You Call That Investing? AT&T. Alphabet. JNJ. Amazon.

You call thatBanner, Link to the Real

APRIL 24, 2020

 

If

you’re looking to phone up some profit now you may need to Google it first and maybe medicate for a long river run past toe-tagging underbrush. Or you could simply sum these four plays up here and how. No sweat or blood. Breezing through the buys or whys. “You Call That Investing? AT&T. Alphabet. JNJ. Amazon.”

 

 

-AT&T-

 

AT&T, logo
AT&T’s a stalwart dividend play. Income investors love the telecoms. Few can miss T’s current 7.06% yield.  Will that last?

Is

AT&T a good stock?  We’ve stated it clearly and it bears restating once again.  AT&T is too big, too complicated, and is roiled by too much change, to be managed efficiently.  Year-to-date the share price has dropped -24.5%.  Its’ land line business is a maintenance-heavy money losing legacy business it will mostly need to extricate itself from.  It labors beneath a massive debt load, and will for years.  If rates rise, servicing that debt will become a very different and corrosive story.  And what did that debt buy?

 

 

 

AT&T’s troubling debt load stems from their choice to become a content provider; both pipe and product.  What did they splurge on?  The antiquated satellite service Direct TV, Time Warner, and HBO.  Now it’s a battle just to service that debt and pay the dividend.  This week Frankfurt-based DZ Bank, the second largest in Germany, downgraded T to a “Sell” and lowered it’s PT from $38.80 to $26.  On Thursday CFRA cut their PT to $37 and maintained a “Buy” rating.  Both BOFA and Guggenheim  also just cut their PT’s to $36 and $38.

 

 

AT&T’s attempt to become a key media player is both very late, under-funded, and hyper-expensive.  Netflix has two decades worth of experience, infrastructure build out, a vastly larger installed customer base, by far the best predictive proprietary software, on-going OEM relationships(their button on your remote), the largest usage data base, a larger and faster growing content vault, and is out-spending them 6-to-1.  Besides, are you interested in paying $15 a month for HBO Max when you can get Netflix for $9? 

 

 

 

 

gRAPHIC, THE STREAMING WARS
AT&T’s entry into the media melee is belated and under-funded. T’s announced $1B. annual spend for content going forward is no match for NFLX’s drumbeat of $6B. per. Content is both king and hyper-expensive and T doesn’t have enough to disrupt the current leaders. Heavy weights Netflix and Disney will likely dominate for years, leaving AT&T;s HBO, Warner, & Direct TV, battling with many other second-tier players over what’s left.  T’s slice of that will not prove sufficient to service debt, build content, and expand.

T

is continuing to lose millions of “prime TV subscribers” each and every quarter.   Meanwhile, they’re dumping every dollar they can find into that business.  The incredibly shrinking Direct TV is now worth approximately 20% of the price paid, and it’s losing both subscribers and relevance, as well.

 

Direct TV is the liner ad-driven model attempting to survive in a SVOD world.  Simultaneously, content rich Disney is live and rapidly growing it’s SVOD offering.  The Disney Plus package is more attractive to both families and sports fans, as it includes ESPN Plus.

 

 

 

Now at $29, AT&T is far more reasonably priced.  Again, YTD T’s dropped -24.5%.  Over the past year T has lost  -2.6%, with the dividend included.  To most, that’s neither investing, nor “defensive.”  Over three years T’s lost -12.2%, again with that chunky dividend.  Over five it’s returned 13.1%, or 2.6% a year.  Think risk-free CDs, unless you’re solely seeking income and can get it for $27. or $28.  Sell it at $34 or $35, and do it all over again.  T’s payout ratio is currently a questionable 78%, while Verizon’s is a much healthier 52%.  Maybe better for income, think utilities, AEP or SO.

 

 

 

-ALPHABET-

Graphic, Alphabet, map
Page and Brin are gone now, yet for many they’re still simply Google.  Either way Alphabet is central to nearly everyone’s daily lives. Yet, is Alphabet really a good buy?  How long did it battle range-bound between $1000 and $1200?

No

one doubts Alphabet’s bright future.  Like it or not, Google Fa King owns search worldwide, and a beefy slice of digital ads.  Youtube is slowly and finally being monetized, and long-time users hate it for just that.  Youtube’s pay service isn’t Netflix or Prime, nor for many up to any polished SVOD standards.  Waymo seems forever a dream–yet years away from significant sustained profitability.  So again, is Alphabet a good stock?

 

For ever Alphabet’s been viewed by most as a serious “growth” stock, one fuming angrily on the launch pad headed to stardom.  Fact one.  Not really.  Fact two.  They’ve paid you nothing for that wait.  The wait has indeed been long.  Yes, Alphabet is a monstrous cash flow machine, capable of thriving nearly any downturn.  But what precisely has GOOG returned to its’ long-term shareholders lately?  Over the past month 16%, three months, -13%, six moths 1.2%, and one year 1.86%.  That’s doesn’t even rate as a minor swelling.

 

 

 

smartphone-1281632_1920
Alphabet’s open source Android platform led the company to an 80% OS share in the smartphone market. Nice.  What does that mean?  That means they can sell apps to everyone.  Look for that income, way down on the income statement, way way down.  Open source means free.  Yet as the global search giant, they thrive. Add in a robust cloud business and digital ads, and keep in mind that the EU and American politicians still have a hard-on for Alphabet.  And?  For years now investors have loosely counted on “Other Bets” as a viable future source of income.  Yet it never has been.  While Waymo continues a very long march to viability, “Other Bets” as a whole has thus far proved a cash hole.

Truth

often reveals itself most clearly over time.  Over the past three years GOOG has returned 51.4%, or 17.1% a year.  Over five GOOG’s returned 134%, or 26.8% a year.  That’s nice, but not tech-nice.  Nvidia(NVDA); 1Y, 49.5%, 3Y, 182%, 5Y 1221%.  Trex(TREX)–the industrial; 1Y 10.2%, 3Y 141.5%, 5Y 237.6%(For comparison only.  We do not recommend TREX now, in this shutdown.)

 

How much potential return are you willing to forego for Alphabet’s stability, massive cash flow, ingenuity, and centrality to our daily lives?  If it drops below $1050 again, it’s a sleep-at-night option.       

 

 

 

 

-J&J-

JNJ HQ, large
JNJ has long been seen as a go-to haven for safety and income. True. JNJ is a “dividend aristocrat.”  The company is now being looked to as a possible COVID-19 vaccine maker, one capable of ending this economy-crushing distancing.

“Name

me something else that’s triple-A other than batteries.”  Jim Cramer on JNJ(Squawk on the Street, CNBC, 4-24-20.)  There are those for whom JNJ can do no wrong. regardless of mountains of pending lawsuits.  Johnson & Johnson is in reality a conglomerate healthcare play; 54% pharma, 30% medical devices, and the remainder packaged healthcare goods.  JNJ is a true “defensive” play, but not without it’s multiple unresolved legal issues.  Not mentioning these dose not make them disappear.

 

 

 

 

 

Out of the biggest 17 analysts tracking, JNJ sports 5 “Buys,” 7  “Outperforms,” and 5 “Holds.”  It’s performance alone could explain that exuberant love.  Rightly so.  No longer do we hear any concern regarding it’s enormous legal troubles relating to opioids, talcum powder, or Risperdal.  At one point the company faced greater than 100 thousand lawsuits, on three fronts.  One Risperdal case, involving a single individual, resulted in a judgement of $8 billion. 

 

 

 

JNJ, Risperdal
The pharmaceutical industry is the most hated in America. This virus has brightened that picture. Still, rising healthcare costs will no doubt refocus resentment. That’s in the mail. Risperdal, the Johnson & Johnson anti-psychotic is targeted over failures to properly communicate the breast enhancing side-effect identified in male patients.

Is

JNJ a good buy?  JNJ has roared as of late, returning a stunning 43% in one month.  Excessive market volatility and the search for yield and safety are obviously behind that move.  The move returns JNJ to a positive ground, an 18% six month return.  Over the past year JNJ’s returned 14.2%, and over three 38.3%, or 12.76% a year.  Over five JNJ’s posted a 77.3% return, or a 25.7% annual average.

 

 

What’s not to love, unless you blame them for their part in the on-going opioid epidemic, an epidemic far larger in human costs than COVID-19, so far.  At $154.65 JNJ sits just below it’s 52wk high of $157.  CFRA calls JNJ a “Buy” with a price target of $160. set ten days ago(4-14-20) when shares were selling at $139.77.

 

And valuation?  JNJ sells at 2.5x the S&P 500 benchmark on sales, but half the cost on forward P/E; 20 vs. 41.  Still that’s expensive, relative to JNJ’s historical forward P/E average below 17.  In our view, JNJ will continue to rise, but better, more reasonably priced, options exist, ones without the legal headline risk or financial damages.

 

 

 

-AMAZON-

Amazon Prime
Amazon is wonderful. Amazon’s unfathomable selection and Prime’s oodles of goodness ease and streamline our days. Yet, what are shareholders receiving for their financial commitment?

For

nearly two years it’s felt like AMZN’s high-growth had ended.  Yet shares have blown through the $2100 barrier and the $2400 level as well.  Ironically, it took a butt-nasty virus to return the full luster to this unique star.  But what do the numbers actually say?  For one year shareholders have received 26.7% return.  For three years it’s been a fat 167%.  Over five Amazon’s paid you a massive 515.3% return, or 103% a year.

 

 

 

 

This goddamn virus has even changed the anti-trust landscape.  Social distancing has starkly demonstrated the foundational place the below companies have in American lives; Amazon, Facebook, Alphabet, and Apple.  Netflix is filling our days with streaming goodness, but never really been an anti-trust target for U.S. regulations or congress.

 

In the NFL Amazon’s results might be called “carrying the wood.”  Hard times have turned into a catalyst for AMZN.  It’s a buy.  Yet, a serious pull-back looks unlikely anytime soon.  Fridays close of $2410 is perfection pricing.  Morningstar typically values below current prices.  However, their AMZN Fair Value Estimate is here, $2400.

 

Amazon reports in a week, on April 30th.  Expectations lie more on the high side.  Over-reactions are the rule during earnings season, particularly immediately following the earnings announcement.  A 10% drop would be a viable entry point for a starter position.  However, that’s very unlikely.  It seems more likely that investors are happy, and thus will be more forgiving.  That’s in part because no AMZN alternatives exists.  The “Death Star” may in fact have the widest moat of all. 

 

 

 

Amazon Prime truck
Who else offers this? Costco’s awesome but they won’t be showing up at yo door.  Amazon, a true wide-moat long-term hold.  But wait for a better price; $2200.

Amazon

is emblematic of our lives now and later.  For many the truck above will simply become the way, and a funky look and head tilt to going out to get….  If it can be delivered it will be.  E-commerce is now even more quickly becoming all commerce, groceries too.  Habits die hard but fear changes that and lingers even after.

 

For investors nothing works like a mega-trend and we’re creating a mega-trend of distancing, harboring. and caution.  COVID’s not the end of contagion.  Meanwhile, safety and convenience will always be huge winners.   Likewise, mega-cap and essential services spell investing caution, and savvy.  Think these; communication, search/digital ads, drugs/vaccines/packaged healthcare products, fast and free home delivery of over 200 million items, along with entertainment too.  Now you’re thinking about telecoms, Alphabet, JNJ, & Amazon.  As always, good luck and good investing.

 

 

 

 

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https://www.schwab.com/public/schwab/client_home
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