Speculation about stocks to buy comes and goes in waves.
Fast money piles into what seems hot, then rushes away as new prospects are found. Amid those quick sales investors may find bargains, good companies whose stocks were abandoned by speculative profit taking.
The recent fall in big tech stocks, and the collapse of Archegos Capital, left damaged shares in their wake. I spent last week picking through them, looking at their real prospects. The question I sought to answer was whether an investor, using time as their ally, could find bargains here.
Time. That’s the difference between speculating and investing. Speculators seek a quick profit. They may be uninterested in fundamentals. They’re like 19th century gold miners, adrenaline junkies searching for the next score. Investors are like the merchants and farmers who follow those gold miners. We’re willing to invest the years necessary to get a real return.
Patience will usually be rewarded. You want to get in on the ebb tide, but in the end, tides matter less than whether a company has a runway for growth, a management that’s knowledgeable, and customers who will come back.
Here are seven to consider:
- Apple (NASDAQ:AAPL)
- Microsoft (NASDAQ:MSFT)
- Adobe (NASDAQ:ADBE)
- Salesforce (NYSE:CRM)
- Alphabet (NASDAQ:GOOG, GOOGL)
- ViacomCBS (NASDAQ:VIAC)
- Discovery (NASDAQ:DISCA)
Stocks to Buy: Apple (AAPL)
Apple is the world’s first $2 trillion company. Before Saudi Aramco went public late in 2020 it was the world’s most valuable company.
But does it offer real value to a new investor? I concluded recently that it does.
While the iPhone business has stabilized, there are still growth catalysts. Payments are one. Health, through the Apple Watch, is another. TV could be a third.
Meanwhile, the search for new, faster profits may have created a bargain here. Apple shares that sold for $143 in February were selling at $125 in April. They’re still not cheap. The once-generous dividend now yields less than 1%, and the price-to-earnings ratio is 34. But the stability of Apple’s business is its attraction, more than a short-term capital gain.
Apple will be maintaining its fat margins, nearly 20% of revenue reaching the net income line. It will do this by designing its own chips, manufactured by Taiwan Semiconductor (NYSE:TSM). This will unify the PC, phone and eventually Watch product lines under compatible operating systems. A decade of growth has built a stockpile of $91 billion in cash, making these investments affordable.
Time is still on Apple’s side
In early April, the market cap of Microsoft was within 15% of Apple’s and momentum remains on its side.
While shares were hit by selling in mid-February, they had already recovered to new highs by April. They’re continuing to close the gap with a market cap of $1.88 trillion. Their P/E ratio is even higher than Apple’s at 37, meaning investors expect big income gains ahead.
It’s the Azure cloud that powers Microsoft. It’s the only cloud network that’s gaining on Amazon (NASDAQ:AMZN), a platform powering both its own software stack and its partners. Instead of selling software on disks, they now sell it through online subscriptions, generating reliable income and margins.
These software gains let Microsoft get into hardware. This story is written on a Microsoft keyboard. Microsoft’s Xbox is winning its long-running war with the Sony (NYSE:SONY) PlayStation. Steady profits justify long-term investments in “mixed-reality” headsets, with 100,000 going to the U.S. Army for $21.9 billion and, eventually, into your head as well as Microsoft Mesh.
While politicians win applause for demanding the break-up of Apple’s cloud rivals, like Alphabet , Amazon and Facebook (NASDAQ:FB), Microsoft has already learned its lesson. Its social network, LinkedIn, is all-business. Its online efforts remain a scrappy underdog that will benefit from the antitrust push. Satya Nadella, who has made himself a legend as Microsoft CEO since 2014, is still just 53.
I’m old enough to remember when Adobe was founded in 1982, around the idea of “desktop publishing.” Those who invested in it became rich. Thanks to its partnership with Microsoft Azure, those who invest now can stay rich.
Shares fell from $500 each to $421 in February and early March. But by April they had made back nearly all that ground, opening for trade at $491. At that price, the stock isn’t cheap, a price to earnings ratio of 42, a market cap of $235 billion, and no dividend. But the stock has averaged 80% gains over the last five years, and more should be coming.
That’s because Adobe sells its software by subscription. Its Creative Cloud, Marketing Cloud and Sales Cloud command margins of 85%. It’s getting into managing customer workflows by buying Workfront for $1.5 billion. That acts as a bolt-on to its other offerings. If you’re in marketing or any large-scale creative work, your Adobe bill is the first one you pay.
Stocks to Buy: Salesforce (CRM)
Salesforce was founded in 1999 to sell applications based on Oracle (NYSE:ORCL) database software. It passed Oracle in market cap during 2020 as the cloud made such purchases obvious to buyers and highly profitable to sellers.
In early April, the shares had yet to recover from their February sell-off, which sent them from $247 each to a low of $206. Oracle has exceeded its market cap, having finally gotten the cloud religion. But that may be temporary because Salesforce has such momentum.
The momentum is in the market even more than in the stock. Revenue has nearly tripled since 2017, but the stock is only up 200% over the last five years. Further growth is assured as the company prepares its largest acquisition to date, Slack (NYSE:WORK), which will cost $27.7 billion.
Father Time is undefeated, and co-founder CEO Marc Benioff now owns Time magazine. But the future looks secure with Bret Taylor, 42, as heir apparent. Taylor helped launch Alphabet’s Google Maps, and joined with Quip, a mobile productivity suite Salesforce bought in 2016.
The best time to buy good companies is when acquisitions like Slack cause analysts to doubt them. Now is such a time.
Alphabet (GOOG, GOOGL)
Alphabet has been the hottest tech stock of 2021, rising 24%. Its market cap in early April was up to $1.5 trillion, with a P/E ratio of 38.
The House of Google is hot because it is monetizing its monopolies. Its search engine dominates online advertising, and now its YouTube video service dominates TV as well. The company is losing money to gain share in the enterprise cloud market, but investors are betting that will soon become an enormous profit center. If it does, the stock’s current price will look cheap.
It takes money to maintain these advantages and Alphabet is spending $22 billion/year on undersea cables and new data centers. Google is one of five “cloud czars” whose investments, alongside those of Apple, Microsoft, Amazon and Facebook, now dominate the global economy.
Monopolies are hard to maintain, however, in the face of government action. Regulators are increasingly skeptical of every Google move. They want to tax it, regulate it, and fine it. But every one of the analysts following Google at Tipranks say you should buy the stock. If my portfolio weren’t full of the other cloud czars, I would be doing just that.
When ViacomCBS shares topped $100 each in mid-March it made no sense to me.
Now, after the forced liquidation of Archegos Capital, which was bidding the stock up with leverage, it might be a bargain again. (ViacomCBS helped make that happen by deciding to raise capital based on Archegos’ buying.) It was trading in the mid-40s, a market cap of $27.8 billion on 2020 revenue of $25.3 billion.
My best analogy to ViacomCBS is Under Armour (NYSE:UAA), which lost the sporting good chains who’d distributed its merchandise and has yet to recover five years later. In ViacomCBS’ case, the fading distribution channels are movie theaters, broadcast TV and cable, all losing share to streaming.
The answer, according to the company, is Paramount+, a streaming service formerly called CBS All-Access, which claimed almost 20 million users at launch. That sounds great until you realize Netflix (NASDAQ:NFLX) has more than 200 million paying customers, Amazon Prime has 150 million, and Walt Disney (NYSE:DIS) 100 million.
ViacomCBS also owns Showtime, a pay cable channel, and Pluto, which streams cable. But it’s clear the company needs a stronger connection with customers to survive. We know this because it had to sell rights to Paramount’s top 2021 movie, Coming to America 2, to Amazon.
It would cost Apple, with a market cap over $2 trillion, the equivalent of seat cushion money to buy ViacomCBS for even $40 billion. That, or a similar buy-out by Facebook, is something worth speculating on, especially since principal owner Shari Redstone is 66.
Stocks to Buy: Discovery (DISCA)
In mid-March, before the collapse of Archegos Capital, which is still being unwound, Discovery was worth more than $35 billion. But this was one of Archegos’ prime holdings, so by early April that was under $20 billion.
I put out a bearish column on Discovery in early March, after seeing Oprah Winfrey sold one-quarter of her OWN network to Discovery in December for half what she’d sold another quarter for three years before. You don’t become a billionaire by being stupid. Oprah Winfrey is not stupid.
Few cable programmers are as hard hit by the streaming revolution as Discovery. Its focus on reality TV, with made-up stars who otherwise lead ordinary lives, make it vulnerable. It is trying to cross the chasm between cable and streaming with Discovery+, selling direct access to its library (with a few add-ons) for $5 to $7/month, even while it keeps new episodes as cable exclusives. In reporting its 2020 results, Discovery claimed 12 million subscribers for Discovery+
But as rapidly as Discovery+ is gaining streaming revenue, it’s losing cable revenue. Revenue for 2020 was below that of 2019. Start-up costs for the new service meant net income fell 37%. Analysts may be wrong, as at least two gave up on the stock as it was falling. The library would also make a nice bolt-on for Amazon Prime. But even at its new, lower price, you’re still speculating when you buy Discovery stock today.
At the time of publication, Dana Blankenhorn directly owned shares in AAPL, MSFT, FB and AMZN.
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 firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.