If you’re looking for stocks to buy and you’re concerned about stakeholder capitalism, the Engine No. 1 Transform 500 ETF (BATS:VOTE) could be just the idea generator.
Despite only holding 0.2% of Exxon Mobil (NYSE:XOM) stock, Engine No. 1, a relatively new activist investor, got the oil giant in late May to give it at least two seats on its board. Then, in June, Engine No. 1 launched its new ETF, appropriately traded under the symbol VOTE, which looks to transform 500 of America’s largest companies.
As VOTE’s website states, the ETF’s investment strategy seeks to accomplish the following:
“Engine No. 1 intends to measure the investment made by companies in their employees, communities, customers and the environment, including through the use of financial, operational, and environmental, social and governance (“ESG”) metrics.”
Interestingly, even though it seeks to transform these companies through activism and dialogue, the fund is not actively managed. Instead, it tracks the performance of the Morningstar US Large Cap Select Index, using proxy guidelines and other active tactics to influence the decisions of the companies whose stocks it owns.
The market capitalizations of the stocks in the index vary from $3.8 billion on the low side to $2.1 trillion on the high side.
I will try to pick seven stocks to buy from seven different sectors. That way, investors get some diversification with their activism.
- Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B)
- Danaher (NYSE:DHR)
- Home Depot (NYSE:HD)
- Nike (NYSE:NKE)
- Nvidia (NASDAQ:NVDA)
- Procter & Gamble (NYSE:PG)
- Salesforce.com (NYSE:CRM)
Stocks to Buy on Engine No. 1’s List: Berkshire Hathaway (BRK.A, BRK.B)
The first thing you’ll notice about this collection of stocks to buy is that the top holding in VOTE — Apple (NASDAQ:AAPL) at 5.91% — isn’t amongst the seven. That’s because Berkshire Hathaway is also in VOTE’s top 10. It owns 5.5% of the trillion-dollar tech company, making the maker of iPhone’s Warren Buffett’s largest equity holding by three-fold.
The other thing you’ll notice is that I’ve got at least one stock from five different sectors. Berkshire, of course, represents financial services. I consider BRK.B an excellent alternative to owning a broad-based mutual fund or ETF because it owns a piece or all of many businesses in so many sectors.
And, the best part is you don’t pay an annual management fee. Plus, Berkshire has repurchased a lot of its stock in recent years — Buffett bought back $24.7 billion of its Class A and Class B stock in 2020 — suggesting that one of the best values out there last year was Berkshire’s own stock.
Berkshire generated $29.4 billion in free cash flow (FCF) over the trailing 12 months (TTM). The company’s TTM FCF is greater than the current market cap of approximately 231 of the S&P 500 Index components.
That’s pretty big.
Danaher (DHR)
It’s hard to believe that Danaher was once a real estate investment trust. But, then, its largest shareholders — brothers Steven and Mitchell Rales — pivoted the company to manufacturing. Today, it’s considered part of the health care sector.
Larry Culp, the current CEO of General Electric (NYSE:GE), was the CEO of Danaher until stepping down in 2015 after fourteen years in the top job.
His former relationship with Danaher obviously helped when he looked for a buyer of GE’s life sciences division. Danaher paid $21.4 billion for it, renaming it Cytiva. In the quarter ended July 2, 2021, Cytiva contributed 4.5% of Danaher’s overall sales growth of 31.0%.
Speaking of acquisitions, in June, Danaher announced the $9.6 billion acquisition of Aldevron LLC, a privately held company that manufactures plasmid DNA, mRNA and proteins. Moderna (NASDAQ:MRNA) is one of its largest customers.
Danaher has $6.9 billion in TTM FCF. Based on $26.72 billion in TTM sales, that’s an FCF margin of 25.8%. I consider anything over 10% very healthy indeed.
Stocks to Buy on Engine No. 1’s List: Home Depot (HD)
If you were wise and bought HD stock during the March 2020 correction and still hold today, you’ve more than doubled your money in a brief 18-month window. On an annualized basis, that’s a compound annual growth rate of 65%.
The home-improvement retailer reported Q2 2021 results on Aug. 17. The company’s U.S. same-store sales grew by 3.4%, the lowest increase in the past two years and 150 basis points lower than the consensus estimate. The stock dropped on the news, although it’s regained much of those losses as I write this.
As a result of higher vaccination rates, more Americans put down their power tools and construction projects and go outside, even traveling for the first time in a while. That certainly helped put a damper on sales.
However, CEO Craig Menear stated in its Q2 2021 conference call that all 19 of the company’s U.S. regions had double-digit same-store sales growth over a two-year basis. It continues focusing on driving growth faster than its peers in any economic environment, in part, by providing the lowest prices in the industry.
Home Depot has a TTM FCF of $11.5 billion and a TTM margin of 8%.
Nike (NKE)
Nike’s “Just Do It” slogan could easily be a description of the company’s ability to grow its top and bottom line. In recent years, its focus on direct-to-consumer has accelerated the footwear and apparel giant’s growth in all regions where it does business.
The company reported its Q4 2021 results in June that were much better than analyst expectations. As a result of the strong showing, Oppenheimer analyst Brian Nagel raised his price target on Nike from $150 to $195.
“We believe NKE enjoys further room to run. In our view, recent investments are only beginning to pay off and the market is underappreciating meaningfully enhanced intermediate- to longer-term EPS power of a digitally-driven NKE model,” CNBC reported Nagel stated on Aug. 1.
Nagel further emphasized Nike’s strength by pointing out that its digital business has doubled to more than $9 billion over the past two years. In addition, its Nike Direct business, which includes its brick-and-mortar stores, accounted for 39% of the Nike Brand’s overall revenue. By 2025, it expects that to be approximately 50%.
In fiscal 2021, Nike had $6.0 billion in TTM FCF and a TTM margin of 13.5%.
Stocks to Buy on Engine No. 1’s List: Nvidia (NVDA)
Nvidia is the first of two tech stocks from VOTE. It is one of the ETF’s top 10 holdings at a weighting of 1.41%. As tech stocks go, Nvidia is one of the best ways to play the growth in gaming and artificial intelligence.
The chipmaker reported second-quarter results on Aug. 18. They beat on both the top and bottom-line. Its sales were $6.51 billion, $180 million higher than the consensus, while earnings came in at $1.04 a share, three cents better than the estimate. Nvidia expects sales of $6.8 billion, $300 million higher than analyst expectations in the third quarter.
I suppose if you wanted to grumble about its results, you could say that its 68% increase in sales during the second quarter was considerably lower than its 84% increase in the first quarter.
However, that would be a stretch. Except for its crypto-currency sales, the company is firing on all cylinders despite supply chain constraints. As for the company’s pending $40 billion acquisition of UK-based Arm, it’s confident regulators will ultimately approve the deal.
“Although some Arm licensees have expressed concerns or objected to the transaction, and discussions with regulators are taking longer than initially thought, we are confident in the deal and that regulators should recognize the benefits of the acquisition to Arm, its licensees, and the industry,” CNBC reported Nvidia stating.
I’ve always liked Nvidia because of its FCF. In the TTM, it had FCF of $6.7 billion and an FCF margin of 30.6%.
Procter & Gamble (PG)
It’s always good to have one or two consumer defensive stocks in your portfolio to deliver performance when more growth-oriented stocks are spinning their wheels. Procter and Gamble fills the bill perfectly.
Did you know that P&G is the world’s biggest advertiser? It is, according to AdAge magazine. AdAge estimates that the packaged goods company spent $11.5 billion on worldwide marketing in fiscal 2021 (June 30 year-end). That puts it ahead of Amazon (NASDAQ:AMZN).
You have to spend money to make money, goes the saying. That’s especially true during a pandemic. MarketingWeek recently discussed how P&G’s got a time-tested tradition of doubling down on advertising when facing a major crisis. As a result, it prospers when others falter.
“There’s big upside here,” MarketingWeek reported then COO, now CEO, Jon Moeller said during P&G’s Q3 2020 conference call, “in terms of reminding consumers of the benefits that they’ve experienced with our brands and how they’ve served their and their families’ needs, which is why it’s not time to go off-air.”
So, how did P&G do in 2020? It had sales of $76.1 million, 7% higher than a year earlier, while its core earnings per share grew 11% year-over-year to $5.66 a share. So, P&G spent $1 in marketing in fiscal 2021 to generate $6.62 in sales.
That’s not a bad return on its investment.
Procter & Gamble had FCF of $15.6 billion in fiscal 2021 and an FCF margin of 20.5%.
Stocks to Buy on Engine No. 1’s List: Salesforce.com (CRM)
Salesforce’s stock got a 13% increase in its target price on Aug. 22. JMP Securities analyst Patrick Walravens upped his target price to $320 from $282 while maintaining his outperform rating on CRM stock.
The analyst believes that even though he values Salesforce at 9.3x its expected 2022 revenue, that is still 20% less than the SaaS (software-as-a-Service) median multiple of 11.5x.
A few days before this latest upgrade in target price, Goldman Sachs did the same, upping its estimate by $15 to $335. GS has a buy rating on its stock. Of the 48 analysts who cover CRM, 40 have it as a Buy, with 8 at hold. There are no sell calls. As for the median target price, it is currently $300.95, providing investors with approximately 13% upside as of writing.
I expect these targets will move higher in the next few quarters. That’s especially true now that it’s closed its $28 billion purchase of Slack, the collaboration platform Salesforce will use to provide its customers with an even stronger customer relationship management platform.
Salesforce has TTM FCF of $5.6 billion and an FCF margin of 25.1%.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
