5 Secular Trends And Stock Picks For 2022
Summary
- Five macro themes investors need to keep in mind when investing for 2022.
- Five suggested stocks to buy related to those themes and valuations.
- GOOG, CVS, DIS, FB and XOM are a buy and will provide your portfolio a boost for 2022.
Olivier Le Moal/iStock via Getty Images
In this article, I will talk about 5 investment themes for 2022 and how you can take advantage of these investment themes by suggesting 1 stock that you can buy based on these themes. With the big picture of inflation, Fed tapering, COVID and supply chain issues, 2021 has been fraught with problems, but as 2022 comes about and Omicron causes havoc in our communities, there are still some underlying secular trends that we as investors can rely on for our investments.
Theme 1 - Cloud everything as a service
The transition toward the “as-a-service” model has been underway for years, but it’s accelerated in the last 3-4 years. Disruptions due to shutdowns and the complexity of rapidly enabling a remote workforce have created the need for flexible IT solutions. To keep up in today’s rapidly changing environment, organizations need solutions that enable them to create new business processes, products, and services. As a result, adoption of the everything-as-a-service model is increasing. This has resulted in increased cloud spend over the last few years as data, enterprise apps and consumer facing apps driven by social media and content creation influencers have accelerated the move to cloud. The trend will continue in 2022 with the chief beneficiaries being Microsoft (MSFT) (with its Azure offering), Google (GOOG) (GOOGL) with its search, YouTube, and cloud offerings is also gaining traction in this space.
With a forward P/E of 27 and PEG of 1.1, GOOG remains a great buy here. GOOG and MSFT together make 10% of my portfolio and I have been long since a decade on these stocks and have added when opportunity comes about. I believe one such opportunity is now. MSFT seems a bit overvalued in comparison. The below table shows some key growth-related metrics for GOOG.
Source: Seeking Alpha Premium
Theme 2 - Pandemic turns into an endemic as global vaccination rates improve
With Omicron spreading quickly, more people are lining up for vaccination boosters and pharmacies will benefit in the short term as revenues get a boost with more foot traffic coming to these stores also causing an uptick for sales at the front end of these stores. In the long term, companies that offer end to end comprehensive health solutions like CVS (CVS) have a huge advantage here as they look to cover the entire gamut of the health chain from insurance, PBMs and pharmacy. CVS bought Aetna in 2018 and was a highly leveraged company with net debt position of $48 billion at the end of the third quarter of 2018. This amount has declined by about $20 billion over the last couple of years. The company is now generating significantly higher profits and larger cash flows, which makes higher debt levels more sustainable. In 2022, CVS will realize the financial benefit of its virtual primary care and national network offerings via MinuteClinic and HealthHUB. CVS is still cheaply valued at 17 times forward earnings when the SP500 is at almost 22 times forward earnings and is likely to go higher as more deleveraging happens. CVS already has announced a 10% dividend raise and a $10B buyback. I am long CVS which I bought around $74, but will be adding if there is a pullback to around $94.
Source: Seeking Alpha Premium
Theme 3 - Cutting the chord accelerates
The trend to move from traditional TV bundle offerings from AT&T (T) or Comcast (CMCSA) to Direct to Consumer offerings and subscriptions is here to stay and has a long runway ahead of us. There is a plethora of choices available including Netflix (NFLX), HBO Max, Apple TV (AAPL), Disney+ Plus, Amazon Prime Video (AMZN), Paramount Plus, Sling etc. Among all these options, winners are clearly emerging from media wars and Netflix seems to have established itself as a clear frontrunner and almost a must-have subscription for entertainment. The varied content targeted at 15-plus age group which is refreshed frequently has provided Netflix the edge.
NBC, Fox, and Disney shows will continue their exodus from Netflix in 2022. Glee recently left the service in December, and New Girl will be leaving in Jan 2022. Netflix is becoming less and less a destination for reruns of old faves and more a hub for new, original content. I am looking at NFLX closely and will buy if the right opportunity presents itself. Another company to look at closely is Disney (DIS), which is transforming itself from a theme park operator and a studio to DTC content provider. Disney+ with Disney, Pixar, Marvel, Star Wars and National Geographic branded content is a winner in the kiddie content category. Although the content is relatively weak compared to Netflix, it has earmarked $33B for creating new content in 2022 and will continue to be a front runner in that category. I have owned DIS stock for a number of years and recently added to it at around $150. I believe you will get a shot between $140 and $150 on this one in early 2022. With forward EPS growth rate of over 40%, DIS is a good buy for 2022.
It is become clear that in a few years Netflix, Disney, Amazon and AT&T spin off of WarnerMedia will occupy 80% of the streaming market and will crowd out smaller players, leaving them with uneconomical businesses. I am long all these 4 stocks. In mid-May, AT&T unveiled a deal to spin off WarnerMedia, merge it with Discovery (DISCA) and get $43 billion, in the process creating a new global content powerhouse with scripted and unscripted programming. AT&T will use the sale of its entertainment unit to reduce debt and focus on its connectivity business. T pays a good dividend and the newco could unlock substantial value for the shareholders. I have added recently to T.
Source: Seeking Alpha Premium.
Theme 4 - Metaverse gains ground
The recent renaming of Facebook to Meta Platforms (FB) has brought Metaverse at the center of the new tech conversation. In his quest to turn Facebook into a metaverse company, Zuckerberg is seeking to build a system where people move between virtual reality (VR), augmented reality (AR) and even 2D devices, using realistic avatars of themselves where appropriate. Here they will work, socialize, share things, and have other experiences, while still probably using the internet for some tasks such as searches which are like how we use it now.
Oculus has been a popular Christmas gift this year and the Oculus virtual reality app was one of the most popular app in the Apple App Store. As far as Meta is concerned, this is the first time its Oculus app has topped the App Store list at Christmas. Facebook plans to extend Oculus' existing advantage in gaming to new verticals, including communications, media and entertainment, education, and other areas. Given these broad potential applications, virtual reality technology is a strong candidate to emerge as the next social and communications platform. I am long Meta since 2013 with 5% of my portfolio in Meta. FB is a buy and is a great GARP (growth at a reasonable price) stock for 2022.
FB MAU (Monthly Active Users) and ARPU (Average Revenue per user) are growing as seen below.
Source: FB Investor presentation
Apple is another player in this space and users will be able to get their hands on Apple's long-rumored AR and VR headset within a year. I am long AAPL since 2010 and have enjoyed the fantastic run that Apple shareholders have had over the last decade. With AR/VR, I expect Apple to win again, and Apple Car could be another long-term revenue driver for this stock in the long term. Apple seems to be extended at this time, but a pullback would give opportunity to add for long-term investors.
Theme 5 - Oil continues its comeback
The energy sector has been on a tear in 2021 as countries emerged from lockdowns and growth bounced back for most big economies. This week saw another near-record inventory draw, as already low crude and oil product stocks fell by ~20mb in the US. Inventories are now back to the 2010-2014 range when Brent crude prices averaged $100+ per barrel and global oil demand was substantially lower. China and India are major consumers of oil. The internal estimate from the Chinese SOE calls for peak oil demand in 2030 at about 15.8mb/d; conversely, the IEA is forecasting China's oil demand of 16.1mb/d by 2026. Demand in India is also rising, and oil demand will continue to be robust for the next several years. Yes, the rise of EVs and push for renewable energy will eventually put a cap on the demand, but the time window for demand to taper off may be a decade out as countries will take time to build the infrastructure required to transition to EVs.
Oil will continue to be in the $65-$80 range in 2022. There has been a huge underspending in oil infrastructure over last few years as oil prices had gone south pre-2020, especially with the supply increase driven by the rise of US shale. Exxon (XOM) and Chevron (CVX) continue to benefit from high oil prices. XOM continued to spend in Guyana even during the downturn and is poised to reap the returns from the capex spend as the upcycle for oil continues in 2022. XOM also did not cut its dividend during the downturn, gaining confidence with the investors. I am long XOM, and I believe XOM is a buy as the company deleverages rapidly and will eventually earmark funds for buybacks by late 2022/early 2023. Recent 8-K filing indicates that higher oil and gas prices could have increased XOM’s Q4 GAAP earnings by as much as $1.9B compared with Q3. The below shows how XOM is performing on several key metrics (Source: XOM earnings call presentation).
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG, FB, CVS, XOM,DIS either through stock ownership, options, or other derivatives. 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.
This article only represents the author's thinking and is not meant to be investment advice to buy or sell any stock. The author is not always right with his predictions. It is available as a free read, written and distributed only to assist in research while providing a forum for second-level thinking.
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