Note that I did not write "Top Pick" or anything like that. These are the kinds of columns that those of us trading these markets and writing about our trades don't really like. Oh, I have no problem writing up my ideas, addressing losing trades, and explaining why I was right or wrong. In fact, I think it serves as an educational tool both for the readers who depend upon me, and for myself, simply because retracing publicly what has worked and what has not, even if you know what you thought at the time, is therapeutic. The teacher who stops learning no longer deserves to teach.
These columns are different. While I really did nail it one year (Lam Research: (LRCX) ), and I almost nailed it another year (KLA Corp: (KLAC) ), I have also laid a number of eggs (ViacomCBS: (VIAC) ). I see it as difficult to pick a stock for 12 months. I would rather name a stock that I think will do well this year, but choosing an exit 12 months out? What if I think we should make a sale in September? That was the case the year that I picked KLAC. Up big for a time, the stock closed down for that year. I sold my shares that year at a much higher price point than where it went out, but there are always folks who miss the column where you actually inform readership that you have changed your mind.
The Year Ahead
I do not think making money in financial markets will be as easy in 2022 as it has been for the past three years running and four of the last five. I'd like to stay on board the tech train, and the evolution of artificial intelligence, 5G, the internet of things, machine learning, augmented reality and the metaverse, and I will. That said, Nvidia (NVDA) is up 132% year to date this year and Advanced Micro Devices (AMD) is up 67%. I won't be exiting those names anytime soon, but favorite for next year?
We know that the Fed is going to try to keep removing not accommodative policy but growth in accommodative policy at least into March. Then if inflation is still hot, the FOMC will have some tough decisions to make. There is no way to slow inflation through policy without also slowing economic growth. Regardless of outcome, the headline risk moving from late in Q1 2022 into the second quarter is enormous. After that, it's election time. Volatility? Let's just say that we all better become comfortable with being uncomfortable.
Did I mention geopolitical risk? I could make a case for Raytheon Technologies (RTX) , up 20% this year. Here you have a robust aerospace and defense business, where the defense side will support the firm and provide cash flows for as long as it takes to get civilian aircraft utilization to where it needs to be. Should the travel industry get past the pandemic, Raytheon is set up for not just success, but even more success. Even so, the stock yields 2.4% and trades at just 20 times forward looking earnings.
The Big Cats
How does one not consider Apple (AAPL) , up 35% this year. Apple is the most valuable, and most broadly held public company. The firm's devices, iPhone, iPad, Mac, Apple Watch and AirPods all serve to drive growth across the firm's services. That's where the real growth and higher margins are. In my opinion, over time, Apple only picks up steam, as the firm is expected to release its first augmented/virtual reality device next year. What does that do to consumer demand? What does that do to their installed base? How does that grow the services sector, and thus margin? To be honest, it is very difficult not to pick Apple for next year, though I will of course be long the name. Oh, and you know that the company is an aggressive buyer of the equity outside of you. You don't stand alone.
Then there's Amazon (AMZN) , a true underperformer at +4% this year. Could Amazon have a 20% to 30% year? My target price is $4258, so if I'm right... that's 24.7% right there. Amazon is not afraid to experiment or to spend, and at times, this can be an Achilles heel. Would I play around in brick and mortar retail in their shoes? No. Then again, I do not run the company. Amazon has spent on improving logistics to the point where they can provide five hour service in 15 cities. Does Amazon eventually compete in the delivery services industry instead of relying upon it? Does Amazon take enough share in groceries to turn that industry into a higher margin business? Does Amazon eventually decide to split the stock? That alone could make Amazon "stock of the year."
The Envelope, Please...
The fact is that right now, my most active portfolio is long 37 individual equities. If I did not like them, I would sell them. I also have a few derivative positions that synthetically mimic long positions. I could make some kind of case for each and every one of them. In fact, I am currently long past picks Lam Research and ViacomCBS.
This year's selection is The Walt Disney Company (DIS) , which is down 14% for 2021. Why would I select one of the most prestigious brand names in the world when the shares are trading at 37 times next year's projected earnings and the firm has suspended the dividend as it spends cash on growing certain businesses and other businesses remain under the drag of a global pandemic?
That's exactly why I have selected Disney. One, while 37 times is expensive, the streaming service is still a money loser and is expected to be for another couple of years. Ex-that business, and Disney is not so expensive. Now, let's talk about legacy businesses. My adult sons went to see the new Spider Man movie in an actual movie theater this past weekend. First time in two years. They loved it. It was as if it was new to them. I still have not gone "to the movies" since the start of the pandemic. I know my wife is dying to. Disney's theme parks have experienced an uptick of late. Ever stand in line for Space Mountain and some foreign tourist kid keeps bumping into you? Well, that foreign tourist kid hasn't been to Orlando or Anaheim in a long time, but he is coming sooner or later, and he's bringing a whole lot of people with him. Oh, and Disney Cruise lines haven't contributed for two years.
Now, let's talk about streaming. Disney Plus has already amassed almost 120M subscribers in just about two years. Netflix (NFLX) , the industry leader, has 215M subs. Bundle Disney Plus, ESPN Plus, and Hulu and you have the best bargain in streaming. That may matter in 2022. Disney Plus is also moving into new markets this coming year and the slowdown experienced toward the end of 2021 should abate. The firm expects to see 240M to 260M subs just for Disney Plus by 2024.
The deal is this. Disney has been negatively impacted by the pandemic as much as any company. Fortunately, the firm launched its streaming services at the right time, and was able to lean on its cable and television networks more so than they probably expected prior to the spread of the infection. That day that children play, that birds sing, that church bells ring from one end of every town in America to the other... that day that nobody lives in fear any longer.... Everyone is going to Disney World. I mean everyone.