividend stock means putting it away and letting time work for you. Five years ago, shares were trading at $105, and the dividend was 51 cents. If you had bought some shares then and just held on, next year’s expected dividends of $4.84 represent a yield of nearly 9.4%.
Owning AMT stock is like owning a bond. When interest rates rise, your equity value drops. But so long as AMT can keep drawing income from its assets, it’s money in the bank. That’s what income investors are looking for in stocks to buy.
AT&T: Money for Bits
AT&T delivers an even better yield than American Tower, 7.23%. It is well positioned with 5G and the promise of the Machine Internet.
But investors aren’t buying that right now. AT&T opened for trade Jan. 29 at $28.80. While its earnings beat estimates, its past still haunts.
It’s now clear that buying DirecTv and, later, Time Warner, were among the biggest business mistakes of the 21st century.
DirecTv cost $67.5 billion, including the assumption of debt. AT&T recently sought bids on the asset, which came in at $15 billion. WarnerMedia cost $108.7 billion, again including debt. WarnerMedia revenue dropped 21% during the most recent quarter, due to cord-cutting and less advertising.
But AT&T’s base business of moving bits did well. It added 800,000 net postpaid wireless customers during the quarter. Churn was just .76%. The company also added 273,000 new AT&T Fiber customers.
Comcast (NASDAQ:CMCSA), Charter Communications (NASDAQ:CHTR) and DISH Network (NASDAQ:DISH) may have teamed up to buy a competitive 5G spectrum position, but AT&T already has its network assets operating. It had $2.1 billion in capital spending during the fourth quarter. New equipment will be expensive but it can be bolted onto the existing network, which is highly profitable.
Most of today’s mobile services run in frequencies of about 2.4 GHz, close to the low end of the WiFi you have in your house. What 5G does is open a range of spectrum, from old TV signals at 450 MHz to former satellite spectrum at over 50 GHz, to digital exploitation.
This means 5G services can be run at either very short distances or very long ones, along with current cellular distances. It means backhaul, which AT&T has in abundance, becomes more important. It means new applications inside factories, homes, and cities, what I’ve called the Machine Internet, are on the way.
AT&T is burdened by its past mistakes. But there are also opportunities ahead. If AT&T can bring its asset base to bear on them, huge profits can be won over the next decade. You can get a 7% return while you wait for management to get a clue.
Moderna: Riding the COVID-19 Bull
At the start of the year I opened a speculative position in Moderna at about $110 per share.
I saw the shares as overvalued, but I had also spent two years praising its drug discovery system, which uses messenger RNA. MRNA creates instructions that DNA, the chemical at the heart of life, uses to create new proteins. I figured on taking a short-term loss. But I also believed the success of its COVID-19 vaccine, mrna-1273, would give it a financial base to capitalize on that mRNA system. So I took a risk.
On Jan. 29 Moderna was trading at over $170. Its COVID-19 vaccine is the hottest product in the world right now. But I’m not going to sell.
The reason is its pipeline. Moderna is now working on vaccines against HIV, the Nipah virus, and the flu. Its pipeline includes vaccines against the viruses that causes herpes, Zika, respiratory syncytial virus and more. The pipeline also includes drugs against heart disease and cancer.
A few years ago, Moderna would have needed partners, who would have taken the bulk of potential profits, to exploit these drugs. Now it can do it on its own. It’s beefing up its executive suite with people like Corinne Le Goff from Amgen (NASDAQ:AMGN), who helped bring drugs like Otezla to the market.
Moderna has changed the vaccine game. While AstraZeneca (NYSE:AZN) is having production delays and Johnson & Johnson (NYSE:JNJ) has yet to finish its phase three trial, Moderna is already lining up plans for “booster shots” against new variants of COVID-19, which continues to evolve rapidly.
That means the COVID gravy train may just be leaving the station. Moderna CEO Stephane Bancel says that COVID will be around “forever,” like the flu. That would mean yearly booster shots, meaning Moderna’s COVID success is sustainable.
While Moderna’s current price is built on a white-hot stock market, and on assumptions that competition may turn to dust. I like it among stocks to buy for the long-term. If we’re talking about DNA as a programming language, Moderna speaks that language.
Amazon Can Afford Some Failures
On my street, blue Amazon trucks have become as familiar as the mailman. Now the largest of the Cloud Czars by revenue (beating Apple) and the second-largest retailer in the world (behind only Walmart (NYSE:WMT)), Amazon has proven itself during the pandemic as essential infrastructure.
Investors have been richly rewarded for it. Amazon has become a profit machine. It’s due to report earnings Feb. 2. Net income of $7.26/share is expected, on revenue of $120 billion. But there’s a “whisper number” on earnings, one brokers are supposedly telling only their friends, $10.45.
Amazon is now so big it can afford some failures.
A recent Placer.ai report highlights one such failure, Whole Foods. The grocery chain Amazon paid $13.4 billion for in 2017 has suffered grievously during the pandemic. Visits fell by half at the pandemic’s height and were still down 16% in December.
But who cares? Traffic at Amazon’s warehouses was up by 50% in October, thanks to a late Prime Day, and still up by one-third over Christmas, more than making up for it. Amazon has also adjusted, making online groceries part of its Prime service and launching a second grocery chain called Amazon Go.
The same pattern can be seen in another failure, Haven Health. The effort to transform healthcare, launched with great fanfare alongside JPMorgan Chase (NYSE:JPM) and Berkshire Hathaway (NYSE:BRK.A), is being quietly shuttered. But Amazon’s Pharmacy, fueled by its PillPack acquisition of 2018, grows merrily on.
Despite its size, and its leadership in cloud, voice interfaces, and infrastructure, Amazon still faces competition. That’s good news. It’s proof that charges of monopoly are misplaced. Its technology gives it an advantage against all comers.
Amazon is still growing at 35% per year, at scale. Profitability is only growing. Even at $3,300/share, Amazon is still one of the best stocks to buy. Imagine what it could be with a split and a dividend.
Microsoft: So Much Winning
Microsoft keeps going from strength to strength.
Its December earnings release shows net income up 33% year over year, to $15.4 billion, on 17% more revenue, or $43.1 billion. More than one-third of every dollar that came in hit the net income line.
Along with Amazon and Alphabet (NASDAQ:GOOGL), Microsoft now has half the world’s cloud data centers. In 2020, while everyone was talking about Zoom Video (NASDAQ:ZM), Microsoft grabbed nearly five times more of the Unified Communications as a Service (UCaaS) market.
While less dependent on advertising than stocks to buy like Facebook (NASDAQ:FB) or Alphabet, the ad network of Microsoft’s LinkedIn is coming off a record quarter, with $2.58 billion in revenue. Microsoft paid $26.4 billion for Linkedin back in 2016 and was widely criticized for it. Even its search business, tiny next to Alphabet’s, drew $2.1 billion.
Microsoft’s quarter was strong across the board. The company’s release focused on the cloud, but its Xbox gaming unit also had a big quarter. Revenues there came to $15.1 billion.
The only concern anyone can have about Microsoft is its valuation. Investors are paying over 10 times revenue, and 37 times earnings, for Microsoft shares. But even that is more a criticism of the market than the company. The average price-earnings ratio on the NASDAQ is almost 26x and Microsoft’s results are superior.
Lowes: Marvin Ellison’s Shining Success
The biggest change made by the pandemic lies in the use of real estate. Office and retail rents are down, warehouse and home rates are up. Few benefit as much as Charlotte-based Lowe’s.
Since CEO Marvin Ellison, a former Home Depot executive, was hired in 2018, Lowe’s has become a shining success. The stock is up 83% on his watch, against a 46% rise for its Atlanta-based rival.
The momentum of the pandemic has continued. But Lowe’s stock is still cheaper than Home Depot.
Key to Lowe’s rise is the deep south, according to a recent white paper from Placer.ai. Foot traffic is up nearly 20% in Louisiana, Mississippi, Alabama, and Arkansas, where Lowe’s is stronger. (Its market share in Mississippi is nearly twice that of Home Depot.)
Lowe’s has also learned how to cater to its best customers with a loyalty program called Lowe’s for Pros, launched in July. About 63% of its store visits are now from regulars, a figure matched only by Home Depot and Menards, a privately-owned chain in the Upper Midwest. Lowe’s foot traffic has been consistently higher than Home Depot’s since June, although the gap narrowed in the most recent quarter.
Lowe’s is richly valued when compared with the market, but still undervalued compared with Home Depot, according to Trefis.
Entering trade on Jan. 26, Lowe’s was selling for $172/share. That’s a market cap of $127.5 billion on estimated fiscal 2021 sales of $72 billion. (The fiscal year runs from February to January, as is true for many retailers.) Retailers consider this is a rich valuation. It’s 1.76 times revenue, and 24 times sales. But Home Depot sells for nearly 2.5 times its sales.
Lowe’s continues to gain market share. The company has managed to improve margins even while raising salaries. The stock’s outperformance has continued into 2021, according to Zack’s. It’s so hot it has doubled the performance of Amazon over the last six months.
Both Lowe’s and HD are richly valued right now. Some of the gains from the pandemic are almost certain to be temporary. I think Home Depot still has an edge among professional contractors.
Ellison has done a superb job of improving Lowe’s merchandising, especially online, bringing the chain neck-and-neck with its larger rival. A conservative investor can buy either stock with confidence.
At the time of publication, Dana Blankenhorn was long shares in AMZN, MSFT, AAPL, MRNA and T.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.