[Investor Ralph Wagoner] likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner. How stock markets work, as recalled by Bill Bernstein
This is an unusual post.
As my regular readers know, I generally shy away from specific stock recommendations in this blog as I feel strongly that most individual investors are best served betting their money on their own experience and expertise. I have unwaveringly advocated buying the stocks of companies in fields those individuals already know and understand-- or at the very least, of companies they know from their own experience as consumers. But today, in violation of my self-selected and self-policed restrictions, and at great risk to your future readership (if my predictions prove inaccurate), I will tell you what I think are great values right now.
At this moment, as the S&P 500 index is down precipitously from its May 2015 highs (though up again some today), value opportunities have presented themselves which are too good to ignore. To be fair: these are companies whose stocks were down by their own doing prior to a week ago when the correction began, and which have been dragged down further by the broader market rout. Yet these are businesses which I believe in and which should provide real gains in the coming years. Two are smaller, growth oriented businesses, and two are ultra large-cap blue-chip stalwarts. I present them here in no particular order.
1. Twitter
Twitter (TWTR) has had problems for some time now. The company recently reported stagnant user growth, largely due to an interface which many find difficult to use and a lack of top executive leadership: 5-year CEO Dick Costolo resigned early this summer amid a rash of concerns, not least among them investor frustration with the shrinking valuation of this once high-flying tech Silicon Valley darling. Twitter founder and ex-CEO Jack Dorsey immediately stepped in as interim CEO, and many are calling for his leadership to continue permanently (assuming he can find someone to replace his role atop his other startup, Square).
But Twitter seems now to be hovering on the brink of resurgence. In June an angel investor in the company, Chris Sacca, published an 8,000-word screed entitled What Twitter Can Be. Though a tiresome read, the document presents what many believe will become a sort of blueprint for Twitter to follow over the next several years as it corrects its leadership issue, improves ease of use and begins to harness the massive power of over 1 billion registered users-- of whom only about 300 million are actively engaged on the platform exchanging breaking news, photos, opinions, and open dialogue in real time. As I write this, Twitter's revenue is rising even as its stock has fallen to about 5% below its IPO price of $26, presenting a singular opportunity. Always buy what you are comfortable with: your understanding of the businesses you own is paramount to your ability to accurately assess changes.
2. Apple
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| Apple retail store, Hangzhou, China |
It is the largest company on Earth by market cap, more than 50% bigger than the closest competitor. Just about every investment portfolio contains at least a few shares of this over-exposed but widely-loved company. Nonetheless, Apple (AAPL) has shown itself to be increasingly a one-product business, as its iPhone is now responsible for over 60% of its total revenue. As such, shares are 20% discounted from their record highs a few months ago, not least due to concerns about the seeming collapse of the Chinese economy (China is now one of Apple's biggest customers).
Apple has become a victim of its own success: Apple investors grew accustomed to one industry-altering mega-hit product after the next and the staggering market share and revenue growth that accompanied them. Beginning with the iPod and iTunes Store in 2003, the company first changed the way people bought and consumed music. Then with its original iPhone in 2007, Apple upended the mobile phone business, ending the dominance of Blackberry and Nokia and Sony with an exclamation point. Finally Apple made even its own laptops look old-fashioned as its 2010 iPad ran rampant over previous technologies and effectively darkened the only bright spot in the personal computer business. Now its just-released Apple Watch is winning some early adopters, though most believe it cannot and will not wallop the market like preceding products.
But just because Apple will not continue to grow and change industries as in years past does not mean the company is cooked. Far from it: Apple has perhaps the most loyal customers in all technology, and they will both need to replace their myriad devices over time, and will continue to look to the iTunes Store for music (often subscription-based purchases likely), apps, and movie rentals in the future. Additionally the second version of the Apple watch will likely be a bigger hit than the first, and Apple is moving sharply into both the live television and the payments businesses over the next few years, not to mention rumors of an electric Apple car one day. At a price-to-earnings ratio of only 12 and a price-to-sales ratio under 3, with some of the best growth rates of any major global business, in spite of its size, Apple looks like a steal at today's prices.
3. Zillow
When consumers want to know the price of the house up the street that just went on the market, or they're thinking of moving across town or they're weighing a job offer that requires moving to a new city, there is only one place they look today: Zillow (non-voting: Z, voting: ZG). Zillow's stock has taken a beating this year as the company spent heavily to acquire their only significant competitor, Trulia, then spent substantially more to merge the two companies' complex software systems. But there is absolutely nothing wrong with the underlying business as its revenues, largely from the advertising of real estate agents, keep climbing and its user base keeps growing. Zillow is expanding into new markets as well, including rental data, mortgages, and virtual 3-D online display of listed homes. Now, with already a profitable and well-known brand and without real competition, as soon as the merger is fully in the past this company is going to blow the doors off. You'll want to be on board.
4. Disney
The entertainment conglomerate has taken a pounding since it peaked in late July of this year, but unfairly so. When Disney (DIS) reported earnings August 4, it called out a drop in ESPN cable sports subscribers and since then has been playing defense against the Wall Streeters who are concerned that ESPN, which provides the bulk of Disney's cable segment revenue, will not be able to regain lost sales given the "cord-cutting" trend which has taken a toll on nearly all media companies and cable providers. But those fears will likely not be realized: it is more likely that even now Disney is working on a standalone ESPN app to allow those with internet but without cable TV in the future to continue to tune into their favorite teams, a strategy which has worked well for HBO, Showtime, and Amazon, not to mention Netflix. In any case, Disney has a multitude of very healthy businesses upon which to fall back.
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| The cast of the new Star Wars movie. Kidding, I'm kidding. |
For starters, there's the eponymous theme parks, which are doing extremely well and (in the U.S.) are expanding to accommodate new, substantial Star Wars-themed attractions. Everything else aside, the opportunity to immerse oneself in a Tatooine universe of characters and experiences, not to mention to experience personally piloting Han Solo's smuggler spaceship The Millennium Falcon, is all but a guarantee of strong theme park revenue in the years to come. Disney's multiple film-production business are crushing it as well, with Marvel superhero pictures continually ranking among the biggest hits worldwide year after year and its Pixar films scoring with audiences young and old each and every time out of the gate. Then there's the avalanche of merchandising for the hundreds of Disney cartoon and film characters, including video sales, toys, games, and clothing. And we haven't even touched the big one: Disney's release of a new Star Wars film, the first in a decade and the first of three to come, in late autumn. Even those who aren't fans of the films are expecting lines around the block for days in advance of the opening.
Disney is the sort of company you want to buy stock in and leave to your children. It's a feel-good, crowd-pleasing, family-friendly media juggernaut currently experiencing a fire sale on its stock. Load up and forget about it for decades.
There are several more great opportunities I could include here for your consideration: Starbucks (SBUX), Under Armour (UA), LinkedIn (LNKD), and GoPro (GPRO) among them. All well-priced and all with substantial growth ramps ahead. I'll let you to do your own research on those, just as you should on the ones I discuss in more detail above. Always buy what you are comfortable with: your familiarity and understanding of the businesses you own is paramount to your ability to accurately assess changes in their operations, management, financial structure, and the competitive field on which they play.
As I wrap up this post, I note that (of course) a bit of the pricing value I discuss above has evaporated in a roaring market comeback today. Not to worry. The 4 companies I've detailed will see dark days again tomorrow or next week and many times over the coming years, which is how it goes for publicly traded companies which have wide consumer awareness and attention. Your job is to start walking, ignore your pooch and keep your eyes to the northeast.