Best US stocks to buy?
7th October 2020
My review of the technical analysis for all of the stocks in the S & P 100 index, found that six of these had particularly bullish charts. These are as follows:-
1. Texas Instruments
2. Colgate-Palmolive
3. Microsoft
4. Netflix
5. Oracle
6. Eli Lilly
I have written about Microsoft one two occasions already this year, firstly in April; 'Best Shares To Buy' and again in May; 'Which FAANGs will outperform?'. Both contained buy recommendations, so I will omit it this time around - to avoid repetition.
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Netflix was also featured in my above articles (in the 'Market Topics' section), the April article being positive, but the May article was less so, due to valuation concerns. So I have decided to omit it this time for the same reasons.
Oracle and Eli Lilly are perhaps a little too much in the spotlight recently, and it is often difficult to find value in that type of scenario. What I mean by that, it that the good news that has put them in the spotlight with the financial media, is usually priced in by that time. The former looks likely to pick up a sweet deal on buying the US interests of TikToc, owned by Chinese company ByteDance which is privately owned. The latter is developing a treatment for Covid.
That leaves us with Texas Instruments and Colgate-Palmolive, neither of which have been featured very much in the financial media recently. However, a review of the fundamentals indicates that both have some very positive characteristics.
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1. Texas Instruments (TXN)
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Share price: $146.28
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A technology company that has been around since 1930, would appear to be something of an oxymoron. Yet TXN has continuously adapted to new technology trends, and has survived and thrived in that time. The chart is very bullish, primarily because of the recent breakthrough the previous all time high of $130 set in September 2019, and retested in December 2019.
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TXN makes semiconductors, which are an essential component of computer chips. These are used in mobile phones and tablets, factory automation systems, electronic components for the auto industry and various other applications. It also makes some consumer products such as calculators.
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So why is the chart so bullish - what is going on? A review of the fundamentals does not reveal anything terribly exciting - at first. The revenues and earnings have been static for the past three years, with revenues of approximately €15 billion and profits before tax of around €6 billion each year. That is a very healthy net profit margin of well over 30%. However, the lack of growth raises questions about why the sudden burst of strength in the shares has occurred.
A further review of the financials reveal a few possible explanations. TXN regularly beats quarterly earnings expectation by 5% to 10%. However, in the most recent two quarters, it has beaten earnings by a much higher margin. The earnings per share (eps) average forecast by analysts was $1 for the quarter ending 30th March 2020. The actual earnings came in 24% higher at $1.24. Again, the forecast for the quarter ending 29th June 2020 was $0.88. The actual earnings beat that by a whopping 68%, coming in at $1.48.
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Why were analysts forecasts too low? Two possible reasons. Firstly, they overestimated the negative impact that the beaten up car industry (an important customer for TXN) would have on earnings. TXN has negotiated this better than expected. Indeed, it could be set to benefit significantly from the move to electronic vehicles as this will increase the car industry spend on some of the components made by TXN.
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Secondly, analysts may have underestimated the benefits to TXN from the move to 5G in the mobile sector - another important customer segment.
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The majority of analysts (17 out of 32) rate TXN as only a 'hold'. However, their average forecast of eps for 2021 has increased from $4.90 to $5.45 in the past three months.
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TXN has been very resilient throughout the Covid crisis, to date. It has maintained its quarterly dividend, whereas other chip makers such as Western Digital has suspended their payouts, with a consequent fall of 50% in the share price. TXN's forecast dividend yield is 2.8% and it looks reasonably well covered with the payout amounting to about 50% of cash generated in 2019. The desperate search by income funds for reliable dividend payers, could also account for the recent strength in the stock.
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With a diverse range of customers and products, and an excellent track record of good management, the P/E of 28, based on 2020's forecast earnings, falls to 26 for 2021, if earnings expectations are met. That looks reasonable, and if those earnings expectations are exceeded, then the shares are particularly good value at their current level around $146.
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2. Colgate-Palmolive (CL)
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Share price: $77.97
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The well known toothpaste and toothbrush maker, which one would normally expect to be a sort of 'steady eddy' i.e. a mature company with little growth, has registered a very strong buy signal on the chart recently - on breaking through a resistance level at $76 which had held for the past five years.
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So what's up? The P/E looks high enough at 26 times earnings, and the dividend yield is reasonably attractive (by US standards) at 2.24%.
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On reviewing the fundamentals, I found an article on the web which quoted from the 2019 investor letter of a hedge fund that hold a large position in the shares, VGI Partners. Their thesis is as follows:-
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Colgate's global market share of toothpaste is 42%, up from 35% in 1995. This constitutes 'Amazon type' dominance of this market. And where is the growth going to come from? The answer is, in emerging markets. Colgate's dominance in some of these markets, such as India where it has a market share of 50%, gives investors exposure to these growing markets.
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Consumers tend to be quite loyal to the brand of toothpaste they grew up with, so there is unlikely to be any major change in this very high market share. Colgate's pricing policy is to dominate the market with a lower priced product, and then introduce higher margin products which customers gradually trade up to. Examples are, toothpaste with whitener, mint flavouring and lighter paste for sensitive teeth.
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In addition, it also has a pet food business (described as 'pet nutrition') which is orientated at dogs and cats that need to go on a diet (don't we all!), and again it is the global leader. This is a growing market due to the trend for higher pet ownership as 'companion animals', particularly for the increasing number of single households.
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Analysts re forecasting earnings per share growth of about 5% for 2021; $3.13 for 2021, up from $2.96 in 2020. Most analysts (17 out of 23) rate the stock as only a 'hold'. However, the recent strength in the shares could indicate that a re-rating of the stock may be in progress, and the longer term outlook as outlined above looks attractive.