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Motley Fool Issues Rare “All In” Buy Alert
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Investors come in all shapes and sizes. Sure, that means investors run the gamut in terms of their age, experience, and socioeconomic backgrounds. But there are several types of investors as well: low-risk investors that who utilities that pay big dividends, high-risk investors who favor up-and-coming social media companies — and everything in between.
We asked five of our analysts for their top stock picks for May. What we got back has something for everyone. The list includes dividend payers like AT&T (T -2.88%) and Blackstone (BX -6.21%), a biopharmaceutical in Vertex Pharmaceuticals (VRTX 1.70%), and high-growth names including Pinterest (PINS -3.21%) and Shopify (SHOP -3.71%). Read below to see which is right for you to add to your portfolio in May.
Image source: Getty Images
Tim Green (AT&T): Telecom giant AT&T is officially out of the media business. With the spinoff of WarnerMedia now complete, AT&T can refocus on its core wireless and fiber businesses.
There’s no question that AT&T destroyed a lot of value with its media acquisitions, but those mistakes are now in the rearview mirror. The new AT&T is a straightforward investment. The company’s wireless business is strong, its fiber broadband business is growing, its balance sheet is vastly improved, and the dividend is well covered by free cash flow.
AT&T reported nearly 700,000 postpaid phone net additions in the first quarter, along with close to 300,000 fiber net adds. Mobility revenue jumped 5.5%, driven by both service and equipment growth, and broadband revenue surged 6.8% thanks to a 24.7% jump in fiber revenue. The growth story for AT&T now revolves around 5G and fiber.
By 2023, AT&T expects to be producing around $20 billion in free cash flow annually. The dividend will eat up $8 billion of that total, leaving plenty of cash to pay down debt. At the current stock price, AT&T trades for around 7 times this free cash flow estimate and sports a dividend yield of nearly 6%.
Of course, AT&T could come up short of its projections. Consumer appetite for new phones may not hold up as inflation takes its toll, potentially putting a dent in the wireless business. But with such a pessimistic valuation, there’s room for some things to go wrong.
If you’ve been avoiding AT&T for the past few years due to its costly foray into media, it’s time to reconsider the telecom giant.
Tyler Crowe (Blackstone): It’s surprising how little attention Blackstone (NYSE: BX) and other big asset managers have received for growing as fast as they have in recent quarters. Over the past 12 months, Blackstone has reported $288 billion in capital inflows. That’s how much institutional investors and high-net-worth clients have handed over to Blackstone to manage. As a result, the company’s total assets under management (AUM) have ballooned 41% year over year to $915.5 billion.
For asset managers, AUM is incredibly important because it generates fees for managing capital and realized performance. As a result of growing its AUM, distributable earnings per share — revenues from fees and performance minus operating expenses and compensation — for the past 12 months are up 70% compared to the prior 12 month period, and it has allowed management to return $7.2 billion to investors through dividends and share repurchases. What’s more, the investments it’s making — real estate, credit & insurance contracts, and private equity — haven’t been nearly as impacted by public market volatility.
Investing in companies like Blackstone can feel like a bit of a black box, because it’s hard to know what is happening with every investment in a near $1 trillion portfolio. That said, the company has run circles around the S&P 500 over the past 10 years with a 1,330% total return, so it’s worth giving management some credit for outstanding performance. With $139 billion in “dry powder” to invest right now, a stellar track record of creating value, and a dividend yield of 3.8%, Blackstone is worth a look.
Adam Levy (Pinterest): Pinterest’s share price bounced off its 52-week low after the social media company reported better-than-expected first-quarter earnings. Shares still look like a bargain as Pinterest’s management invests for long-term user growth and improved monetization.
In the short to medium term, Pinterest will continue to see very little user growth, but revenue growth should come from better user monetization. That was the case in the first quarter, when the company increased revenue per user 28%, more than offsetting the 9% year-over-year decline in users.
That said, Pinterest’s investments are putting near-term pressure on its profit margin. Adjusted EBITDA margin fell to 13% in the first quarter, down from 17% in the first quarter of 2021.
Investors should expect user growth to pick up at the end of the year as Pinterest laps the impact of the COVID-19 pandemic and search algorithm changes. It should see increased engagement as it improves its content algorithm and builds out its creator ecosystem, incentivizing more video and shoppable posts. And user monetization should continue to grow as well.
The stock seems to be greatly oversold compared to Pinterest’s long-term potential. Importantly, it’s setting itself up for strong margin expansion over the next few years. With an enterprise value-to-revenue ratio of about 4, it’s trading at a significant discount to similarly sized social media companies.
Brian Stoffel (Shopify): One of the hardest thing for beginning investors to wrap their mind around is this: There’s a difference between a business and its stock. Especially over the short term, there can be a huge divergence between the direction of the underlying company’s business, and the direction of its stock. Perhaps there’s no better example of this today than Shopify. The company helps just about any merchant set up an online presence. And shares are down a whopping 75% from their all-time highs.
Don’t get me wrong: A fall like that is painful. As a shareholder myself, I’m aware of that. At the same time, I don’t think there’s a single problem with the underlying business. Unsurprisingly, shares of the company exploded when COVID-19 lockdowns began, and any business that didn’t have a digital presence was … out of business. On its most recent conference call, management said that hypergrowth would be slowing as societies open back up. That’s not surprising, but it was also a downer for many investors.
Where are we today? Shopify just ended a year in which it saw gross merchandise volume (all the stuff sold on the platform) grow 47% while revenue grew even faster, at 57%. That shows merchants are selling a lot more stuff, and are using more of Shopify’s tools to do so. The real moat builder is also emerging in the form of the Shopify Fulfillment Network, which offers an option to make shipping much easier and more streamlined for merchants. Add that all together, and I think right now is a great time to buy shares of Shopify.
Keith Speights (Vertex Pharmaceuticals): Most biotech stocks continue to perform dismally. But not Vertex Pharmaceuticals. Its shares have soared more than 20% year to date. I think Vertex’s momentum could even pick up.
The company’s cystic fibrosis (CF) franchise remains a big winner, with sales jumping 22% in 2021. Earlier this year, Vertex won a label extension for Kaftrio in Europe for treating kids ages six to 11, which should boost the drug’s sales. Reimbursement agreements in Spain and the Netherlands should also make a difference when Vertex reports its first-quarter results on May 5.
Vertex also appears to be on track to expand beyond CF. CRISPR Therapeutics and Vertex expect to file for regulatory approvals later this year of gene-editing therapy CTX001 in treating rare blood disorders sickle cell disease and transfusion-dependent beta-thalassemia.
Look for management to play up other non-CF programs in Vertex’s Q1 call as well. The company is evaluating VX-147 in a phase 2 study for treating APOL1-mediated kidney disease. This indication presents an even bigger market opportunity for Vertex than CF does. The biotech also plans to advance VX-548 into pivotal phase 3 testing later this year as a non-opioid treatment for acute pain.
I’m especially intrigued with Vertex’s type 1 diabetes program. The company has reported encouraging initial results from a phase 1 study of stem cell therapy VX-880. It expects to file for approval to begin clinical testing of another type 1 diabetes candidate this year. Vertex thinks that it ultimately will be able to develop a functional cure for the disease.
With its monopoly in CF, a promising pipeline, and a growing cash stockpile that totaled $7.5 billion at the end of 2021, my view is that Vertex ranks as the best biotech stock on the market. Investors who don’t consider buying this stock now just might be kicking themselves down the road.
These are all great choices for investors. But no matter what type of investment you favor, all of these stocks require a long-term time horizon. That means that while we identified them as top buys for May specifically, there’s only one way to help ensure you’re exposed to big winners: intending to hold these stocks until May 2025 at the earliest. When you give the companies you are investing in time to grow, you greatly increase the chances of increasing your personal wealth.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Market-beating stocks from our award-winning service.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 04/29/2022.
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Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
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