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For anyone who missed the first 5 stock picks sent out last week, you can find them here.
Now, let’s pick up from where we left off:
6.Intercontinental Exchange (ICE)
Intercontinental Exchange (ICE) owns several exchanges and clearing houses worldwide, with the New York Stock Exchange being the most notable among them.
The exchanges generate revenues by offering a marketplace to trade various securities, offering data and connectivity services, and collecting listing fees.
Valuations pulled back sharply for ICE in 2022, hardly surprising given their Earnings Per Share fell 64% during the year.
But when it comes to earnings adjustments like this, It’s always essential to determine whether this is a once-off write-down or if the net income attributable to the core business is falling.
In this case, the drop in net income was primarily due to poor investment decisions outside of ICE’s core business. Net losses from Bakkt during 2022, the divestment of Coinbase and the deconsolidation of Bakkt during 2021 all weighed on the bottom line.
On an adjusted basis, net income attributable to ICE's core business was up 5% year-over-year.
A bad year but not a bad business.
Despite this recent earnings decline, I believe ICE is well positioned to provide consistent earnings over the long term for three main reasons
Exchanges have relatively fixed costs, while their revenues can grow in line with inflation and population.
The network effect creates an extremely powerful economic moat. Liquidity tends to consolidate towards the biggest securities exchanges. This makes it almost impossible for smaller exchanges to gain a foothold in the industry when size and liquidity play a pivotal role. As one of the most liquid exchange providers, ICE benefits from this flywheel effect as their ever-increasing liquidity drives more trading towards their exchanges, which in turn increases liquidity, which in turn…… you get it.
The recent sharp price correction in 2022 makes it a much more interesting play from a valuation standpoint.
The main risks to watch for are the aggressive growth and acquisition approach that got them into trouble in 2022 and the potential emergence of digital tokenisation.
This technology switchover could threaten the economic moat in place so ICE will need to ensure that its backend systems continue to adapt to the changing environment.
7. Garmin
Garmin provides navigation, communication, and information devices. The company’s key focus is on GPS-enables products.
Unfortunately, Garmin is best known for producing the ‘original’ sat navs. You know the ones: The Square box stuck to every car windscreen in the country with the infuriatingly unresponsive touchpad.
Thankfully over the last 10 years, the company has evolved and diversified its product offering. It has now positioned itself as a well-managed value stock with consistent earnings growth and stable dividend.
The growth of their wearables business combined with contracts from the department of defence to modernise fleet of US Navy and Marine Corps aircraft have allowed Garmin to pivot away from their reliance on automotive navigation over the years.
A steady trend higher in profits over the last decade shows management is skilled at managing costs to increase profitability faster than revenue.
Management has also shown its optimism towards the future by authorising a $300 million share repurchase plan. This complements a dividend of close to 3%. The company also ended 2022 with over 3 billion in free cash flow, so there is plenty of cash on hand to boost returns for shareholders, either through business investments, increasing dividends or buybacks in the future.
If you are looking for high growth in this space, Apple’s wearable division offers more upside, but as a steady earner with reasonable valuations, low volatility and a consistent dividend, Garmin ticks a lot of boxes.
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8. Amazon
A little-known online book store with some other notable side hustles.
Amazon’s valuation was hit hard last year, with the company down over 50% at one point.
Undoubtedly investors jumped the gun in terms of valuation here. The massive surge in revenue seen during the pandemic lockdown was never going to be sustainable. Investors extrapolating the 2020/2021 earnings growth rate out in the future have suffered some significant losses as a result.
With that said, Amazon has never been overly attractive from a valuation standpoint.
Amazon has consistently sacrificed short-term profits in an effort to deepen their competitive advantage and solidify their moat. They have invested heavily into their fulfilment network, which has caused some frustration amongst shareholders who see the bottom line being eroded by huge capital expenditure each year.
In 2022 alone, Amazon brought in almost $514 Billion in sales but still reported a net loss of $2.7 billion. That should help bring the rate of Amazon’s spending into context.
Of course, it’s not all Capital expenditure. A $3 billion dollar loss in 2022 as a result of a shockingly overvalued position in Rivian didn’t help their case either.
Strangely, this aggressive spending is one of the main reasons I am bullish here. Amazon has built out a product offering with a speed of delivery that can’t be matched by competitors. So despite disappointing bottom line numbers, the company has created an enviable moat across its e-commerce and web services cloud operations.
In short, Amazon have invested heavily and are now positioned as market leaders across two rapidly growing sectors.
Some short-term headwinds as a result of slowing economic conditions ahead but over the long term, I expect amazon to moderate its expenses and reap the rewards from a decade of vertical integration.
9. Arista Networks
In simple terms, Arista Networks provide software and hardware used to run data centers, or the cloud.
I have held this stock for a number of years, and I like it for two main reasons;
1.Strong secular tailwinds
Adoption of the cloud, 5G, internet of things, machine learning, autonomous vehicles... the list is endless. All of these will require ever-increasing computational power. While networking hardware may be dependent on capital expenditures, and therefore be somewhat cyclical, Arista is emerging as a strong leader in a growing space.
Companies like Microsoft and Meta are two of Arista’s largest customers. To facilitate powerful AI software and increased traffic going into and out of data centres, both companies need to install new networking equipment that can handle more data at faster speeds at these massive computing units for the cloud. The result has been booming sales for Arista, and I don’t expect this to stop over the short term.
2.Strong ROIC
When valuing a company, you want to see a company investing more capital into its business and ideally, the returns earned from that capital are also increasing.
Arista has demonstrated a consistent ability to reinvest well, generating returns on invested capital with a current ROIC of 28. ROIC has been between 11% and 44% over the last decade, well above the average of 11% earned by companies in a similar industry.
Valuation is a little on the high side here given the recent 50% run-up in price; that’s what happens when your revenue jumps 55% year over year, I guess.
This may be one to jump in on during momentary pullbacks in valuation if the opportunity presents itself.
10.Airbnb
2022 was another record year for Airbnb. Since the height of the pandemic in 2020, the company has streamlined their business model.
Since 2019, their headcount is down 5% while their revenue is up 75%. In other words, during what could have been a fatal time for the business, they almost doubled the top line - with few people.
The struggles of the pandemic now seem to be behind them, with operating and free cash flow margins up almost 50% year-over-year in 2022.
2022 highlights
Revenue: $8.4 billion +40% year-over-year (YoY)
Gross Profit: $6.9 billion +43% YoY
Net Income: $1.89 billion compared to a loss of $352 million YoY
In my view, Airbnb will continue to benefit from trends in remote work and the search for authentic travel experiences.
The most notable headwinds ahead are mainly on the regulatory side. Cities such as Paris, Barcelona and Amsterdam have very strict policies regarding who can and cannot rent out Airbnb’s. A continuation of this trend could see a drop off in the supply, which has been growing consistently in recent years.
The path ahead won’t be straightforward, but with almost 400 million 'Nights and Experiences' booked on the platform in 2022, Airbnb has well and truly established itself as a leader in the travel sector. A position I expect it to build on in the coming years.
Again... None of this is personal investment advice. Make sure to do your own research.
In the meantime, here are a few more of my recent article if you are interested.
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