The U.S. stock market hasn’t followed the script in 2021. The
S&P 500
index returned 26% through Dec. 16, well ahead of the roughly 10% gain projected, on average, by strategists at the start of the year.
Many expected value stocks to finally best their growth counterparts after a decade of underperformance. But after a strong start this year, value is ending in a familiar place, about five percentage points behind growth, based on the large-cap
Russell 1000
index.
Every December, we identify 10 promising stocks for the new year. Our picks for 2022 have a value tilt and reflect input from Barron’s writers, in particular Eric J. Savitz, Al Root, and Nicholas Jasinski.
The selections:
Royal Dutch Shell
(ticker: RDS.B),
IBM
(IBM),
Johnson & Johnson
(JNJ),
Hertz Global Holdings
(HTZ), Amazon.com (AMZN),
Visa
(V),
Berkshire Hathaway
(BRK.A and BRK.B),
Nordstrom
(JWN),
AT&T
(T), and
General Motors
(GM). Nine are new; Berkshire is the only holdover.
Our 2021 picks narrowly trailed the S&P 500, returning 26.9% on average, less than a percentage point behind the benchmark average. We nabbed some big gainers in
Alphabet
(GOOGL),
Goldman Sachs Group
(GS),
Eaton
(ETN), and
Apple
(AAPL), but flopped with
Merck
(MRK), gold miner
Newmont
(NEM), and
Madison Square Garden Entertainment
(MSGE).
The backdrop for stocks could be tougher in 2022 after three consecutive years of big gains—the S&P 500 returned 31.5% in 2019 and 18.4% in 2020. The Federal Reserve is widely expected to raise interest rates in 2022. That could help value stocks finally win out over their growth counterparts.
Here are Barron’s 10 stock picks for 2022, in alphabetical order:
Amazon.com
Amazon.com
’s
dominance in two major businesses makes it a rarity. It has a 40% share of the U.S. e-commerce market and about half of the lucrative cloud-computing sector, through Amazon Web Services. An estimated 85 million U.S. households are Prime members.
The stock, recently at $3,377, has trailed the market in the past year. It still isn’t cheap, trading for 66 times projected 2022 earnings, but none of its megacap internet peers has better prospects. Amazon’s fastest-growing businesses, like AWS and advertising, have high margins.
Evercore analyst Mark Mahaney sees 20%-plus annual revenue gains and expanding margins over the next two to three years. He has an Outperform rating on Amazon, with a price target of $4,300.
Company / Ticker | Recent Price | YTD Change | 2021E EPS | 2022E EPS | 2022E P/E | Dividend Yield | Market Value (bil) |
---|---|---|---|---|---|---|---|
Amazon.com / AMZN | $3,377.42 | 4% | $41.11 | $51.37 | 65.7 | None | $1,713 |
AT&T / T | 23.71 | -18 | 3.38 | 3.17 | 7.5 | 8.8% | 169 |
Berkshire Hathaway / BRK.A | 454,550.00 | 31 | 17,466.30 | 18,928.50 | 24.0 | None | 673 |
General Motors / GM | 58.39 | 40 | 6.73 | 6.93 | 8.4 | None | 85 |
Hertz Global Holdings / HTZ | 21.01 | -22* | 4.02 | 2.55 | 8.2 | None | 10 |
IBM / IBM | 125.93 | 5 | 10.05 | 11.04 | 11.4 | 5.2 | 113 |
Johnson & Johnson / JNJ | 173.01 | 10 | 9.83 | 10.38 | 16.7 | 2.5 | 455 |
Nordstrom / JWN** | 20.05 | -36 | 1.27 | 1.99 | 10.1 | None | 3 |
Royal Dutch Shell / RDS.B | 42.82 | 27 | 4.86 | 6.19 | 6.9 | 3.9 | 166 |
Visa / V*** | 214.37 | -2 | 5.91A | 7.04 | 30.5 | 0.7 | 467 |
*Since July 1. **Estimates for Jan. 2022 and Jan. 2023 fiscal year ends. ***Sept. fiscal year end. E=estimate. A=actual.
Source: FactSet
Mahaney calls Amazon the “TAMiest” of the megacap internet companies because of the huge opportunities in retail and cloud computing, while offering “the best mix shift in tech.” TAM refers to “total addressable market.”
With more than $60 billion in annual sales, Amazon Web Services could be worth $1 trillion alone. That means investors are paying about $700 billion for the rest, which includes the leading online retail business, offline shopping (including Whole Foods Market), advertising, media (Amazon Prime Video, Audible), and logistics, including warehouses, trucks, and planes.
Two potential pluses for 2022 would be a spinoff of AWS or a long-awaited stock split.
AT&T
There is a price for everything, including AT&T, which recently hit a 13-year low. The stock, now around $23, is off 18% in 2021 and amounts to a cheap play on the depressed telecom and media sectors.
The shares have been hit lately by renewed concerns about competitive conditions in the wireless market. The bull case is that AT&T will become a simpler company with less debt after it combines its WarnerMedia business with
Discovery
(DISCA) in a deal due to close in mid-2022. A more focused management could deliver strong results after years of distraction from overpriced acquisitions.
And the wireless business could get more rational, considering that there are only three leading players: AT&T,
Verizon Communications
(VZ), and
T-Mobile US
(TMUS).
AT&T now yields 9%; that should fall to about 6% after a planned dividend reduction following the WarnerMedia deal. Here’s the math: AT&T plans to pay out about 40% of $20 billion in projected 2023 free cash flow. That equates to a roughly $1.10 annual payout. That should translate into a 6% yield after reflecting the current value of Discovery stock that will be received by AT&T.
The company may spin off Discovery to holders or exchange the Discovery stock for AT&T shares with holders in a split-off. Whatever the mechanism, AT&T should have one of the highest yields in the S&P 500.
Berkshire Hathaway
When Berkshire Hathaway CEO Warren Buffett made his initial equity gift to the Bill & Melinda Gates Foundation in 2006, he wrote that Berkshire’s stock is an “ideal asset to underpin the long-term well-being of a foundation.”
“The company has a multitude of diversified and powerful streams of earnings, Gibraltar-like financial strength, and a deeply imbedded culture of acting in the best interests of shareholders.”
That’s still the case 15 years later.
The Class A stock, at about $454,550, is up 31% this year. Buffett refuses to pay a dividend, but Berkshire has ramped up its stock buybacks and should repurchase more than 4% of its shares this year. It trades for 1.35 times our estimate of year-end book value, a cheap level, given that its businesses are probably worth much more than their carrying values.
Berkshire’s stake in
Apple
(AAPL) alone is worth $160 billion, following the iPhone maker’s recent run-up.
General Motors
Tesla
(TSLA) may not be the only winner as the auto industry transitions to electric vehicles. General Motors is as well positioned as any of its peers and is valued at less than a tenth of Tesla, at $85 billion. GM, at about $58, trades for eight times projected 2022 earnings.
Led by CEO Mary Barra, GM has lofty plans to roughly double its annual revenue to about $300 billion by 2030. That includes $90 billion in sales of electric vehicles, up from a projected $10 billion in 2023. GM is expected to soon unveil its all-electric Silverado.
Company / Ticker | Price 12/18/20 | Price 12/16/21 | Total Return |
---|---|---|---|
Alphabet / GOOGL | $1,726.22 | $2,888.90 | 67.4 |
Apple / AAPL | 126.66 | 172.26 | 36.8 |
Berkshire Hathaway / BRK.A | 337,900.00 | 454,550.00 | 34.5 |
Coca-Cola / KO | 53.74 | 58.65 | 12.6 |
Eaton / ETN | 116.08 | 168.80 | 48.3 |
Goldman Sachs Group / GS | 242.13 | 397.37 | 67 |
Graham Holdings / GHC | 482.69 | 571.77 | 19.6 |
Merck / MRK* | 75.83 | 75.91 | 3.7 |
Madison Square Garden Entertainment / MSGE | 80.75 | 62.86 | -22.2 |
Newmont / NEM | 60.50 | 59 | 1.2 |
AVERAGE | 26.9% | ||
S&P 500 | 27.6% |
*Total return includes value of Organon spinoff.
Source: Bloomberg
Investors are skeptical that GM can manage a tricky EV transition and achieve anything close to its ambitious goals, but the stock already discounts a lot of doubt.
“GM has built a scalable platform and is a leader in both autonomous vehicles and batteries,” says investor Ross Margolies of Stelliam Capital Management.
General Motors’ controlling stake in Cruise, a top player in autonomous driving that plans to roll out robo-taxis in the coming years, is worth about $17 billion based on the latest minority investment. GM talks about generating $50 billion of revenue from Cruise by 2030.
A GM bull, Morgan Stanley’s Adam Jonas has a $75 price target on the stock, and conservatively ascribes no value to its legacy car business.
GM enthusiast Ryan Brinkman at J.P. Morgan looks at it differently, saying that investors effectively are…