Slowing economic growth and sharply rising inflation is forcing a repricing of risk in the equity markets. This is further compounded by an expected decline in corporate earnings as companies navigate higher labor and raw material costs. While we expect the dislocation in prices and increase in volatility to carry over into the second half of 2022, equity valuations are approaching fair value. This is presenting opportunities across sectors. Heading into the second half of the year, here are six stocks that Winthrop considers high-conviction investment ideas based on underlying fundamentals, current valuation, and expected forward earnings growth.
Alphabet has created one of the best digital advertising platforms across the industry. Revenue has grown above 20% annualized over the past five years, despite a market cap of $1.5 trillion and sustained annual revenues above $250 billion. Despite heavy investment into new products and technology, the company still produces $75 billion of free cash flow per year. This year has been a challenging year as 2021 revenue growth of 41% created a difficult year-over-year comparison. Shares of the stock are down -26% year-to-date and trade at 2138 per share, leading to a forward P/E of 19.3x. We expect earnings of $105 per share in 2022 driven by ad monetization, YouTube growth above 50%, and by Google Cloud growth of 55%. GOOG announced a 20-1 stock split that will be effective in July. As the landscape for streaming media continues to evolve, we think Alphabet is in a superior positioned as both a technology and an original content provider with a much better cost structure than its competitors.
Ally Financial is a leading digital financial services company. The Company is one of the largest full-service automotive finance operations in the U.S. and also offers a wide range of financial services and insurance products. The Company has continued to show momentum in net financing revenue, driven by auto pricing, origination volumes and incremental product offerings. In general, the U.S. consumer remains strong, with historically low debt servicing, elevated household savings and a tight labor market. Ally’s cost of funds has continued to improve, as the company has strengthened its funding profile over the past five years. The Company is 88% core funded, with an investment grade debt rating and access to alternative funding. Management expects to sustain an upper 3% net interest margin, even in a higher deposit beta scenario. With a CET1 ratio of 10.0%, Ally has the financial capacity to support its growth plans and return excess capital to shareholders. The Company is on track to complete a $2 billion share repurchase program in 2022. Shares of Ally Financial have declined -21% so far this year. With the stock trading around $34.38 and earnings of roughly $8.10 per share, the stock trades around a 4.31 P/E ratio. The stock presently yields 3.2%.
Shares of Nike are down -33% year to date. On March 21, Nike reported its third quarter earnings ending February 28th, 2022. Revenue grew by 5% to $10.9 billion while the currency exchange provided a negative impact of -3%. Adjusted earnings per share were $0.87 compared to $0.90 in the prior year. Nike Brand revenue increased by 6% to $10.9 billion with North America providing the strength in apparel and equipment. Footwear in North America increased 6%. Sales in China fell -5% with weakness in apparel and footwear, due to forced government lockdowns in an effort to control the surge in Covid cases. Nike’s direct business grew 15% to $4.6 billion and Nikes’ digital business increased by 19%. Finally, Nike’s margins were a solid 46.6% and the company repurchased over 8 million shares at an average price of $148. We expect Nike to earn $3.75 per share in 2022. Earnings growth is expected to be around 5%, which is substantially lower than the 10% we have experienced over the past decade. The stock trades at $111 which values the stock today at 29 times forward earnings.
Tencent is the holding company for one of the largest portfolios of media and gaming companies around the globe. Shares are down -40% on a trailing twelve-month basis and is trading at 15x forward earnings. Mobile gaming and fintech services are their largest growth drivers at 20%+ expected growth per year. China will ultimately move out of its current lock downs, which should provide a catalyst for further accelerating growth. Despite the current economic and political issues in China, international gaming and video monetization is growing near 25%. Unlike many Chinese company ADRs, Tencent files full GAAP financial reports and is not under audit review by the SEC. There is still a threat of delisting of Chinese stocks from US exchanges, however, we expect that rational voices will ultimately be heard. We believe Tencent has been dragged down by the overall negative sentiment with Chinese equities and once the narrative settles, the stock will outperform over the long run.
Semi-conductor manufacturers have had a challenging year due to supply chain issues. Global demand for chips continues to accelerate faster than production will allow. More and more chipmakers have begun building manufacturing facilities outside of China and Taiwan, but these facilities often take five years to complete. Qualcomm’s contract cycles are finally beginning to roll over such that they can increase pricing, even as supply issues persist. We view the handset business as largely a commodity business and are looking at the auto business and internet-of-things as the long-term growth driver for the company. Connectivity of all that we do continues to become more important. As technologies develop further, so does the need for an increase in the quantity, and more advanced chipsets. Qualcomm has continued to demonstrate a market-leading technology ahead of competitors including Intel. The stock is currently trading at 11 times next year’s earnings and 3.5 times revenue, making Qualcomm the cheapest stock in the large cap semi-conductor space. We believe revenue growth will sustain a 10% annualized growth rate over the next five years.
Alibaba is a leading e-commerce and cloud computing company in China. The company has the number one market share in cloud and the leading position in B2B e-commerce. The stock has declined sharply by -68% following the Chinese government crackdown on tech companies over the past two years. The threat of the U.S. de-listing the company also is a cloud hanging over the stock. The company’s first quarter earnings were $1.55, which was a 44% increase over analyst expectations. Revenue increased 9% year-over-year to $32.2 billion with its cloud segment increasing 12% and the China Commerce segment increasing 8% annually. The company’s active users increased by 28.3 million to a staggering 1.3 billion. The company repurchased 56.2 million shares totaling $9.2 billion.
This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice. Views should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable. WCM does not warrant or make any representation regarding the use or results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use. You should assume that Winthrop Capital Management has a financial interest in one or more of the positions discussed. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Winthrop Capital Management has no obligation to provide recipients hereof with updates or changes to such data.
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