- Nike (NKE): Best-of-breed apparel maker and a leader in sports apparel.
- Alphabet (GOOGL, GOOG): Owns the top two websites in the world.
- Apple (AAPL): Unrivaled business model with its Products and Services businesses.
- Visa (V): Runs a near-duopoly on the credit card market.
- MasterCard (MA): Like Visa, operates with impressive margins and cash flow.
- Nvidia (NVDA): Best-of-breed tech juggernaut catering to multiple end-markets enjoying strong secular growth.
- Starbucks (SBUX): A leader in the consumer/retail business and has a strong focus on shareholder returns.
Early in my investing career, I saw something that really piqued my interest: blue-chip stocks. But not just blue-chip stocks of that era. Instead, I was after future blue chips; And thus, the Future Blue Chips idea had dawned on me.
Since then, I have been hunting tomorrow’s shining stars of today, sniffing out the best stocks I can find with strong fundamentals, solid leadership and reasonable valuations.
These are long-term, theme-oriented stocks that are relying on high-quality businesses and secular trends. Years ago — perhaps a decade — I would get people that would reach out to me and say, “Hey! These are already well-known companies. Find something new, would ya!”
Well, it’s hard to be a future blue chips stock if the company isn’t already a good one. At the time, it included many of the names you see above, minus Nvidia unfortunately. On the plus side, the rest of these companies have continued to deliver the goods. And now, we’re going to go one-by-one through them to see why.
|GOOGL, GOOG||Alphabet||$2,803.01, $2,814|
Blue-Chip Stocks to Buy: Nike (NKE)
One of the largest apparel companies in the world is Nike (NYSE:NKE). It operates a wonderful blend between being a wholesale apparel maker and a high-end athletic retailer. By running its own locations, as well as selling to other retailers, Nike diversifies its revenue and is able to drive incremental margin growth to its bottom line.
In a nutshell, it can drive sales at its own locations, while relying on the size of other retailers to generate revenue. But Nike’s real crown jewel is its direct-to-consumer (DTC) business.
Referred to by the company as its DTC unit, this business is what allows Nike to drive significant margin expansion. It’s also what allowed the company to recover more quickly than most apparel makers and apparel retailers in the early days of the novel coronavirus pandemic.
With its DTC business, Nike can sell right to its customers. In turn, that allows it to build better analytics and improve its target marketing. It also allows it to cut out the middleman. Last quarter, overall revenue increased 4.9% year-over-year (YOY). However, its DTC business climbed 17% on a currency-neutral basis. So, clearly, that’s where the momentum is at.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is one of the best companies in the entire market, and there are three simple reasons why: Assets, growth and its balance sheet. Let’s go in that order.
The company commands a market capitalization of about $1.9 trillion, so of course, it has many assets. However, its main assets are Google.com and YouTube.com. Not only are these the two most popular websites in the world — akin to owning Boardwalk and Park Place in the game Monopoly — but they also boast strong growth.
That leads us to our second point. In combination with its cloud unit and other divisions, Alphabet continues to churn out impressive growth. Last quarter, revenue climbed more than 32% YOY. This year, analysts expect sales growth of 16.7%. And for 2023, those estimates sit at 15.6%. Meanwhile, earnings growth forecasts are similar.
When it comes to free cash flow, Alphabet generated $67 billion in FCF last year. That was up more than 55% from the prior year, while this figure grew more than 35% in each of the prior two years as well.
All of this growth is doing just one thing, which is growing the balance sheet. As of its latest quarter, Alphabet has $188 billion in current assets, almost $140 billion of which are in cash and short-term securities. The company also carries $14.8 billion in long-term debt, or a quarter of that when we exclude capitalized leases.
Blue-Chip Stocks to Buy: Apple (AAPL)
I refer to Apple (NASDAQ:AAPL) as having one of the best business models in the world. It runs the razor/razor blade model, but at an incredible premium.
The razor/razor blade model is premised on the idea of getting the razor into customer’s hands — even if that means giving it away at cost (or less) — so that they will continue to buy razors from you, which is the real money maker.
Rather than give away its razors though — in this case, that’s iPhones, iPads, Macs, etc. — Apple charges a hefty premium. They mark these devices up in price to the point where they alone generate an enormous business for Apple.
So, what then is the razor blade portion of the business? Services.
Last quarter, overall revenue grew 11%, while Services revenue grew almost 24% YOY. Not only is it outpacing the company’s Products revenue in terms of growth, and overall revenue growth, but Apple’s Services unit is more than twice as profitable as its Products business. And that is the main catalyst that people need to understand.
Outside of the tech space, these next two companies have been some of the best performers over the last decade. Visa (NYSE:V) and MasterCard (NYSE:MA) run what I like to call a “toll booth” on transactions.
There’s a secular trend that’s been underway for years, as consumers transition from cash and check to credit and debit. Additionally, the rise of online and digital sales has only fueled this move, as consumers obviously find it easy to shop.
Specifically, with these two businesses, investors have been quick to critique the valuation by pointing out that Visa stock trades at more than 17 times its trailing 12-month revenue. In the past, this valuation has also been an issue. Even during generous market periods, that’s a rich valuation for many growth stocks. However, in those instances, investors aren’t taking profits into account for the growth stocks, because many don’t have any. And in the case of Visa, it’s incredibly profitable.
Overall, the company sports gross profit margins of almost 80% and net profit margins of 51.6%. These metrics aren’t back to the pre-pandemic highs just yet, but they are inching in that direction now. Therefore, it makes a great option among the top blue-chip stocks to buy.
Blue-Chip Stocks to Buy: MasterCard (MA)
MasterCard is very similar to Visa. Like the latter, MasterCard also tends to trade at a high price-sales (P/S) ratio. While many will glance at this metric and dismiss these stocks, it’s a foolish way to evaluate them. Admittedly the valuations have crept higher, but from this standpoint, they have almost always been elevated. And yet, investors have reaped enormous rewards by staying long Visa and MasterCard.
In fact, 76% of revenue is converted into gross profit and almost half of revenue falls to the bottom line. In turn, MasterCard boasts a net profit margin of 46%. Of course, like Visa, these margins are not back to pre-pandemic levels; But they do continue to climb.
Collectively, the major risk to these businesses isn’t digital sales, cryptocurrencies or otherwise. It’s a recession, either globally or domestically. Lower consumer spending will be a big net negative to these stocks specifically since spending is what drives the top and bottom line.
As one of the greatest companies in the market as well, Nvidia (NASDAQ:NVDA) caters to multiple end-markets that are enjoying long-term secular growth. Some of those end markets include:
Datacenter, cloud computing, supercomputing, artificial intelligence and machine learning, graphics, gaming, autonomous driving and automotive, drones, robotics, the metaverse and more.
Moreover, when you look at those markets, it’s pretty clear to see the trends. Do customers want faster computers, better graphics, and more responsive gaming and control (for drones, robotics, autonomous driving)? Do they want faster cloud-based applications and are they generating more data?
The answers to these questions all point to more demand for Nvidia’s products In turn, it’s the main reason I believe this firm will eventually command a $1 trillion market cap.
Blue-Chip Stocks to Buy: Starbucks (SBUX)
Last but not least, we have a dominant food- and drinks-based retailer with Starbucks (NASDAQ:SBUX). Aside from routinely landing among the top spots in the Piper Sandler teen survey, Starbucks remains a go-to “third place” for consumers of all ages.
The company may be out of its strong growth days, but Starbucks still generates impressive cash flow and growth. With that in mind, analysts expect about 13% revenue growth this year, then a steady 8% to 9% growth in each of the next three years. On the earnings front, analysts expect roughly 18% earnings growth this year, followed by more than 17% growth next year.
Furthermore, the recent dip in the stock has driven Starbucks’ dividend yield up above 2%. While it’s not winning many income investors over at that rate, it’s not bad for those of us with a long-term horizon that isn’t necessarily focused solely on dividend income. However, the company has made this yield a priority.
Starbucks has grown its dividend for 11 years now, with a five-year average growth rate of about 15.9%. So, clearly, it’s a focus.
Thus, as long as the world is drinking coffee, Starbucks will be a winner.
On the date of publication, Bret Kenwell held a long position in V, NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.