The holiday season is here! And in the investing world, that means now is the perfect time to cozy up by the fire and review your portfolio to see where you are and what you need to do to reach your long-term financial goals.
One way to position yourself for financial success is to invest in quality companies that have what it takes to endure a downturn in the economic cycle and, preferably, take market share when their peers are unable to do so.
United Parcel Service (UPS -0.59%), Brookfield Infrastructure Partners (BIPC 6.75%) (BIP 7.51%), Roku (ROKU -0.70%), Mastercard (MA 0.29%), and TransMedics Group (TMDX -1.17%) stand out as five stocks investors may want to add to their wish list this holiday season.
UPS and Brookfield Infrastructure blend value and passive income, while Roku, Mastercard, and TransMedics are excellent growth candidates. Here’s a breakdown of each company so you can determine which stocks fit your risk tolerance and are worth considering now
This is the type of stock you want to buy the dip on
Daniel Foelber (UPS): Cyclical companies can see ebbs and flows in their sales and earnings based on the economic cycle. UPS benefited from the onset of the COVID-19 pandemic as package delivery volumes surged and interest rates were low. Today, the narrative has flipped. And UPS finds its revenue declining and margins compressing faster than originally anticipated.
In Q4 2022, UPS guided for $97 billion to $99.4 billion in 2023 revenue and a consolidated adjusted operating margin between 12.8% and 13.6%. Its updated forecast now expects consolidated revenue of just $91.3 billion to $92.3 billion and an operating margin of 10.8% to 11.3%.
Investors who followed UPS’s torrid growth from 2020 through 2022 aren’t used to seeing the company miss this badly on its numbers. And unsurprisingly, the stock has paid the price and is now down more than 20% year to date and more than 40% from an all-time high in January 2022.
When industry-leading cyclical companies go out of favor, it’s usually a great time to buy — especially if the company pays a dividend. The following chart tells just how far the UPS stock sell-off has gone despite the much-improved fundamentals.
Even when factoring in the company’s recent earnings and revenue declines, trailing-12-month net income has still more than doubled over the past five years. The stock is up 31.2%, which is about on pace with the revenue growth. But the company’s income, supported by growth from healthcare and small and medium-sized businesses, is of far higher quality today than it was five years ago. Plus, the dividend is 78% higher thanks to a massive 49% raise in early 2022. To top it all off, UPS has reduced its total net long-term debt position by 27.4% over the past five years.
All told, UPS deserved to fall, but not this much. The stock’s 4.7% forward dividend yield is a worthwhile incentive to buy the stock and hold it through this industrywide downturn.
Time to take advantage of this sell-off
Neha Chamaria (Brookfield Infrastructure Partners): The recent sell-off in Brookfield Infrastructure has driven the units of its partnership as well as corporate shares down 40% each so far this year. That’s a steep fall, and it presents a fantastic opportunity for long-term investors to buy the stock, for several reasons.
Contrary to what the markets believe, Brookfield Infrastructure hasn’t stopped growing. It reported a more than 60% year-over-year jump in its net income for the six months that ended June 30, and its funds from operations (FFO) per unit grew by 10% year over year during the period. At its annualized run rate, Brookfield Infrastructure’s FFO per unit could grow by 13% this year. That pace of growth is nothing to sneeze at.
Brookfield Infrastructure also has an impressive track record of putting its cash flow to good use. The company typically buys infrastructure assets, most of which generate stable cash flows. Examples include electricity transmission, toll roads, ports, natural gas infrastructure, and telecom towers.
An equally important part of its business model, though, is capital recycling, or selling assets as they mature to reinvest the proceeds opportunistically. The markets have been wary about Brookfield Infrastructure’s prospects of finding buyers for its assets in a rising interest rate and high inflation environment. Brookfield Infrastructure, however, is going strong so far — it sold assets worth $1.9 billion this year through the end of the second quarter. At the same time, it bought a stake in a data center platform and acquired Triton International, the world’s largest lessor of intermodal freight containers.
Furthermore, Brookfield Infrastructure’s 14-year track record of consecutive annual dividend increases is testimony to its business resilience. With the company still committed to growing its annual dividend by 5% to 9% in the long run and units of the partnership yielding 6.8%, it’s a rock-solid opportunity to buy Brookfield Infrastructure stock now.
Don’t change the channel: Why Roku is a top pick again
Anders Bylund (Roku): I keep bringing up Roku as a top investment idea — and for good reason. The media-streaming technology expert’s stock is chronically undervalued, and the discount has only grown larger in recent months.
For example, I highlighted Roku as a terrific buy in October. The stock price has fallen another 20% since then, perhaps making you turn away from my advice in disgust. I get it, I really do. It’s not easy to stay informed and enthusiastic about a great long-term growth opportunity while the business is going through a difficult period.
But then you’d be hating Roku for all the wrong reasons, and at a problematic time. The company did nothing to deserve a beatdown in October. Locking in lower stock prices by slapping the “sell” button too early will disconnect you from a tremendous multi-year growth opportunity.
- The current situation reminds me of Netflix (NASDAQ: NFLX) in 2011. Early investors sold off their Netflix shares by the truckload when the newfangled streaming service broke off into a separate business. If you dumped your Netflix holdings at the height of the Qwikster debacle, you turned a short-lived misunderstanding into a real-money loss of 67%. On the other hand, $1,000 invested in Netflix at the end of 2011 would be worth $40,600 today.
History doesn’t necessarily repeat itself, but it does rhyme — and as a former Netflix division, Roku absolutely paid attention to the Qwikster saga. Not a bad plan to copy, in my opinion.
- Roku is addressing a massive global market of streaming media services that is still a toddler, basically learning to walk. The company already dominates the North American market for consumer-facing streaming platforms and is currently working to apply the lessons learned there in places like South America and Western Europe. Beyond those test markets, the whole world waits.
- Sales have been slow in the last two years, as a side effect of the inflation crisis. Ad buyers aren’t buying a lot of ads in a market where people aren’t ready to spend money on what they’re selling. This situation is surely temporary, and I can’t wait to see how Roku will perform when the global economy gets back on its feet.
So here we stand at a potential turning point, as Roku is set to report third-quarter results on November 1. Other titans of the digital advertising trade have reported robust growth in ad sales over the last couple of weeks, and this report could signal the start of a positive trend for Roku too.
If so, Roku’s stock should soar and I don’t expect it to come back down again. And if I miss the mark about next week’s business update, you’re only looking at another delay. If Roku were the Beatles, you should think of this era as the early days of building a reputation and earning their chops on little-known German beat music stages. Everlasting superstars had to start somewhere, too. That’s how I see Roku’s current struggles.
The lower Roku’s stock price goes, the more I want to buy and recommend this undervalued stock.
A payments giant trading at a discount
Trevor Jennewine (Mastercard): Payments giant Mastercard reported solid financial results in the third quarter, beating estimates on the top and bottom lines. Revenue climbed 14% to $6.5 billion as consumer spending remained resilient, and non-GAAP earnings jumped 26% to $3.39 per diluted share as the company continued to repurchase stock.
The investment thesis here is simple: Mastercard operates the third largest card payments network in the world as measured by purchase transactions, and its acceptance network rivals that of Visa. That scale not only underpins a powerful network effect but also affords the company a material cost advantage. Mastercard consistently earns higher profit margins than smaller rivals such as American Express and PayPal because it can spread expenses over more transactions.
The upshot is that Mastercard has a virtually insurmountable economic moat, and it is bound to benefit as more money changes hands electronically. The company has a clear foothold in consumer payments, but Mastercard is also making progress in the greenfield areas of commercial payments, where it has the market-leading virtual card, and value-added services.
Boston Consulting Group says global payments revenue will increase at 6.2% annually over the next five years. Mastercard should outpace that figure given its strong competitive position, and its bottom line should grow even faster as the company continues to repurchase stock. Indeed, the Wall Street consensus calls for earnings growth of 19% annually over the long term.
That forecast makes its current valuation of 32 times earnings look reasonable, at least relative to the five-year average of 41.4 times earnings . That’s why patient investors should buy a small position in this stock in November.
A great time to buy this disruptive stock
Keith Speights (TransMedics Group): Some might think TransMedics Group is a stock to avoid rather than buy, with its shares plunging around 60% in recent months. Instead, right now is a great time to buy this disruptive stock, in my view.
TransMedics’ Organ Care System (OCS) is quite literally a lifesaver. OCS keeps donor hearts, livers, and lungs alive during transport to their targeted recipients. Many donor organs are never used in transplants using the current standard of cold storage because they don’t survive the transit. The numbers are shocking: 40% of livers, 72% of hearts, and 82% of lungs from donors ultimately can’t be used. With OCS, utilization rates are 81% and higher for all three organs. OCS also helps significantly reduce severe post-transplant complications.
As you’d expect with such tremendous results for OCS, TransMedics Group’s revenue has skyrocketed. The company’s revenue more than tripled between 2021 and 2022 to $93.5 million. TransMedics projects that its revenue will roughly double year over year in 2023.
The company faces some competition from privately held OrganOx Limited and Xvivo Perfusion. However, those rivals support only one type of organ. TransMedics boasts the only approved multiorgan platform.
I think, though, that TransMedics Group’s greatest competitive advantage is its National OCS Program (NOP). This program provides an end-to-end service for organ transplants. One of the biggest challenges for NOP in the past has been gaining access to airplanes to transport donor organs. However, TransMedics’ recent acquisition of private charter operator Summit Aviation should solve that problem. With Summit’s fleet of airplanes, the company will be able to build out the only national air logistics service in the U.S. dedicated exclusively to organ transplantation.
Organ transplantation is a multibillion-dollar market. TransMedics’ market cap currently hovers around $1.3 billion. With its disruptive OCS technology and unparalleled logistics capability, this beaten-down stock should have a lot of room to run.