Seeking Alpha

Recession Playbook: 5 Generational Buying Opportunities

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About: Alphabet Inc. (GOOG), GOOGL, ISRG, NOW, SQ, TWLO, Includes: ADBE, AIRB, BA, CMG, FB, HD, LMT, LYFT, SPY, TWTR, UBER
by: Louis Stevens
Louis Stevens
Long only, value, growth at reasonable price, research analyst
Summary

I lay out exactly what I've been buying and why these companies remain fantastic buys.

I briefly demonstrate the thinking behind each of the buys, and I share more in-depth discussions of the companies, on which I've previously written (via links throughout the article).

I rate ISRG, NOW, SQ, GOOG, and TWLO all strong buys.

keep calm image

Source: Mission Mindfulness Blog

Introduction

Ok, now that you've taken a deep breath, prepare to enter a world of positivity and forward-looking optimism. In these difficult times, it may be tempting to walk away from your portfolios and bury your head in the sand, which some might believe is a valid strategy, as we could decline further from here.

I am here today to offer you another perspective: Now is the time to go on the offensive and to pick your spots (or stocks if you will). Now is the time to be buying quality discounted companies, the likes of which you will find later in this article. Could we fall more from today's prices? Sure, we could. But the companies that I am about to share will almost certainly rebound strongly over the coming 6-12 months.

Before I Begin

I just quickly want to highlight my performance on nearly all of my calls over the past two months. Commenters on my recent Chipotle (CMG) article were quick to ensure accountability was upheld after it declined in line with the broad market. Interestingly, Chipotle is performing either at or above the market as of writing this article.

I am sharing this not only to maintain self-accountability (I take my recommendations very seriously and only really write about stocks in which I've to invest my entire net-worth) but also to share with readers what good companies look like. These companies don't have 10%+ yields. They aren't penny stocks. They aren't companies that produce things like oil and tobacco (with which I don't take any issue, but they certainly aren't good investments). So here are some of my calls and their performance over the last two months.

The majority of my calls over the past 2 months have outperformed the SPY; in that, their declines have been less than the declines of the overall market, against which my fund competes. Also, every stock I share in this article is now a very, very strong conviction buy.

For example:

Alphabet (GOOG) (GOOGL) is down 24.32% versus the SPY's (SPY) decline of 27.52%. I re-iterated in the last week that this is a generational buying opportunity for Alphabet's shares.

Source: My Coverage Tab in my Author Profile

Lockheed Martin (LMT) is down 25.85% versus the SPY's decline of 26.42%. I re-iterated my buy recommendation on the stock in the last week or so.

Source: My Coverage Tab in my Author Profile

ServiceNow (NOW) is down 9.42% versus a decline of 17% by the SPY from where I originally recommended buying the stock. This is stock is lagging others, which is creating a very attractive entry point. More about this company later in this article.

Source: My Coverage Tab in my Author Profile

Adobe (ADBE) is down 15.12% from where I recommended it versus a decline of 25.85% from the SPY.

Source: My Coverage Tab in my Author Profile

And all of these stocks have become buying opportunities, of which I've been taking advantage. What's more, even if these stocks were bought last month, one should still expect their projected returns over a 10-year time span, and in many cases, these companies will return to growth as usual over the coming year or so.

I share all of this not to boast, but rather to ensure the accountability my readers want. Just as you must pick good stocks, you should also pick good authors and advisors. To further this accountability, I want to share another example of me being "on the right side of history".

I have been actively railing against tobacco stocks, oil stocks, and many of the "get yield quick" REIT schemes that curiously dominate Seeking Alpha, much to the detriment of investors. Again, I am sharing this so that readers understand what good stocks look like, and not just to feel good about myself. This crash should be instructive for those who may have been tempted to chase "sucker yields" that inevitably imploded.

Here's some evidence of my position on the aforementioned:

Source: My Comment History

Many of these "high yield REITs" (those that had yields in excess of 10%) are now down 60%-90%, and some have already slashed their dividends.

And as for my opposition to oil stocks, here's the evidence for that. My comment history details my opposition to tobacco stocks also.

I also want to be clear that I'm far from perfect.

I've been bullish on Boeing (BA), which has proven to be a bad call; not because it's down, but because it now faces existential risk, which could become systematic risk to the economy if not properly addressed by the government.

Great Louis, So What Should I Buy Today?

I'm glad you asked!

Below you will find my top five buys to capitalize on this panic. If you'd like more recommendations from me, simply go through my past articles and look at the total expected return near the end of each article.

What I've found very interesting in analyzing my past articles is the following. You will find a pretty direct correlation between expected return and level of decline experienced recently. That is, you will find that "riskier", less proven companies had higher expected returns than the more proven and stable companies. I did not create the valuations with that dynamic in mind, so it's interesting to see that my models' expected returns mirror the beta of each of the companies I've publicly examined.

This dynamic also lends great credence and legitimacy to my L.A. Stevens Valuation Model, which you can see demonstrated in action here, or in most of my articles.

Anyway, let's get into the analysis!

Pick #1: Intuitive Surgical

I wrote at length about my in-person visit to the company and at length about the company as a whole here. In the article, I arrived at the conclusion that Intuitive Surgical (ISRG) would generate annualized returns of about 11% at a purchase price of ~$575. I then went on to say the following:

"For those looking to buy, the recent decline following an earnings report that entailed underwhelming guidance provides investors an opportunity to dip their toes in the water. If the stock were to re-test the $400s, it would be an all-in scenario."

So here we are, an all-in scenario.

You can read my original piece on the stock to understand its future prospects for growth, which are still strongly intact; however, today, I will look at its balance sheet to assess the strength of the company's financial position.

Here's a little look at it:

Source: YCharts

As can be seen above, ISGR has $3.2B in cash on hand. This could cover its entire COGS, SG&A expense, and interest on debt expense for an entire year. What's more, its total liabilities are only about $1.4B, which makes for a very small interest expense. Therefore, ISRG has very little risk of bankruptcy and will likely resume normal operations in the coming weeks.

Thus, ISRG is currently offering a value that likely won't come around ever again. That is, ISRG below $400 will generate well over 20% annualized returns over the coming decade, based on the math illustrated in my L.A. Stevens Valuation Model in my original article on the stock.

Pick #2: ServiceNow

I wrote at length about ServiceNow recently, after realizing that it is set to become the "platform of platforms" for thousands of major businesses. ServiceNow is the platform of platforms in the sense that the company provides the railways on which information within a business travels to and fro. From HR to IT, NOW digitizes the entire workplace experience on a simple, seamless platform.

In my original piece on ServiceNow, I wrote about the "business herd effect", which theorizes that hockey stick growth is on the horizon for the company, as consulting agencies and competitive businesses realize that incredible efficiencies in IT, HR, and employee/customer interactions can be derived by using NOW's platform.

The benefit of NOW is so incredibly clear now that I couldn't imagine CEOs not rushing to become subscribers. Take this scenario for example:

  • Right now, a CEO is wondering what's happening in his business. Is everybody okay? Are HR issues piling up while everyone's at home? What's the financial position of his company? He can't talk to anyone, nor can he look at his CFO or Chief of HR's computers. So, what can he do? He can turn to the cloud where ServiceNow has digitized the entire business' operations on one simple to use, seamless dashboard.
  • The CEO has every answer he needs at his fingertips, as his entire business operates in the cloud thanks to ServiceNow! He can put out the fires that need to be put out by simply tapping a few buttons from his ServiceNow dashboard!

Alright, so it's a great company, but what's going on with the financials?

Here's a snapshot of the company's balance sheet:

Source: YCharts

With $1.7B in cash on hand and $835M in receivables, NOW has positioned itself well to weather this storm and emerge even stronger, as companies realize that they must put their entire business' workflow in the cloud, which NOW enables.

Further, once NOW becomes a part of a company, it becomes vital to the functioning of that company; therefore, it would be literally the last subscription a business would cancel, as doing so would destroy information flows exactly when businesses need them the most.

Pick #3: Square

Square (SQ) may be controversial for some, as the company will certainly be hit hard by this shutdown of the U.S. economy. However, the company has more than enough cash to weather this storm and emerge even stronger on the other side. What's more, it has shown that it has the right idea about recessions:

Go on the offense while others are panicking and withdrawing!

As evidence of this mentality, Jack Dorsey has taken to Twitter (TWTR) to announce that Square will be giving away money through its Cash App. This is going to cause an explosion in usage over the coming months, and hopefully, much of the usage will stick.

Source: Twitter

Additionally, Jack has addressed how the company will support its small business owners, which will likely entail short term loans that will be repaid as a percentage of transactions over the coming 3 to 6 months.

Source: Twitter

To bolster this position as a leader in a crisis, Square received approval for its bank charter recently. This approval means that Square's moat has become even larger.

According to the release, Dorsey's bank will provide commercial loans to merchants using Square's existing payments system.

Competitors like Clover have bundled their offerings with banks, which made such an offering more appealing. Square has not had this advantaged (yet continues to dominate the landscape), but now, with the approval of its bank charter, there's much less incentive for merchants to use inferior offerings simply because they're attached to a bank and its many services, such as business credit cards. Square will now be the one-stop-shop for small business development.

And Square is extremely well capitalized!

Source: YCharts

It could exist for well over a year without a single dollar in revenue, all while paying its employees as usual. Hence, Square's declaration that it will start handing out money on its Cash App makes sense. Square was born in the great recession, and this recession will only empower the company further!

Pick #4: Alphabet

Many of you are probably aware that I have been vocal about Alphabet's need to return capital to shareholders, especially when it's extremely attractive to do so during this temporary panic.

Aside from that ideological position, I am a huge believer in the company due to explosive growth in YouTube and Google Cloud, both of which are growing well above 30% annually.

According to my sum of parts valuation analysis in the article linked above, Alphabet remains undervalued by about 50% at its present valuation of around $750B. And I believe this undervaluation remains even in light of the inevitable revenue and free cash flow hit the company will take due to the virus-induced shutdown.

Source: YCharts

As can be seen above, Alphabet currently trades at a valuation touched only at the very bottom of the great recession.

New flash market! Alphabet is more profitable and better positioned than ever! This undervaluation highlights exactly why Alphabet needs to act decisively and execute an ASR (accelerated share repurchase), or begin strategically acquiring deeply discounted companies that could, for example, bolster its Cloud offering.

Pick #5: Twilio

Source: YCharts

I wrote about Twilio (TWLO) when it was trading at about $120, stating that it was a great value at that price. The article was entitled "6 Million Reasons Twilio Could Dominate The CPaas Industry", and it detailed how Twilio's platform strategy would lead to a revolution in the space. So if it were a great value at that price, it's an unbelievable value at $70-$80, granted it can remain solvent, and I strongly believe it can/will.

Further, the need for Twilio's services has never been higher!

What Twilio Does

Essentially, Twilio provides a communications platform for businesses, whereby these businesses develop their own unique strategy for communication with customers, i.e., the companies communicate through some combination of text messages, Facebook (FB) messenger, email, app alerts, etc.

Twilio's platform is used by many of the largest companies on earth, such as Home Depot (HD), Lyft (LYFT), Airbnb (AIRB), and many others. You can read a much more in-depth exploration of Twilio's business here.

As for Twilio's solvency, the company has never been in a better position than today, as can be seen below.

Source: YCharts

With $1.8B worth of cash and only $1B worth of expenses in the last year, Twilio could easily survive for a year without a drip of revenue dollars.

But that's not how Twilio rolls! Twilio's services are predicated on a subscription model, and during a time when the need for communication between businesses and consumers/employees is at its highest, we can be pretty certain that Twilio will not lose many of its customers. In fact, it will likely yank market share out of the hands of inferior alternatives that exist within the communications platform as a service arena.

Concluding Remarks

At the risk of making this article unbearably long, I will conclude here. I urge any prospective investors in these companies to read my more in-depth reports so that you can develop a solid idea of what these companies do. Further, in each of my linked articles, you will find precise expected returns. As I mentioned, you will notice that the higher the expected return, the larger the decline in the stock. This proves two things: 1) My L.A. Stevens Valuation Model provides high fidelity projections (but doesn't necessarily guarantee that these projections will come to fruition), and 2) higher expected returns = greater risk (or beta in finance parlance). This means that the higher the expected return, the greater the company will diverge from the performance of the SPY. Such has been the case for Uber (UBER), on which I remain bullish, as it has declined well in excess of the broader market, but that also may be as a result of it being a transportation company.

Remember, just because the market is selling off aggressively does not mean the market has any idea what tomorrow has in store for us. President Trump's aid packages could avert a recession, or they could prove to be not enough and could plunge us deeply into another great recession.

Whatever transpires, all of the stocks listed in this article have fantastic cash positions that will enable them to survive this downturn and even emerge stronger on the other side!

Here's a quote I will leave you with:

"This imaginary person out there - Mr. Market - he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused, you sell to him and if he gets depressed you buy from him. There's no moral taint attached to that."

-Warren Buffett

As always, thanks for reading; please remember to follow for more, and happy investing!

Disclosure: I am/we are long GOOG, NOW, ADBE, TWLO, UBER, SQ, ISRG. 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.