Stocks to Watch: Five Favorites
Stocks to Watch: Five Favorites is about my top five companies I would love to own outright. If you’ve been following this blog from the beginning you know by now that I love stocks and I love Bitcoin. I truly believe the best path forward for most investors lies with betting heavily on stocks for the long run. An investor friend of mine recently challenged and asked me which five stocks I would love to own outright with 100% ownership. Always up for a finance and investing challenge, I eagerly accepted and here are my five!
Apple (AAPL)
As we all know, Apple is the company responsible for giving us the iPhone, iPad, Watch, Air Pods, and the Mac lineup of personal computers. They are constantly innovating and coming out with new ways to incorporate their products into daily life. From a stock and investment opportunity they provide uniqueness that makes them very valuable in my estimation.
Pricing Power
First and foremost is their incredible pricing power. Because their products are uniquely intuitive, useful, and in such high demand, they get to set the price and people pay it. Every company in the world covets the ability to set their selling price. Sales or discounts are rarely offered and when they are, they are not very deep.
Contrast this with commodity based companies where they have little to no ability to set prices because the product is uniform across the industry and they can only compete with production volumes and cost.
Inflation Hedge
If you believe their is a coming inflationary storm and you wish to ride it through with stocks, then Apple needs to be at the top of your list. Three reasons for this: One, their pricing power allows them to pass along increased input costs very easily and quickly. Second, they have little to no debt and the largest cash hoard of any publicly traded company in the US. They are extremely interest rate insensitive and could convert their cash into safe haven assets if required, or capture the rising interest rates to fight back inflation. Third, they are a global company with stores and operations worldwide so they can sell their product in any currency.
Incredible Competitive Advantage
List out their product line from the Mac desktop to the Air Pods and beside that, list out their competition. Against each product there is at most one viable competitor chosen from a homogeneous collection of contenders. So as a consumer you either choose the Apple product or one from the conglomerate competition. That’s power. You have a 50/50 chance of being chosen with each consumer. iPhone or one from all the other Android phones, iPad or… well nobody, MacBook or one from all the other PC laptops, Apple Watch or Fitbit, Apple Music or Spotify, and so on.
Buffett’s Blessing
Apple is the single largest holding in the Buffett portfolio of stocks and he didn’t start buying into their company until May 2016. Which means not only has it performed incredible well, but he has continually bought more and more shares and he’s not selling; in his opinion there is more up upside left to go.
Talk Me Out of It
Apple has been so successful and their products so ubiquitous that they could fall victim to their own success. People are upgrading less, and each new product launch is less of an event than the previous one. Sometimes people will want a change just for the sake of change and so on their next tech purchase they try the other competing product. They are also the biggest company in the world currently valued at 2.078T and the probability of them doubling or tripling your money is low. If they much larger and they will start becoming the economy, not part of it.
Honorable Mention
None, there is no equal to Apple. Nothing matches Apple in terms of size, product line, pricing power, cash on hand, return on equity, and industry dominance. But if I was forced to own a likewise company like Apple I would pick Microsoft and Google and split the investment equally between the two.
Do I Own Any?
Yes, I currently own 85 shares of AAPL.
Royal Bank of Canada (RY)
RBC is the largest bank in Canada and is a company that performs at an incredible pace. Year over year this company produces respectable growth and profitability for its shareholders. During the 2008 financial crisis Royal came through unscathed and weathered the financial tsunami. What most American investors don’t understand about Canadian banks is they are ultra conservative and encouraged to do so. There are only 5 major banks and this is regulated to ensure a level playing field for all without hyper competitiveness which can often encourage banks to take on risk.
Oligopoly
This industry cap of 5 major national banks creates an oligopoly state within Canada. They control 87% of the 5 trillion in Canadian banking assets, Royal controlling over 25% of these assets alone. They have tremendous control and because of this control the incentive to take unreasonable risks is muted. This keeps them out of trouble.
Return on Equity
What is most impressive in my opinion is their continual and consistent return on equity above 15%. They pay out 50% of their profits each year in dividends and the retained earnings are put to good use. Management knows what they are doing and knows how to invest these retained earnings within the banking sector. This ability to take retained earnings and generate even more profits each year is what separates them from the pack. The result is always higher share prices and dividend increases which is what we are all after.
Dominant in their Space
Royal is the 26th largest bank in the world. Putting them on par with Lloyds Banking Group in London and slightly bigger than Goldman Sachs in the US. They have the distinction of managing the largest mutual fund in Canada with their RBC Balanced Portfolio fund. They also happen to also own and manage the 2nd and 3rd third largest funds as well. The wealthy of Canada trust RBC with their money. ETF’s? They have partnered with iShares to offer the biggest ETF lineup for Canadian investors. While I don’t recommend mutual funds for any investor because of their higher cost structure, owning the mutual fund provider is an entirely different game.
Talk me Out of It
The banking sector has two major headwinds to face over the next ten years. First they need to face the incoming inflationary pressures as a result of the various stimulus measures taken by Central banks. While inflation itself isn’t a bad thing for banks, it is the associated rise in interest rates that accompanies inflation that will be a problem. If they raise too quickly then it will destroy their margins much like the savings and loan crisis of the 1980’s. Second, the cryptocurrency space is exploding and Canadian banks may not be able to get in quick enough because they are so risk adverse. Blockchain technology could really upend the current banking and financial sector in many different ways. Banks need to adapt or they will be destroyed by those that do. Blockchain technology is a fantastic technology not just for digital currencies but for financial contracts and instruments.
Honorable Mention
If wasn’t allowed to own RBC I would go with TD Bank.
Do I own any?
Yes, I currently own 71 shares of Royal Bank
Amazon (AMZN)
Amazon is THE disruptive force within retail and COVID-19 has accelerated this trend. Some say it has propelled the online adoption of retail by 10 years, and retail shops need to get online or they could die. Amazon and Shopify offer the fastest paths forward to get your shop online and open to a worldwide audience of buyers. Before, when you wanted exposure the retail sector, you would buy the ETF; now you just buy Amazon.
COVID Continuance
Many consumers bought and tried the Amazon Prime service for the first time during the COVID-19 lockdown. Once the pandemic is over and things return to normal I predict that Amazon Prime memberships will continue and not be cancelled. Once people have a taste of their free next day delivery service it is very difficult to go back to shopping in person or the legacy online model of order and wait 2 weeks. In some ways Amazon is constructing the new normal.
Diversification
Aside from their obvious online store front, Amazon offers some compelling services that help diversify their product offering. Their Amazon Prime streaming service is a good supplement to Netflix and is getting better each day. The free photo storage and music streaming service is also a good alternative to the monthly subscription service from Apple. Okay, the music service not so much, but the photo service is great.
Lastly their AWS cloud service is world class and many websites and corporations utilize these as their IT backbone infrastructure.
Talk me Out of It
They have been such a disruptive force in retail they are a target for anti-trust legislation to break them up. They could also face growing legislation and taxes worldwide as countries try to buffer the effects they exert on their local economies; think online sales tax. Once the larger retailers get online with a comparable service they could make it easier for smaller companies to compete against Amazon. Amazon’s fast free delivery could be challenged by Wal-Mart in concert with the logistical partners. In this environment Amazon could have a fight on its hands. Governments and the competition don’t want one online retailer dominating the space forever.
Honorable Mention
If I couldn’t invest in Amazon I would split the investment evenly between Shopify and Microsoft to take advantage of the cloud computing and future of e-commerce retailing.
Do I Own Any?
Yes, I currently own 3 shares of Amazon.
Disney (DIS)
Few media companies own anything close to the breadth and quality of the Disney content library. This is a moat in and of itself that cannot be copied by competitors. They are left to compete by selling for less. Just look at some of the names in this library: Star Wars, Marvel, Disney, Pixar, Indiana Jones, Avatar. You think this list is long, look at the extensive list of media content properties they own. They own the entire supply chain of movie production from special effects, sound, and distribution. They are not a one trick pony for cute children’s cartoons.
Theme Parks
If you have ever taken your children to Disneyland you know how magical these places are. It has been noted that each park costs about $1,000,000 to run each day and they have 6 parks. So while this magic is not cheap, it also also means you can sell it for a premium. In 2018, Disney brought in an average of $19.68 million per DAY across all 6 parks. This is a cash cow that cannot be replicated by anyone else. Disney is selling a magical experience that brings to life the dreams and aspirations of young children and I would argue even some adults too. If you’ve been you know what I’m talking about and you know how much it costs!
New Streamer That Has Netflix Concerned
If anyone can give Netflix a run for its money with streaming its Disney. While in the end the two services will likely be complimentary and not direct competitors, Netflix does need to be careful. Getting into the streaming service was a bold but beautiful move by Disney and the recent COVID-19 lockdowns have been a boon for this service. While the closed parks have really hurt the bottom line at Disney, the streaming service has stepped in and delivered more revenue than was is lost from the parks. Disney Plus generates a combined total of $44 million a day across Disney Plus, ESPN Plus and Hulu. Just imagine how profitable Disney will be once everything is back operational at 100%.
Talk Me Out of It
Disney is a hard one to be talked out of given the reasons above and their ability to synergistically bring the properties and assets together: movies, theme parks, merchandise, and now streaming. At the core, Disney is an entertainment company, and while they continue to control the supply chain to provide entertainment, they can easily adapt to the changing tastes of the audience going forward. Because of their incredible power to set the prices they charge for admission to its park, it is hard to convince me of why they are not a great investment. They are surviving the pandemic well, and just think how well they will do post pandemic when travel is back into full swing. For these reasons I’m all in and can’t think of a solid reason to hesitate with DIS. Though, if forced, I would pick Netflix because streaming entertainment is a very profitable business.
Do I Own Any?
Yes I own 10 shares of DIS
Bitcoin
My last pick isn’t a stock at all, which I hope helps emphasize just how important I think this one is. Surprise!
Performance is Everything
Within the world of investing performance really is everything. Above all I prize total return in whatever form that might come. I don’t pick a stock or ETF based on dividend yield, or how much cashflow the investment gives me. Rather, I pick a particular security because the future prospects are solid and I believe a great return lies ahead. Don’t get me wrong, I’m fine if it comes as a dividend or interest payment, but after everything is said and done, I care most about what the total return was after taxes. I want a WHALE.
I listen to guys on ‘money twitter’ picking stocks, promoting index investing, trading forex, going for cashflow, choosing dividend only stocks, and of course hodling Bitcoin. It’s incredible all the diverse ways to invest and make money. But they will all not perform the same on a total return basis. I too have an investing strategy, and I’ve outlined and shared it in my Four Pillars For Investing Success. I firmly believe after everything is said and done I will outperform all other traders over the next 10 years after costs and taxes with just one exception. Enter my fear for the Bitcoin trader.
Blackhole of Investing
I believe 10 years from now Bitcoin will either be worth nothing or it will be worth everything. Why? You need to read my article Four Reasons Why You Should Invest in Bitcoin. The short is that it holds the potential to turn the financial system on its head. Just today as I’m editing this article before publishing, on December 7th, 2020, the G7 nations are getting together and discussing the future impacts of cryptocurrencies. They are pledging to regulate the asset. Why could this be such a disruptive force? What do they fear? Read my article.
“We must do everything possible to make sure the currency monopoly remains in the hands of states,” says German Finance Minister Olaf Scholz following a meeting of G7 finance ministers and central bankers.
When you buy Bitcoin, you are exchanging a inflationary fiat currency for a deflationary currency that can easily be used anywhere in the world. Eventually as more paper currency is printed and less Bitcoin is mined the amount of fiat required for one coin will be ridiculous. Hence why there is a real possibility that a portfolio of stocks and bonds will kneel in submission at some point in the next 10 years.
Talk Me Out of It
Easy. Institutional bankers and hedge funds are getting into the space and they will have a tremendous influence on the currency and all crypto coins. It is not certain what will happen. Also government regulators could make it illegal to hold the coin which will crater the value. While it will survive given its decentralized nature, there will be no economic incentive to lose your physical freedom in exchange for financial freedom. Next, there is the remote possibility that it could be hacked and the blockchain invalidated crashing the currency near nothing. Last, it is an infant asset class with just barely 10 years of history and we don’t know how it will hold up if interest rates get up to a reasonable rate and if inflation can get controlled by central bankers.
Do I own Any?
Yes, I currently own some Bitcoin. How much? I would prefer not to disclose but I’ll share that I have a target for 2% of my total portfolio to be allocated to Bitcoin. This should be a good balance between the potential sky rocket returns it holds vs. its entire collapse. I can stomach a 2% loss.
Performance
Let’s have some fun shall we. Let’s roll these assets into a portfolio and see what the last 5 years would have given us. I’ll run 3 potential portfolios and we’ll compare how they would perform against the S&P for the same timeframe. Stocks to watch: five favorites against each other and showing why Bitcoin is the potential asset to invest for the future.
Solid Performance
Not one of the portfolios performed badly with each one more than doubling your money, except the index. However, look at the tremendous impact just a 4% allocation to Bitcoin does to performance. This is why I want it in my portfolio and why I would fear going up against a purebred Bitcoin trader.
Summary
Well, I hope you’ve learned a bit about what I look for in a company to invest in. I have a style and preference for companies that have a wide moat, pricing power, and an ability to navigate through inflation. You can also derive my trading style. I’m a buy and hold investor who sees stock ownership as a vehicle to own a portion of the company. I see these as companies I would love to hold and own forever because in the end I believe they will generate tremendous wealth. I see tremendous potential in Bitcoin and some should be allocated to every portfolio. Even if you hate it, despise it and see no future in it – you need to put something in Bitcoin.
So there you have it – if I had to own five companies outright I would own Apple, Disney, Amazon and Royal Bank of Canada; then add a touch of Bitcoin. Not because I’m defiant and you wanted a fifth stock, but because there’s potential here like non other.
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1 comment
I like that Bitcoin is your surprise, ha ha! Talking me into it…
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