As we mentioned last week when we reviewed our Canadian Foundational Stocks, this week, we will focus on a mid-year review of our U.S. Foundational Stocks.
BlackRock (BLK)
Financials got off to a good start in 2022, but in recent months the entire sector has been hit hard. Fears of a recession are dragging financials down, and in Black Rock’s case, the multi-month bear market is impacting performance.
Since the company is heavily exposed to the ups and downs of the stock market, it is no surprise to see its share price underperform this year. However, we think the year-to-date dip is overdone and presents an opportunity for investors.
While assets under management (AUM) have dipped to $9.57T from $10.01T as of the end of Fiscal 2021, the 31% drop in share price is a little steep. The company is trading at an attractive 15.57 times earnings and is now yielding above 3% (3.15%), which it hasn’t done since the COVID-19 crash. As mentioned, we believe this to be an opportunity and an excellent time to accumulate before the next bull run.
Disney (DIS)
There is no sugar-coating this one; Disney’s performance has been abysmal. Down 38% year to date, recession fears and rising interest rates are headwinds the company will face for the year.
Disney+, a key growth driver for the company, has outperformed rivals such as Netflix. However, rising costs are impacting margins.
The company had a good first half of the year with strong Disney+ subscriber growth and higher-than-expected park attendance. However, it also warned about slowing growth in the year’s second half as there is a real threat of lower consumer spending.
The one silver lining is that box-office results are starting to return to pre-pandemic levels. Disney has several flagship movies hitting theatres, and Dr. Strange’s strong performance and Thor’s strong opening weekend could lead to strong year-over-year comparisons.
Lockheed Martin (LMT)
Lockheed Martin has been one of the better performing U.S. Foundational Stocks. Up by ~20% year to date, the company’s stock price got a meaningful bump due to the war in Ukraine. A quick look at Lockheed’s chart, and you’ll notice a spike in the company’s share price when the war started.
Thus far, the company has handily beat earnings estimates in both quarters in which it reported. It also re-iterated guidance for strong earnings growth, which makes Lockheed one of the better value plays. The company is currently only trading at 15.8 times forward earnings and a ~10% discount to historical averages.
Investors can expect a substantial dividend raise in the year’s second half, and while rising rates will no doubt impact margins, it is less exposed to the threats of a recession and reduced consumer spending.
Starbucks (SBUX)
Unfortunately, Starbucks is yet another company with heavy exposure to a recession. Based on the company’s prices, it is undoubtedly a higher-end quick-service restaurant, and reduced consumer spending is a threat. It is also faced with rising commodity prices (think surging coffee prices) and has limited ability to pass those costs on to customers.
As a result, the company’s stock price is down by approximately 30% this year. While it has stabilized, it’ll undoubtedly have the potential to move by double-digits on quarterly earnings. At this point, we need to see how Starbucks handles the next few months.
Interestingly, Starbucks’ price has tracked the Coffee Index quite closely. As the cost of coffee rose, the company’s price dropped; similarly, as it has stabilized, so too has the stock price. While we like the company long-term, short-term growth will undoubtedly be impacted by these headwinds, and analysts have continued to revise growth rates downwards over the year.
Pepsi (PEP)
As investors flock to safety, Pepsi has outperformed the U.S. Markets – although not by much. The stock is up by ~1% this year and likely reflects margin pressures.
While it will be less impacted by reduced consumer spending, and the company’s strong pricing power will enable it to counter inflation to an extent, there is no escaping these headwinds. It is a consumer defensive stock, and we expect it to continue outperforming in this bear market.
Don’t expect huge gains, but it will undoubtedly be a stock that can preserve your capital better than most. Thus far, it has exceeded expectations against estimates and guided upwards on revenue. However, as we indicated before, rising revenue is likely a result of their pricing power. It will only offset rising inflation costs, so it’s not anything to get too excited about.
Overall, it is doing what it is supposed to – providing investors with a margin of safety in times of uncertainty.
Alphabet (GOOG)
The tech rut has been painful for investors. The sector was the darling of the stock market for the better part of the past decade, but it all came crashing down in the first half of 2022. That said, Alphabet is holding up better than most and is down by only 16% – not bad.
This is likely a function of the company’s size and status as a tech ‘blue-chip.’ We expect performance to continue to align with the entire tech industry. Rising rates negatively impact high-growth companies, and Alphabet is not immune to that.
However, what the markets fail to realize is that Alphabet generates a ton of cash flow, has low debt, and can likely sustain its level of growth without too much impact on margins. Will it be impacted? Yes, mainly because of reduced ad spending. Will growth come to a halt? No. The company is still well-positioned to grow and, at 18 times forward earnings, is trading at a ~30% discount to historical averages.
Pfizer (PFE)
Many healthcare stocks, especially those that launched successful products in response to COVID, have tough YoY comparisons as the pandemic has started to subside. That being said, we aren’t out of the woods yet, and companies like Pfizer are still well-positioned to outperform in the current environment.
Pfizer is performing exceptionally well this year. Thus far, it has beat earnings and is expected to post strong earnings (+50%) and revenue growth (+27%) in Fiscal 2022. Even margins are expected to rise despite inflationary headwinds.
So why is the company’s stock price down by 8%? One issue that likely impacted the company is the downwards revision to EPS last quarter. This was a performance-based change but was spurred by a change in accounting policy.
At this point, Pfizer may be one of the cheapest stocks on our U.S. Foundational Stocks list. It is trading at only 10 times forward earnings, has a PEG ratio below 1, and is trading at a 30% discount to historical averages.
Home Depot (HD)
As a consumer cyclical and one that has significant exposure to inflationary costs, Home Depot has struggled mightily this year. Down 30% this year, it will be tough for Home Depot to replicate the strong performance it showed during the pandemic.
While consumers took full advantage of travel restrictions to launch home improvement projects, rising costs and lower unemployment will likely lead to tough comps this year. We’ve seen estimates come down; today, the expectation is for low to mid, single-digit growth.
Of all the stocks on the list, this is likely the one with the most exposure to a macro stagflation environment. That being said, it is one of the best companies in the retail industry, and we are confident in its ability to navigate this difficult period.
Amazon (AMZN)
Amazon has suffered one of the most significant drawdowns in its history. It is now down by ~30% this year and is trading at a 34.88% discount to historical averages.
Much like Home Depot, Amazon is faced with a challenging operating environment. However, it is far more diversified than Home Depot and, as a result, should have far more flexibility to mitigate these impacts. That said, growth is undoubtedly slowing, and the company is now only expected to post 11% revenue growth. Earnings are expected to crater this year before rebounding in Fiscal 2023.
Interestingly, a recently leaked memo indicated the company will have labour shortages by 2024. An interesting contrast to companies laying off staff rapidly, a sign that while short-term headwinds exist, Amazon is still expanding. So much so that availability of labour is a threat in the coming years.
Once again, this stock will not have any meaningful rebound until we see some stabilization in interest rate increases, more clarity on recession, and resulting consumer spending habits.
Also worth noting- Amazon Prime day is coming up this week. This will be a notable event and could be used as a proxy for consumer spending habits.
