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  • My Favorite Stocks: 12/10/21

My Favorite Stocks: 12/10/21

Ending the week with my high-conviction plays and updates across the board.

10 Dec

Big news!

Due to the positive feedback on our recent collaboration with Katie Stockton, she’s agreed to work with me on a weekly basis. Her team will be sharing the best technical analysis set-ups among stocks mentioned in our secular growth trend analyses - something we believe will be of great value to each of you.

As a refresher - once a month I select, research, and publish a “secular growth trend” that I believe people should be disproportionately allocating capital toward.

Here’s the most recent one:

Going forward, Katie and I will publish these in congruence. I cover the fundamentals of the trend and exciting companies within the given category. Out of those companies, Katie covers the tickers she believes show the most upside.

Together, we hope to present you with an array of companies poised to grow dramatically throughout the next 5-10 years, with a few of them ripe for takeoff.

Does this mean Katie has already identified a few cybersecurity stock set-ups from the post shown above?

She has! I’ll share her post below - be sure to follow her on Substack as well.

We strive to make Rate of Return as beneficial as possible for each of you. I really do believe this is going to help our community feel as well-informed as possible when considering your personal portfolios.

My Favorite Stock Ideas:

Welcome back to another edition of My Favorite Stocks - where we attempt to identify companies whose stock prices are trading wildly below their fair value, speculate on near-term catalysts that drive stock prices higher, or simply share a trend I’m learning more about.

Before we jump into things - I have three major call outs I wanted to share.

First, Roku and YouTube are friends again. 

To read more about the details of the multi-year extension, click here.

Roku's deal with Google to distribute YouTube was set to expire this month. Without a deal, YouTube would've been removed from Roku's channel store, creating a big competitive disadvantage, especially during the holiday season.

Due to this concern, a lot of you reached out asking why I was still so bullish on the stock (and rightfully so). In this piece, I reiterated my bullish thesis.

I’m long Roku - and will ride this stock to $400 / share in the coming years.

Second, our friends at DumbMoneyTV found something interesting. 

Solo Brands (ticker: DTC) reported earnings this week and I’ve yet to look into them, but their Solo Stove Outdoor Fire Pit was the #1 ranked gift on Amazon’s holiday wish list. The company’s recently reported Q3 earnings, however, wouldn’t reflect this.

Given this fire pit started trending online during Q4, their next earnings report (released in February) should reflect this - we’ll see what happens!

As a reminder, Chris Camillo and his friends look for trends on social media and ‘real world’ observances that give them an edge when investing. They’re extremely observant and extrapolate money moves from things that most typically wouldn’t see.

Chris Camillo predicted Crocs, Build-a-Bear, and several other big winners in 2021. If any of you dig deeper into this one and find something, please let me know!

Third, I’ve published a deeper explanation on how I go about trying to value companies. 

This walks through free cash flow per share, why Jeff Bezos was obsessed with it in 2004, and how it leads me to believe that Facebook is the most undervalued Mega Cap right now.

💳 Marqeta (MQ): 

Well, they started to heat up for us a little bit there! Having peaked at a whopping +73% return since we mentioned them in October, the stock now trades below its fair value of ~$29 / share.

Marqeta is a mobile card issuing platform - enabling innovative financial products for companies like Coinbase, Affirm, JP Morgan, Square, Uber, Afterpay, Google, Instacart, Door Dash, and countless others.

Why am I so convinced this company is going to be worth owning in the coming 9-12 months? A few reasons.

  1. Massive total addressable market (TAM) of $74 trillion

Of course, Marqeta isn’t going to capture even 1% of that market - but this leaves ample room for revenue growth in the coming years. They’ll likely do +65% growth in 2022 with an elevated growth rate throughout the rest of the decade.

  1. Respected presence in the crypto space

Marqeta is Square’s payment processor.. the same Square that just announced their big pivot into cryptocurrency - did I mention Bakkt uses Marqeta for their crypto payments as well?

“We work with more than 10 teams across Square and Marqeta, everything we do touches pretty much every part of their company and as you said, trust is at the core of it.”

  1. Depressed valuation

Right now, Marqeta is trading around -35% below their fair value of $29 / share. This is a great time to consider building a position of 3-4% weighting.

🤝 Monday.com (MNDY):

This is a company I haven’t mentioned around here yet - but if you work for an agile company, you’ve likely used them yourself. Similar to Asana (ASAN), Monday.com is a low code / no code tool that enables collaboration between co-workers.

For example, you can build your own workflow, CRM, or anything your heart desires.

Do yourself a favor and watch this short 4-minute YouTube video - you’ll get to see exactly what I’m talking about and just how useful this software is.

Beyond the company’s usefulness - let’s quickly highlight just how insane of a business they are, according to their Q3 earnings results below:

  • Revenue was $83 million, an increase of +95% YoY

  • Narrowed GAAP operating margin from -95% to -35%

  • Operating loss was -$9.4 million, compared to -$30.9 million last year

  • Net dollar retention rate for users w/ 10+ seats is 130%

  • Number of enterprises paying $50K+ annually increased to 613 (+231%)

  • Increased gross profit margin from 87% to 90%

Is anyone else’s jaw on the floor?

This is a $13 billion company with 90% gross margins growing at +90% annually with a forward revenue multiple of ~22X.

I’m not saying this company will continue growing at +90% annually forever, but +50-60% throughout the decade is absolutely possible.. with 90% gross margins! Imagine the free cash flow this company will spit out when they’re no longer in hyper growth mode.

Wall Street has them coming in around $430 / share as well.

📺 Roku (ROKU):

As mentioned above, Google (YouTube) and Roku finally struck a multi-year deal - allowing the companies to live in harmony once again.

With Roku’s stock down -25% over the last 6 months, it’s understandable why there’s some worry or doubt. But, I want to be the person that can continually remind you that the stock price is not the company.

The over the last 6 months, the company generated $1.3 billion in revenue - compared to the only $807 million they generated over the same 6 month stretch this time last year. They’ve increased gross profit margins, heightened average revenue per user (ARPU), and began to strategically expanding internationally.

The stock however, is now trading at only ~12X TTM enterprise value / sales - compared to the 14-18X it traded at before the pandemic. Before the tens of millions of new users. Before the +65% increase in ARPU. Before the international expansion.

I’ll continue to dollar cost average into this one.

⚡️ Applied Materials (AMAT):

This company jumped back on my radar after some incredibly upbeat research notes from Wall Street analysts concerning the company’s Q3 results.

Stifel: Patrick J. Ho

Following last week’s market sell-off, we want to reiterate our fundamental thesis and recommend purchasing shares at these more attractive price levels. We believe the company remains well positioned to outperform in the near term (2022 and over the long run).

We have cited our industry outlook where the equipment sector is poised to benefit from sustained and elevated spending levels to build out the necessary capacity to serve multiple emerging markets.

We believe Applied is positioned to capitalize not only on these market trends, but can outperform the industry with its multiple growth levers. While its technology supports its leading- edge opportunities, it is also well positioned to capitalize on trailing-edge (ICAPS) and services opportunities, which can be key differentiators.

On a valuation basis, the stock now trails its large cap peers on several metrics (including P/E and EV/sales) and thus, a more attractive entry point into the name.

The company was also named #1 for exposure to ‘higher equipment spending for 3D devices, heterogenous computing, and government spending’ in their respective industry by Citigroup.

These banks have strong buy recommendations with $190 price targets.

💊 Healthcare Stocks (UNH, HUM, ANTM):

Going to mention 3 major winners in the healthcare space right now - UnitedHealth Group, Humana, and Anthem.

Healthcare companies have shown immense resilience and strength in times of uncertainty given their dependable revenue and necessary services.

If these companies aren’t on your radar, consider giving them a glance and catching up on their IR websites (UNH, HUM, ANTM).

Personally, UnitedHealth Group will be the one I have my eyes on and will take a heavy weighting in my 2022 portfolio. I made a video explanation here.

🔍 Snowflake (SNOW):

As mentioned in the post below, Snowflake will be in my 2022 portfolio in a very big way. The company reported revenue growth of +110%, RPO growth of +94%, with only a +30% increase in customers (5,426).

They just eclipsed $100B in market cap, meaning they’re trading ~85X forward revenue. When this company first took to the public markets, we all came to the conclusion it was too frothy - which was accurate considering they traded sideways / down for about a year.

Now, given their large deal momentum, international acceleration, and increasing net revenue retention rate (168% to 173% YoY) this premium is deserved. It would be nice to see this stock come down closer to ~60X forward revenue, but I’m happy to begin growing a meaningful position here.

We’ve also identified an increase of bullish reports from Wall Street post earnings.

Published December 2nd by Mizuho:

SNOW reported a robust F3Q, including product revenue growth of 110% Y/Y that showed acceleration. Moreover, we maintain that SNOW's offerings are substantially ahead of the competition at this time.

We also believe SNOW is enabling customers to transform from large data stores to data-driven organizations, and that companies will increasingly standardize on its platform.

And while SNOW trades at a large premium, we reiterate our belief that the shares will likely continue to outperform as the company grows at elevated rates over the NTM and beyond. We maintain our Buy and our near Street high PT of $450.

Since reporting earnings, the stock has seen some what of a “floor” around this $300 to $360 range - it seems like the stock hasn’t meaningfully traded below $300 / share since summer.

I think $300 / share is likely the best we’ll be able to do in the short-term - or about ~75X forward revenue expectations.

Have a great weekend!

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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