Nick's Picks 2019

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Includes: AAPL, BABA, CGC, CMCSA, DIS, EEM, FB, GOOGL, MO, NKE, NNN, O, PM, STZ, T, WPC
by: Nicholas Ward
Summary

Nick's Picks has beaten the market every year since I began this project.

In 2019, Nick's Picks portfolio is made up of 11 holdings.

I'm focusing more on value and income this year than I have in the past; in 12 months we'll see if this strategy pans out.

I just published my Nick’s Picks 2018 review. If you missed it, here’s the link. I was pleased to announce during that piece that Nick’s Picks beat the market yet again in 2018, giving it an undefeated record against the S&P 500 since this project began in 2016.

In that piece, I explained my rationale behind Nick’s Picks. I’d hate to waste everyone’s time who’s already read that, so if you’re aware of Nick’s Picks and why I do it every year, please feel free to scroll down to the graph displaying this year’s portfolio and my rationale for each pick below.

For those of you who aren’t familiar with Nick’s Picks, I’ll give you a quick break down (if you want more detail on this project, feel free to look through the archives on my profile here at Seeking Alpha).

In short, I believe that anyone can beat the market. I know this isn’t what Wall Street or your local financial adviser will likely tell you, but I’m here to stand up for the little guy.

Furthermore, I think anyone can beat the market with relatively little work involved. I’m not saying that’s the best way to go about investing, but I do think it’s possible, and thus far, Nick’s Picks is proving that to be true.

All I do each year is “invest” the money that I’ve given myself for this theoretical project on January 1st and let it sit there until Dec 31st. I don’t do any trades. Frankly put, I don’t even look at the portfolio. I don’t think about it. I just let the market do what it does (which, over the long term, is generate wealth).

I don’t have any limitations on what I can do with the money during any given year. I can invest in stocks, bonds, ETFs, mutual funds, gold, real estate, etc. I could hold all cash if I wanted to, but that wouldn’t be any fun. Since I focus on the DGI equity space for my personal investing portfolio, that’s where the majority of Nick’s Picks come from (buy what you know). However, I do branch out a bit within these theoretical portfolios because the goal here is to beat the SPY whereas the goal of my personal portfolio is different (I’m much more income oriented in those accounts).

We began the project with 100,000.00 theoretical dollars in 2016 and that figure has grown to $142,895.39 since then. In the past, I’ve put more focus on asset allocation within the portfolio. I’ve weighted different holdings differently, for different reasons. However, because of all of the volatility that we saw in 2018 (and my belief that it is likely to continue into 2019), I decided to simply evenly weight all of the holdings. I’ve also reduced the number of holdings year over year substantially. In 2018, Nick’s Picks was comprised of 28 holdings. In 2019, that number is down to 11.

I am generally bullish on the market in 2019, yet with a cautious stance. I discussed my year-long outlook in this recent interview with Seeking Alpha editors. This cautious stance has led to me focusing more on higher yielding names in 2019 than I have in 2016, 2017, or 2018. Only time will tell if this more conservative approach will pay off, but here’s to hoping that 2019 will result in my fourth victory over the S&P 500 in a row.

Name Ticker 12/31 price Shares Year Start Value
Alphabet GOOGL $1,044.96 12 $12,539.52
Altria MO $49.39 264 $13,038.96
Apple AAPL $157.74 82 $12,934.68
AT&T T $28.54 456 $13,014.24
Comcast CMCSA $34.05 382 $13,007.10
Constellation Brands STZ $160.82 81 $13,026.42
Disney DIS $109.65 120 $13,258.00
iShares MSCI Emerging Markets ETF EEM $39.06 333 $13,006.98
Nike NKE $74.14 175 $12,974.50
Philip Morris PM $66.76 195 $13,018.20
W.P. Carey WPC $65.34 200 $13,068.00
$142,886.60
Cash $9.35
$142,895.95

Apple (AAPL) has been a core position in the Nick’s Picks portfolio since the beginning of this project. In 2019, I’ve gotten rid of the “core” holdings since all positions are weighted evenly, though AAPL still remains in the portfolio and I have high expectations for it. Apple is the largest holding in my personal portfolio, so obviously I’m bullish on the name. I know that AAPL has been in the news lately and most of it has been negative. 2019 hasn’t treated AAPL shares well thus far. Management spooked the market last quarter by getting rid of iPhone unit reporting and it seems that all of the news since has been negative. We’ve seen AAPL supplier struggle and multiple reports of iPhone unit sales slowdowns. Furthermore, AAPL seems to be caught up in the U.S./China trade war. The Chinese market represents a significant percentage of Apple’s revenues, and if sales in this country continue to slide (or go away entirely due to government regulation), it will surely be bad for this company. However, I’m still bullish on the name because like Tim Cook has said in recent interviews, the AAPL ecosystem remains very strong. To me, a bullish AAPL thesis shouldn’t be about quarter to quarter iPhone sales, but instead, the total unit count and the high margin services business. As Apple diversifies its hardware and service offerings, I continue to expect the services side of the business to grow. This should demand a higher multiple than the sub-market multiple that AAPL is trading with now. I expect AAPL to continue to grow its dividend and return massive amounts to wealth to its shareholders. The company’s buyback alone should help it generate strong bottom line results in 2019, even if short-term headwinds in the iPhone business do result in revenue troubles. With this in mind, I think AAPL is incredibly cheap and I wouldn’t be surprised in the least if it out performed the market in 2019.

AT&T (T) is also an incredibly cheap blue chip name that was easy to include in Nick’s Picks this year. As you’ll see throughout this piece, I’ve focused more on yield this year than in past years. This is because I’m in a bit of a risk-off mindset regarding the market at large. I like having AT&T’s ~7% yield as a buoy against market volatility and the potential for another troubling year in 2019. But, T is not just a defensive holding in my opinion. The company’s cheap valuation (T shares are trading at their cheapest valuations in years) means that the stock not only provides a strong yield, but significant upside potential if we see any sort mean reversion with regard to multiple expansion. I’ve been bullish on T for years now. That hasn’t exactly played out well in my favor in the recent past. However, I think move to “smart pipes” via the integration of content is a good long-term move by management, and although the Time Warner deal has certainly created headwinds for T shares in the short term, I think T picked up one of the best media assets in the world and I can’t wait to see where they go with it. Debt remains an issue for T (especially in a rising interest rate world), though rate increases appear to be slowing and I think management will continue to focus on de-leveraging the balance sheet. Frankly put, 8x TTM earnings is simply too cheap for T. It is one of my largest personal holdings and I feel comfortable including it in Nick’s Picks for 2019.

While we’re on the subject on media/entertainment names, I think it’s best to move on to a couple of others selections that I’ve made for this year’s portfolio: Walt Disney (DIS) and Comcast (CMCSA). Both of these companies are blue chips in the entertainment space with well diversified portfolios. I believe that after the Fox (NASDAQ:FOX) deal is completed, Disney will reign as the unquestioned king on content (once again) with massive market share in Hollywood and upcoming streaming options to compete with the others digital distribution offerings that have popped up in recent years. I think Disney will break its own global box office record once again in 2019 with a stellar line up of huge films and this success will trickle down to its other segments. Disney does have China exposure, which is worrisome. It’s also a play on a strong economy and a healthy consumer. Should the U.S. fall into recession in 2019, DIS likely won’t outperform, but then again, while I do have my macro concerns, I’m not necessarily calling for a recession sometime in the next 12 months. All in all, at 16x earnings, which is more than the broader market’s multiple, yet well below Disney’s long-term average premium in the 20x range, I think shares are trading for at least fair value, if not better, and “buying” high quality names when they’re trading for fair valuations tends to lead to great results.

Comcast’s revenues are probably more durable, with its focus on distribution and internet, yet it trades with an even cheaper valuation, at just 14x. Some fear technological disruption here, though I have to believe that a company with the cash flows that CMCSA has will be able to compete in an evolving data distribution landscape. Like DIS, CMCSA has a strong studio and theme park division. It also made headlines in 2019 with M&A that strengthened its business in the face of digital disruption. CMCSA has been one of the best dividend growth stories in the market in recent memory and I expect that trend to continue. I think these two names are best in breed in the media/entertainment space, yet they’re trading with sub-market multiples. They’re too cheap, in my opinion, while still being poised for strong growth. I think they’ll both do well in 2019 (and beyond) and were easy names to include in this year’s list.

Up next we have another pair of somewhat similar stocks (at least, in my book they are): Altria (MO) and Philip Morris (PM). Tobacco names were absolutely crushed late in 2018 with news of a potential menthol ban hitting the markets. This news appeared to spark a sell-off which continued when Altria spent ~$15B late in the year on acquisitions outside of the traditional tobacco space. It’s clear that sales volumes are headed in the wrong direction for these names and they have to diversify. Personally, I bought Altria (several times) on the news because I liked their management team being proactive. I don’t own Philip Morris because I think Altria is the better income oriented play of the two; however, I think both dividends are safe with a 1-year time horizon, and since both stocks are incredibly beaten down, I decided that including both in Nick’s Picks 2019 made sense. Both of these names pay very high dividend yields in the 6.5% range. At a 12x multiple on MO and a 13.5x multiple on PM, both companies are trading with P/E ratios well below their long-term averages. I can imagine a world without cigarettes, but we definitively won’t be living in one in 2019. As far as income oriented defensive plays go, I think the beaten down tobacco blue chips are easy companies to buy/hold and I think they’ll make great additions to the Nick’s Picks portfolio this year.

While we’re on the subject of high yielders, I may as well transition to the only REIT in Nick’s Picks 2019: W.P. Carey (WPC). This has been my favorite REIT for years now. It’s much cheaper than the popular retail focused triple net REITs, Realty Income (O) and National Retail Properties (NNN), on a P/FFO and P/AFFO basis. As a value investor, I find this discount attractive. Furthermore, WPC’s property portfolio is much more diversified than its more popular peers’. WPC not only offers exposure to the retail sector but also a variety of others, including industrial, warehouse, office, and self storage. W.P. Carey also offers exposure to international real estate with nearly 35% of its holdings located in Europe (the other 65% are located in North America with the U.S. representing ~62% of the overall pie). The relatively cheap valuation combined with WPC’s diverse portfolio makes it an ideal REIT for me to hold (to me, it basically covers all of the bases with regard to my real estate related desires). Because of its cheap valuation, WPC offers a higher yield than its large cap peers as well. WPC yields ~6% whereas O and NNN offer yields in the ~4.1% area. WPC has recently taken steps to become closer to a triple net pure play which I believe will result in a higher premium on the shares once management proves the new strategy to the market. If WPC experiences multiple expansion, the stock has double-digit upside potential (just based upon the expansion alone). Combine this with its relatively safe 6% yield and I think we have a real winner on our hands.

And now with WPC out of the way, we’re done with the high yielders. Actually, we’re taking a sharp turn into more growth oriented companies. Although I am cautious heading into 2019, the stated goal of Nick’s Picks is to outperform the markets, and while I do believe that every company I’ve mentioned thus far has the capability to do that (primarily due to their low valuations), I think a portfolio whose primary goal is alpha is going to need some speculative growth companies involved to achieve that.

So, with that in mind, let’s move onto the first and only “F.A.N.G.” name in the portfolio this year, Alphabet (NASDAQ:GOOG) (GOOGL). GOOGL is also the only member of the Nick’s Picks 2019 club that does not offer a dividend yield. GOOGL is my favorite high growth tech name because I think it offers a nice balance of growth prospects, reliable cash flows, and a justifiable valuation. Alphabet is the world leader in internet search and the digital ad platform associated with its Google properties generates massive profits for the company. While many think of Alphabet (and the F.A.N.G. names in general) as highly speculative growth names with crazy valuations, GOOGL’s profits actually mean that this isn’t the case. This company has a long history of solid bottom line performance and trades with a P/E multiple that is basically in line with many of the popular consumer staples names. GOOGL shares are trading for just a smidge below 24x earnings right now. Considering the fact that this company is known for 15-20% bottom line growth, I think that is a fair multiple. There are fears in the analyst community of a bit of a short-term slowdown in 2019, though I’ll believe that when I see it. GOOGL remains a leader in the search business, which isn’t going anywhere. It has a growing cloud business which generates strong margins. It has a huge mobile footprint via Android. It has A.I. operations; its driverless car division, Waymo, is a global leader in that growth market; Verily, its healthcare segment, is likely to be a long-term growth driver, and the list goes on and on. To me, owning GOOGL shares is a bit like owning a high growth technology conglomerate, index fund, and even a venture fund, if you will. The company has top notch management, and while there are potential regulatory headwinds forming due to the privacy issues that Facebook (FB) sparked in 2018, I think GOOGL will be just fine long term. GOOGL is my largest personal non-dividend paying position, so I think it made perfect sense to include it in Nick’s Picks this year.

Another growth name, or at least growth relative to my standards, included in the Nick’s Picks portfolio this year is Nike (NKE). Nike was performing tremendously well throughout much of 2018 before it sold off some at the end of the year. However, during their most recent quarterly report, management was upbeat, and unlike many other multinationals, Nike’s performance in China (and other emerging markets) was great. Nike’s guidance for 2019 was solid and I think this best in breed company will continue to perform. Nike definitely isn’t cheap at ~29x earnings, though this premium valuation is somewhat justified by the future double-digit growth that analysts expect to see in 2019, 2020, and beyond. I think that holding a blue chip growth name like this, even when it’s trading with a premium valuation, makes sense. I’d rather own something like Nike than speculate on something more volatile in the technology or biotech space. This is an easy company to underestimate when you think of it as a shoe company or a consumer discretionary play, but I view Nike as a world leader in the material science space. They continue to innovate with their fabrics and materials, improving the quality, comfort, and performance of their products. I don’t claim to know much about the future, but I simply can’t imagine a world where people in developed countries are walking around bare footed and naked. Because of this, Nike is a core holding in my personal portfolio and it will be included in Nick’s Picks as well.

In 2018, part of my growth exposure in Nick’s Picks was comprised of a variety of Chinese internet names. In short, those stocks were terrible bets, performing badly across the board. The trade war talks certainly don’t help the sentiment surrounding the well known Chinese technology plays. However, the size and strength of the Chinese market is still too much for me to ignore. There is no telling if their government ever truly opens up their economy. This is the biggest risk to any investments in that geographic area of the world; companies can be manipulated by the government since the markets aren’t truly free. I think the weakness created in the big Chinese internet names in 2018 has created an interesting long-term opportunity. But, instead of picking and choosing individual names, in 2019, I decided to simply include the iShares MSCI Emerging Markets ETF (EEM). The top 10 holdings of EEM include many of the high growth Chinese tech plays that I’m interested in, as well as other well known companies hailing from Korea, India, Brazil, South Africa, Russia, and so on. The primary reason that I went with EEM as opposed to something like Alibaba (BABA) was the fact that EEM offers a dividend whereas many of the tech names do not. The yield is not hefty (at less than 2%) and it moves around a bit, but I think it does offer a bit of downside protection while still offering me exposure to potential outsized growth and the relatively cheap valuations that can be found in emerging markets. This is a bit of a contrarian play (EEM won’t perform well if the major global markets fall into recession). But, it’s a bet I’m happy to make with a relatively small portion of Nick’s Picks.

And last, but certainly not least, we have Constellation Brands (STZ). Unfortunately for me, STZ has sold off a bit since the year began and I’m already behind the eight ball a bit with regard to Nick’s Picks. I was lucky enough to add shares to my personal portfolio the other day at $151.80, yet Nick’s Picks selections are made with the closing prices of the prior year, so I’m locked in at $160.82 on STZ. However, I still believe the stock can recover. Although STZ shares sold off after the recent earnings report and guidance update, the company still appears to be doing quite well. Its beer segment remains best in breed, and while the wine space did suffer a bit, management appears to have plans to fix (or potentially sell-off) the underperforming assets. STZ began 2018 trading for nearly 30x earnings, and after recent weakness, the shares are available for just 17x earnings. STZ’s growth has slowed over the past year or so and analysts aren’t expecting to see the 20-40% EPS growth that we saw from 2014-2017, yet this company still has high single digit/low double-digit growth expectations, which means that the ~17x multiple seems fair to me. Longer term, I think STZ’s growth potential is great when you look at its marijuana assets. I don’t think those will add much to the company’s cash flows in 2019, yet the market typically places prices on companies based upon their future growth prospects, and as the marijuana industry grows, I think STZ will be rewarded for its investments in Canopy Growth (CGC). In the meantime, STZ investors are collecting a 1.9% yield that I expect to grow by double digits in 2019. As more income oriented investors come to understand the power of STZ’s dividend growth, I think the stock will demand a higher multiple. Simply put, this company has a lot going for it and I was happy to include it into the Nick’s Picks portfolio after the sell-off that it experienced late in 2018.

Disclosure: I am/we are long AAPL, GOOGL, T, STZ, MO, DIS, CMCSA, NKE, WPC, O, NNN, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.