2021 was the first year when I officially published my Top-10 picks. I will shortly publish a podcast episode recapping our performance, wins, losses, and takeaways.
With all the caveats previously mentioned in place (calendar shouldn't dictate what you invest in, this may not fit your individual investment needs, this isn't financial advice, etc.), this post covers my 2022 picks. Would love for you to follow along, join the journey, and invest with me. Let's get right into it:
The 2022 Portfolio
To make tracking easier, here's a Google Doc: Click here to Access
Here's a starting snapshot:
As this is published before the first trading day of 2021, you can mimic the investments above and join along. The sheet models the equal-weighted ETF with a $10,000 investment.
1. Large Cap Growth:
When venturing out of index funds, I always recommend starting with large cap growth: blue chips who have made it big and have proven themselves, but still have business momentum and tons of room to grow.
Amazon: Since the CEO change (Bezos > Jassy), we've seen investments pick up - which has pressured Amazon's earnings and estimates (FY 2022 EPS consensus estimate has dropped to $51 from $66 over last 90 days). The stock barely ticked up (up 2.4%) in 2021 vs S&P's 27%.
With significant recent underperformance and a lot of room to grow into, Amazon carries itself forward to another yearly ETF portfolio of mine. Current investment cycle will reap returns soon - hope it happens in 2022.
Risk I'm looking out for: Continued deceleration in earnings as management may continue to invest towards long term supply chain and fulfillment initiatives
Alphabet: is usually an easy stock to recommend, but it was a bit difficult to pick this after a 60+% return in 2021. The multiple is cheap vs where it could be, but is fair when compared to historical ranges. At ~25x forward p/e, I'm not picking this name solely for multiple expansion, but rather am betting on earnings momentum to continue.
The company has beaten its estimates ('earnings surprise') by 19-65% over the last 4 quarters. If this momentum continues (with continued reopening and ad spend), the 2022 earnings estimates (3.6% YoY earnings growth) maybe on the lower end. If we get a couple more beats with increasingly shareholder friendly capital allocation/return (they're already on the right path), we may see the stock headed well above $2T Market cap in 2022.
Risk I'm looking out for: Failure to commercialize 'other bets'
I was debating adding Meta (FB) instead, as usually that's my style when I select yearly picks: i.e. give me something that has a lot of potential, but also has recently underperformed, is an underdog, and has compressed valuations.
Meta is cheaper (~23x forward eps), unloved by the street, and has optionality opening up (with Oculus and Metaverse). It might be more volatile though: metaverse investments may go on for a decade, but we don't know exactly when investors will get to reap benefits. While I support the direction, its difficult to forecast when the returns and extra multiple points will show up. Alphabet seems driven by EPS vs P/E expansion in near term, which seems a safer bet.
HDFC Bank: We have some diversification (sector as well as geography) by adding HDFC Bank to the list. The Indian private banking giant has been on a tear for years, but has taken a breather since Covid, as loan growth has slowed and bad loans (NPAs) have gone up.
Recent management change (Aditya Puri retiring as CEO) also coincided with the results, shaking up investor confidence in the management and strategy. With setbacks, both in business and stock price, the stock now trades at 20x forward p/e, which is reasonable and has room to grow as the SME (Small & Medium Enterprises) and retail sectors in India pick up steam again.
Risk I'm looking out for: Rise in NPAs (Non Performing Assets, i.e. bad loans), together with slowing loan growth
2. Fairly priced Consumer Discretionary:
Target: has impressed over last years, especially with its: i) omnichannel fulfilment, ii) smaller store formats, and iii) merchandizing (when was last time you walked into Target and just walked out with what you wanted?). Building on these fundamentals and many a competitors having to close in 2020, it had a phenomenal 2020 and 2021 (Sales are projected to be ~$106B this year vs ~$78B in 2019-20). However the growth next year is projected to slow (to 2.3% revenue growth) - in part due to supply chain shortages. With those concerns, the stock is now at a reasonable ~16x forward p/e (~$13 EPS projection, 1.5% dividend yield, 5% Debt/MCap) - which is a reasonable valuation for a great management team executing a great strategy. I hope they continue the execution and estimates are raised through the year, but relying on multiple expansion is also a decent bet.
Risk I'm looking out for: supply chain shortages affecting merchandizing flexibility
Best Buy: Very similar story. Big pandemic winner (Sales up to ~$52B projected this year vs $43B in 2019-20), followed by a forecasted contraction (sales actually forecasted to drop ~2% next year). Primary concern on top-line is that buyers made one-time purchases to adjust to working from home, and won't return again as purchases weren't repetitive in nature.
Primary concern on bottom-line is the Total Tech program, which in short term is pressuring profits, and in long term - we still don't know whether it will work.
Ironically, management's solution to bottom-line problem is addressing the top-line problem in long run by hoping to make revenues more predictable (recurring) and through services (where Amazon can't readily compete).
I don't usually include names with falling revenues, but I like Best Buy's story (its transformation over the last 10 years) and do believe there's value in checking out gadgets in person and wanting advice from "geeks". The company has ~no debt, is trading at ~11x forward eps, and sports a 2.75% dividend yield. I'm intrigued and hoping for both, but at least banking on multiple expansion by 10-20% this year.
Risk I'm looking out for: not-so-good execution on TotalTech
Uber: Reopening story. We know by now that widespread lockdowns are ~out of question. If they happen, they would be targeted and limited to certain geographies. Broadly speaking though, 2022 could be a continued reopening story. While 2021 saw Uber struggling to keep costs in control again (driven by labor shortages and rising wages), 2022 might provide stability. Also with Uber being Top 1 or 2 in most markets, I believe it will retain pricing flexibility.
Revenue is forecasted to jump 52% this year and 48% next year, however the price will be very sensitive to profitability projections. Company is still losing money on bottom line and a 2022 turn around may push the stock price higher.
Risk I'm looking out for: continued push in profitability, rising costs
I closely considered adding LYFT instead of UBER, which I also think is a good buy. LYFT has advantages of: i) being local (US has lesser possibility of widespread shutdowns vs other global cities, I believe), ii) being focused (food delivery is not yet profitable for Uber), and iii) Lyft is supposed to be profitable this year, which should drive positive investor sentiment (Uber has pushed this goal farther a couple times).
3. Sector Focus: Financials & Healthcare
Last 4 picks represent my sector picks for the year: financials and healthcare. In both sectors, we have 1 stable name and 1 leveraged ETF (which is risky, but can benefit returns if we turn out to be right).
Rising rates are the #1 story in every market forecast for 2022. Who does it benefit? Banks! (if yield curve flattening/inverting doesn't become a here-to-stay reality)
Although the GDP growth is forecasted to slow in 2022 (to 3.8%), it remains above average, and should push loan growth higher. Who benefits? Banks!
Also adding to the mix are: i) attractive valuations, ii) better capital-return programs, and iii) profitable businesses (not speculative growth). Together, I would hope valuations as well as earnings to head higher as the year progresses. Instead of picking a specific name, I've decided to go with ETFs (as I can't predict with certainty where most growth will come from - interest rates, loan growths, consumer spending, or M&A/advisory).
FAS gives a 3x leverage to an ETF where large money center banks are major holdings.
KRE gives exposure to a lot of regional banks.
They both had a phenomenal 2021 (FAS with ~90% return, KRE ~25%), but valuations still look decent (performance was driven by earnings for the most part).
Risk I'm looking out for: flattening yield curve, stagflation
Okay, we're addressing two very different animals here with our picks.
XLV is dominated by big pharma (UNH, J&J, Pfizer, Abbvie, etc.), whereas LABU is 3x equal-weighted biotech - which covers a lot of small-mid-cap speculative names.
CURE was our best pick last year. I still believe pharma will continue performing well in 2022 and the valuations still look decent. I wanted to keep the theme moving, but have reduced the leverage: going from CURE to XLV. Don't be in the impression that I was going to reduce the risk though, because here comes..
LABU: which is inherently very risky. I don't have a great reason to add it right here, right now; other than: I'm banking on mean reversion. Biotech has lagged the markets for a some years now, and while there are good reasons for it, we know the biggest policy fears have not come to fruition and there maybe upside here. I have gone with IBB (or BIB) to pick biotechs in past, but I don't like how now the biggest holdings (except Moderna, Regeneron) lack growth (think Gilead, Amgen, Biogen). IBB once used to be led by growth companies (Celgene, Regeneron, Vertex) - not anymore. So I've picked the 3x equal-weighted biotech. This can very well blow up (esp. in a rising rate environment, which is a decent possibility), but let's hope not.
Risk I'm looking out for: speculative assets undergoing another round of devaluation due to a liquidity crunch
These are the 10 names I came close to adding, but they didn't make the final cut (and reasoning):
1. Meta (FB) - Should benefit from increased ad spending and Quest 2 success, but comes with near term uncertainty around RoI on Metaverse investments
2. Lyft (LYFT) - Should benefit from continued reopening and return to profitability, but Uber offered a better rebound (in growth)
3. Disney (DIS) - Should benefit from reopening (parks, movies), but don't have a way to establish a floor in valuations in case Disney+ subscription slows
4. SoFi (SOFI) - Continued execution and fairly valued here (at $15), but student loan (forgiveness) hangover remains in 2022
5. Robinhood (HOOD) - Valuation is attractive (at $18) with possible new crypto features to be announced, but too volatile and may swing with crypto prices.
6. WayFair (W) - Attractive below $200, but already have consumer discretionary exposure with Amazon, Target, and Best Buy
7. Energy - as a sector is the most favored on street for '22, but relative weight in S&P is insignificant - not missing out much in comparison
8. Ulta (ULTA) - I believe Ulta could be the ultimate reopening play with people getting ready to go out, but it trades at 22x forward eps, so stock performance will have to come from earnings - which is more uncertain of a bet.
9. Block (SQ) - Valuation is looking better now (at $160), but Afterpay acquisition ($29B!) needs to be digested.
10. CLOU - Cloud software plays have had a pullback, but may not perform well in a rising rate environment.
Overall, I've tried to stay clear of high-momentum-no-earning speculative names, while also not going all-in on cyclicals (industrials, materials, energy). With Fed's recent change in stance, interest rate hikes are upon us. In this environment, names with better balance sheets and fair/reasonable valuations will do well. Accordingly, I've picked financials and healthcare as sectors to bank on.
As for specific names, I've picked large cap growth companies who are at a reasonable valuation and have (in part, circular reasoning) subdued expectations in the near term (I have higher confidence in them being a great time to pick them in long term, but hopefully they'll work in short term too). Also unless the growth/consumer slows down, I'd suspect consumer discretionary/retail to do well with extended reopening. Target, Best Buy and Uber would capture some of that spending.
I've added some risk too though: UBER isn't profitable, Best Buy's revenue is projected to decline, and LABU is highly speculative and can be this year's Alibaba (you don't want that) - but hopefully all are balanced risks, with opportunity to outperform. There are always risks.
Best of Luck to us - Happy Investing!
Let me know any/all of your thoughts/questions/concerns with this selection (in comments). If you liked this post/strategy, do share it with your friends.
1. I am long all the stocks mentioned above as of 1/1/22 (except KRE), but am not paid by anyone to recommend these.
2. I am not a financial advisor.
3. Invest at your own risk (Do reach out for suggestion for substitutions/adjustments)
If you've been meaning to start fractional investing, options, or Crypto, here's a link to Robinhood. If you use this link, we will both get a free stock + I'll answer any questions you may have (on IG). Link: https://join.robinhood.com/sunnyg
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