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UBS' 15 High-Conviction Stock Ideas + Facebook Outage Details

Sharing UBS' highest conviction stock ideas as well as what happened with the Facebook outage yesterday.

05 Oct

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In this post, I’m going to cover:

  • The Wall Street bank UBS’ highest conviction stocks ideas, as well as my own commentary on the companies

  • Facebook’s 8-hour platform outage that took place yesterday and Wall Street’s current thoughts about the company

⚡️ UBS’ 15 Highest Conviction Stock Ideas:

If you’re not familiar, there are dozens of these investment banks on Wall Street whose entire purpose is to best predict future stock prices. They hire equity analysts to attend conferences, meet with management teams, and build financial models to make these predictions.

According to my research, Barclays is the most accurate - consistently beating out their competition quarter over quarter. The companies they recommend to buy, hold, or sell usually outperform the market by +30% annually.

But, this post is about UBS - specifically their thoughts surrounding pricing power and how that (paired with inflation) will positively impact the companies mentioned below.

According to UBS.. 

  1. Strong pricing power stocks will outperform “weak ones” by +20% on average throughout the next 12 months.

  2. Relative 2-year forward price to earnings multiples are at a ~7% discount when compared to their 10-year rolling average.

  3. Street-wide analyst 12-month forward EBIT margin revisions have swung in favor of strong pricing power companies.

Here are the companies they believe fit that narrative: 

  1. Nike (NKE)

  2. Advanced Auto Parts (AAP)

  3. Coca-Cola (KO)

  4. Charter Communications (CHTR)

  5. Salesforce.com (CRM)

  6. Apple (AAPL)

  7. Danaher (DHR)

  8. Teleflex (TFX)

  9. Generac Holdings (GNRC)

  10. TransDigm Group (TDG)

  11. CME Group (CME)

  12. SBA Communications (SBAC)

  13. Extra Space Storage (EXR)

  14. Ameren Corporation (AEE)

  15. EOG Resources (EOG)

Personally, I’m not too excited about Nike given their recently announced supply chain constraints in Vietnam. I’m a fan of Advanced Auto Parts, specifically because of their share buybacks. Coca-Cola remains a healthy holding in my “core” portfolio. Charter Communications’ recent market / move activity is normalizing at a slower pace than expected - not great.

Salesforce.com recently initiated an FY2023 financial outlook that was well above expectations. Apple’s iPhone lead times seem to be trending in the right direction - showing little impact by global supply chain constraints. Not much to say about Danaher - I’m not too well versed in biotechnology, but Wall Street sees the stock with +10% upside within the next 12 months.

Not incredibly excited about Teleflex given the likelihood of surgical procedure volumes slowing down due to COVID. Generac Holdings is an interesting idea considering just how large their total addressable market is - plus Wall Street likes the stock a lot. Going into some market volatility, TransDigm seems to be a stable compounder spitting out cash.

Relatively neutral on CME Group here - rising inflation could positively impact this company assuming interest rates rise as well. SBA Communications recently raised FY2021 financial guidance marginally - something that could be a near term catalyst. Extra Space Storage is an industry leader in ideal customer demographics + has a leading number of households within a 3-mile range of their facilities. Ameren Corporation seems to be a healthy dividend paying company with growth to be had in the future. Finally, EOG Resources isn’t something I’m too excited about considering they’re a large independent oil and gas company.

👤 Facebook Outage:

Most of you know this, but I’ve been very vocal about my bullish thesis on Facebook.

Not only has their free cash flow per share gone absolutely vertical since 2012, but they’re consistently increasing average revenue per user (ARPU) and onboarding new users annually.

My entire “this is why I like the stock” thesis surrounds not only the company’s products (Facebook, Instagram, WhatsApp, Messenger, etc.), but the billions of people they can send a push notification to with the intent of onboarding them to a new product line.

Leaning into this idea, the company recently partnered with RayBan to begin their journey of building the Metaverse.

Is this product revolutionary and cool?

Probably not, but with the amount of cash Facebook spits out I’m confident they’ll create something that is as widely used as Instagram or WhatsApp while also having billions of people tee’d up on a roster ready to onboard and monetize against.

But here’s the reality - Facebook isn’t perfect.

As I’m sure you’ve likely seen by now, Frances Haugen came out as a “whistleblower” and brought several negative Facebook traits and operational activities to the public eye. The Wall Street Journal has done a great job compiling them all together (below).

Sunday night Frances Haugen appeared on 60 Minutes spilling the tea on everything Facebook.

Conveniently enough, Facebook’s entire online operation went down for north of 5 hours the next day - locking some employees out of the company’s office and making it impossible for users to log into their favorite websites through a Facebook-connected account.

This world-wide outage caused ~$160 million in global economic losses for every hour the company was offline, according to NetBlocks.

As it relates to Facebook itself, the NY Post estimates the company having lost up to $100M in revenue.

Considering they’ve done ~$40 billion in revenue over the last 12 months, a -$100M possible loss isn’t anything to sweat over from an investor perspective. It’s going to be very important, however, to see what this whistleblower catalyzes in relation to users leaving the platform.

Wall Street’s Thoughts:

Bank of America shared an article stating the following..

  • 12-month Price Target remains at $425 / share

Despite extensive press coverage on the accusations yesterday and today, we don't expect a material impact on FB/IG usage as usage has remained stable through prior, very negative, news cycles (such as Cambridge Analytica and Congressional Riots). We note FB stock has performed relatively in-line with the social media group (GOOG, FB, TWTR, PINS, SNAP), down 5% yesterday and up 2% today, roughly in-line with peer averages.

We see potential for new regulations for FB and the social industry including, requirements to share data with outside researchers, new protections for underage users (users under 13 are restricted from FB and IG), or new regulations on what content algorithms are able to amplify. In each case, Facebook could lose some users and activity, but we do not think Facebook (FB) or Instagram (IG) will see a material usage impact. We think it is important for FB to do and share research on the impact of its services, and would expect FB management to address new accusations either ahead of, or on, the 3Q earnings call.

On Monday, 10/4, Facebook, Instagram and WhatsApp platforms were down for about 6 hours due to a self-initiated router configuration change that disrupted traffic between data centers. Regulators are citing the disruption on consumers and business as evidence that the company is too powerful and a reason for a break-up. While we see the 6 hour outage as a negative for the company, outages are not new in the industry. We think the outage illustrates the importance of Facebook's services, and expect little ongoing impact on usage (with a very modest ~$100mn financial impact).

I agree.

The company’s name has been dragged through the mud countless times over the last 6 years or so - and despite this, they continue to report record profits and in-turn their stock price continues to climb.

At the end of the day, the biggest risks for Facebook are users leaving the platform (which in my opinion isn’t happening anytime soon), marginal profile declines as they operate non-tech business segments (smart glasses), regulation pushback, or a macro economic environment that completely decimates paid advertising through their platform.

Sure - those things could happen.

But the potential upside outweighs the potential downside in my humble opinion - therefore I remain bullish on Facebook.

Thank you again, everyone, for being so patient with me as I make this transition away from Patreon. There’s still a lot of moving parts going on behind the scenes, but I’m confident we’ll hit stride by the end of this week.

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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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