Yesterday we dug into the teaser pitch for Blue Chip Gems that promised Bret Jensen’s “#1 Forever Stock for 2016,” and I told you I’d try to also name his other two picks…
… so that’s today’s goal, identifying those other two members of Jensen’s “Top 3 Buy and Hold ‘Forever Stocks'” portfolio.
We don’t get nearly as many clues about these as we did about the “#1 Stock” that turned out to be Macy’s, but we do get enough hints to feed the Thinkolator and get at least a high-probability answer, if not our usual 100% certain match. Here’s what we get for the first one:
“Smartphone Champ— Here’s one of my favorites. A smart phone leader at the forefront of the ‘interconnectivity’ revolution. The company believes new areas of growth will be key drivers to its goals to deliver average annual revenue growth of 8% to 10% over the next five years. Look for your first payday now that earnings season is just around the corner. And get a 4% dividend while you wait. Today’s price mid-$40s; get in under $52.”
The universe of stocks that pay a 4% dividend and are priced in the $40s is maybe a little smaller than you would guess, but once you narrow it down to technology or telecom stocks you’re really left with just one likely match: Qualcomm (QCOM).
Which is indeed an appealing, value-priced stock, with a lot of cash and a strong dividend and a compelling history of leading all recent transitions into new mobile technologies and bandwidths and building strong patent portfolios in those network technologies (3G and LTE and CDMA).
The challenges for QCOM have generally been threefold, as I see it:
1. That their dominance has slipped with each iteration of new technology — so they have less of a patent lock on LTE, the current widely-used high speed data technology in most smartphones, than they did on the 3G/CDMA technology, and therefore their patent licensing earnings are lower.
2. That they have been unsuccessful at getting royalty payments at expected levels out of the smartphone makers who use their technology, with or without permission, in China.
3. That their chip business is facing increasing competition in mobile chipsets, including from Samsung (which Qualcomm, in a high profile move, lost as a phone chip customer late last year).
And, perhaps most importantly, 4. That mobile handset sales growth is finally really slowing, for the first time in decades, and nobody outside of Apple is making much money selling phones.
Qualcomm has a lot of potential growth drivers in their business, they have a relatively new CEO and they are focusing on winning business in automotive, building tools and chips for “internet of things” devices, including sensors, image processors, and connectivity technology, and even taking on Intel in some big (and lucrative) markets like data center server chips (in partnership with Google, which could be a big deal). But none of those, so far, is big enough to cover the shortfall QCOM is seeing in earnings from their mobile phone chips and IP portfolio.
I haven’t owned QCOM personally, but it does look awfully inexpensive here if they can defend their market share in mobile chips, even if the chip market doesn’t grow super-fast… but it’s hard to see it going up fast, it’s just that the stock is relatively inexpensive, has a long history of innovation, and pays a strong and growing dividend that they can easily afford. QCOM is at just about the lowest PE valuation it has ever had, around 14, but investors also have much lower growth expectations than they’ve had for QCOM over the last 20 years or so. I think it looks pretty good at these prices, but I also thought it was starting to get to a reasonable value last Summer when the price was $20 higher, so I may just have a little too much confidence in QCOM’s ability to make its next transition.
Confidence is easy, of course, when it’s not your money at stake — so perhaps, when it comes to my personal sentiment, it’s more telling that I’ve never owned the stock. That will continue to be the case for at least three days, since I’m writing about them for you now and I have trading rules to follow, but if things change after that I’ll let the Irregulars know.
How about our third “Buy and Hold Forever” stock from Jensen? Here are the clues:
“Brand new! Incredibly, this homegrown American success story tacked on a nearly 50% gain in 2015 while most Blue Chips struggled to post any I expect this stock to occupy a slot in our Forever Stocks Portfolio for a very, very long time. Look for it to deliver earnings and revenue increases in the mid-teens for the foreseeable future. It has all the traits, outside a dividend yield, that one should look for in a true ‘Forever Stock’ position. Today’s price before it climbs into the THOUSANDS”
Guesses? This is almost certainly Alphabet, which I often persist in calling Google (GOOGL/GOOG). Google is a stock I’ve owned personally for more than ten years, and I don’t see myself selling it, either. Here’s what I wrote about Google in my Annual Review last month:
* Alphabet/Google (GOOG) $710, personal cost basis $115. Sentiment: Buy. Trade Stops “smart stop” would be $636.
Google is the dominant profit engine on the Internet, though competition with Facebook is heating up — and it has a lot of levers yet to pull thanks to their many “maybe” projects outside of the core Android/Search/YouTube business. The stock is not cheap anymore, having jumped up to something closer to what I think “fair value” is after they reorganized the company and changed the name and, more importantly, gave some indication that they’re going to be more transparent with their R&D spending and new projects under their new leadership. I wouldn’t want to pay a lot over $700, since they’re one of the largest companies in the world and won’t grow at a breakneck pace, but right now it’s right at the top level of a reasonable “megacap growth” buying range with a PEG ratio of 1.5 (trading at a forward PE of about 25, expected to grow earnings at about 16%), almost exactly where Facebook, with faster growth but a richer valuation, is trading currently. GOOG is still cheaper by a few percent than GOOGL, so I’d always buy GOOG in that context — there’s no reason to pay extra for voting rights if your voting right doesn’t matter (founders/insiders control the board and any possible vote).
The stock is down about $20 from then (still referring to GOOG shares, which I prefer over GOOGL), it got a bit of a bump from their fourth quarter earnings (which were excellent) and then came back down along with the rest of the market. We’re still early on in these days of a Google that’s run by Wall Street-savvy management who report more data and talk more about what analysts want to hear, and in prior years we’ve seen a lot of consolidation after Google’s stock makes big jumps in valuation — I’d characterize Google’s 2015 as being a “catch up” year when their share price caught up with their earnings growth, but that followed a very flat 2014, another very strong year in 2013, and a mostly pretty flat several years from 2010-2012 after they’d bounced back from the 2009 lows.
I continue to have confidence in Google as a long-term investment, and I appreciate that they’re being a little more disciplined now with their “other bets” outside of the extremely profitable and growing YouTube, Android and Google Search/Advertising businesses — but I do think those “other bets,” from biotech to self-driving cars, are worthwhile investments in future potential growth and might create some real returns sooner than expected, particularly if they get spun off into independent companies.
And as I said last month, it’s not necessarily cheap — but it has gotten cheaper, now that estimates have risen the shares are trading at about 20X expected 2016 earnings, with long-term growth expected to be over 15%. That’s worth buying… as long as you’re not counting on a short-term profit. I’m fairly confident that Google will continue be a strong investment for the next five or ten years, but it’s already one of the largest companies in the world (the largest publicly traded one, some days), and it might well “settle” for a while in the absence of any big news… particularly if the overall market stays soft.
So that’s what I think, and that’s what the Thinkolator tells us these “Forever” stocks are — GOOG and QCOM to go along with M as Jensen’s favorites during these early days of 2016. Will they be winners? Throwing any of your one money at ’em? Let us know with a comment below.
Disclosure: Yes, I own shares in Apple, Alphabet and Facebook, all of which are mentioned above. I won’t trade those stocks or any of the other stocks mentioned above for at least three days per Stock Gumshoe’s trading rules.