RTX - How I'd Invest $1 Million Today

2023-12-23 00:15:22 ET

Summary

• The original $1 million portfolio performed well, with 15 out of 23 picks up double digits and an average gain of 11.40% in the last two months.
• The market rally has reduced the availability of attractive bargains, making it harder to find blue chip stocks with appealing discounts.
• The new million-dollar portfolio includes stocks like Salesforce, Air Products and Chemicals, Intercontinental Exchange, UnitedHealth Group, FedEx, and Starbucks, which offer solid growth potential and attractive valuations.

Two months ago I published an article titled, " How I'd Invest $1 Million Right Now ".

It was a big hit. It was one of my most read articles of the year. And I think this title resonated with so many readers because the idea of investing $1 million dollars is appealing, no matter where you are along your financial journey.

In that article I discussed why I arrived at the admittedly arbitrary million-dollar figure for the portfolio (this was largely based upon the expected retirement needs of the average American and the current net worth of the average American).

To some people, this is an aspirational idea. A million dollar portfolio is something to look forward to. And that can be motivating. And based upon the averages, it's a realistic target.

To others, the idea of managing seven-figure portfolios is a part of their day-to-day lives and therefore, the model portfolio that I provided was probably interesting to compare and contrast to their own.

Because of the positive feedback that the original piece received, I wanted to revisit the idea of investing $1 million dollars now that the market has experienced a significant rally.

I originally published the $1 million portfolio article on October 20th, 2023.

The S&P 500 is up by 11.6% since then.

Obviously, with the benefit of hindsight, that was a pretty good time to "invest" a theoretical chunk of change.

But things have changed. The rally has reduced, or outright eliminated, the margins of safety that I saw in the market a couple of months ago.

In other words, attractive bargains are much harder to find in the equity space right now.

And therefore, in this piece I plan to highlight the original portfolio's performance and build a new one, based upon the valuations (and therefore, the risk/reward proposition) that I see in the market today.

A Wonderful Two Months

As you can see, it's been a wonderful couple of months for this model portfolio since inception.

Only 1 out of the 23 picks has posted negative price returns since 10/20 (Hershey, which is down by 6.3%).

15 of the 23 picks are up double digits.

And the average gain of the stock selections during the last 2 months came in at 11.40%.

The average dividend yield of this portfolio is nearly 2.7%.

That's nearly double the S&P 500's 1.4% yield.

Therefore, the portfolio's ability to closely follow the price returns of the broader average is great because it means that long-term investors would theoretically outperform the benchmark once annual dividends are factored into the total return equation.

I'm not surprised to see this collection of stocks posting performance that implies outperformance relative to the broad market.

That's typically what happens when investors buy the highest quality companies in the world when they're trading with attractive margins of safety and have the discipline to hold them over the long-term.

With that being said, if this was a real money portfolio that I actually started on October 20th, I'd be totally content to simply hold these assets and watch them compound higher.

Buying and holding blue chips works great, folks.

But, since this is just a fun experiment that readers seemed to enjoy the first go around, I decided to hit the reset button here and discuss what I would do if I were forced to invest $1 million today.

It's much more difficult to find blue chip stocks in today's market with appealing discounts attached to them.

That's especially the case when it comes to the highest quality compounders which typically trade with high premiums.

The opportunities on my perpetual compounders watch list have nearly all dried up in recent months.

As you'll notice on the chart above, all 4 of the stocks in the "compounder" section are now overvalued…as is S&P Global in the high dividend growth category.

That's a bummer because these are such easy companies for me to buy and hold.

Anytime I think about creating an experimental portfolio like this, they're the ones that I want to include.

When I wrote that original article, I said that I was sad not to include Microsoft ( MSFT ) because of how highly I regard that company. Well, this piece makes me even sadder because there are a slew of wonderful companies that I won't be including because of valuation concerns.

Since in reality, I never want to use my hard earned cash to knowingly over pay for stocks - no matter how high their quality scores are - I'm not going to do that with this list of picks either.

I want to own more shares of S&P Global, Agilent, Blackrock, Canadian National Railway, and Honeywell in my personal portfolio…but I'm not looking to buy at these prices.

I'll be patient and wait for weakness before allocating cash their way.

Thankfully, even though there weren't as many options to choose from as there were back in October, I was still able to re-create this million dollar portfolio with other high quality stocks that I'd feel comfortable owning over the long-term.

So without further adieu, let's take a look at the list of stocks that I came up with in the aftermath of this November/December rally.

The New Million Dollar Portfolio

First of all, I should note that many of the companies here are the same.

The fact is, they were wonderful companies back in October and that hasn't changed today.

Sure, some of the values aren't as attractive as they once were. The 1-year total return outlook across the new portfolio is much lower than it was a couple of months ago. That's to be expected after the massive rally that we've seen. But, longer-term, I think these companies will continue to compound their fundamentals and dividends, generating solid returns.

Therefore, I won't comment much on the original picks. Instead, I'll spill ink in this piece on the new additions.

First of all, I'll note that I've increased the money market weighting from 8% to 16%.

Rates on short-term treasury notes are falling and I expect to see a rate cut or two next year; however, the fact is, SPAXX continues to yield 5.00% and to me that's a great risk-free return in today's market environment.

I'm not all that interested in calling tops or bottoms in the market. That's a fool's errand. But, when the market rallies back towards all-time highs I think it's prudent to have dry powder on hand.

Maybe this rally will continue for weeks. Historically speaking, it's likely. Santa Claus rallies occur much more often than they do not. According to Nasdaq, we've experienced a Santa Claus rally during 58 out of the last 73 years.

Maybe that provides momentum into 2024 and we see another secular bull market run?

No one knows.

But, like I said, up and down my watch list I'm having a hard time finding attractive bargains and I know that won't last forever.

When sentiment shifts, I want to be able to capitalize on deals. 16% is a heavy cash allocation, but with a money market fund like SPAXX, I can get paid 5% while I wait. That's a fine consolation prize for patience.

Moving away from cash and into risk assets, I'll start with the addition of a new growth stock to the portfolio: Salesforce ( CRM ).

I thought the company's recent earnings report was stellar.

The company maintained double digit top-line growth and guided for 11% top-line growth on the full-year.

Its margins increased…and management thinks that trend will remain in place throughout the remainder of the year.

They narrowed full-year 2023 EPS guidance to the $8.18-$8.19 range, which represents y/y growth of approximately 55%.

And looking out into 2024 and 2025, I think that the company has the potential to continue compounding its EPS at a 15-20% annual rate.

With that in mind, I think a 30x multiple is fair on these shares. Using the current 2024 consensus EPS estimate of $9.55/share, we arrive at a 12-month price target in the $285 area.

That implies upside potential in the 10% area (and I think that's a conservative target due to the fact that CRM has beaten Wall Street's EPS estimates for every single quarter during the last 5 years).

I wouldn't be surprised to see EPS of $10.00/share next year which would bump that price target up to the $300 area (pushing the upside here to 15%).

Although I had to remove several of the Compounders from the portfolio because of overvaluation concerns, I was able to add in a couple of very high quality replacements.

Air Products and Chemicals ( APD ) is a stock that I've been buying heavily recently in my personal portfolio because of a post-earnings dip that looks short-sighted, in my estimation.

APD has produced position EPS growth during 17 out of the last 20 years and despite the pass-through concerns raised during its recent Q4 results, 2023 was another great year for the company with EPS rising by 11% on a y/y basis.

What's more, analysts continue to be bullish on the company moving forward. Wall Street's consensus EPS growth rates for APD in 2024, 2025, and 2016 come in at 13%, 10%, and 14%, respectively.

This double digit growth is slightly above APD's long-term average.

During the past 20 years, APD's EPS CAGR is 8.6%.

However, this is dragged down by a few bad years (-20% in 2009 and -16% in 2017).

Those big down years are outliers though. APD has produced double digit annual EPS growth during 13 out of the last 20 years and because of the secular tailwinds it has from the growth of the hydrogen industry worldwide (during their Q4 report, APD's management team mentioned a $19 billion project backlog which signals strong demand/growth moving forward) I think Wall Street is on target here with growth expectations.

APD shares are down by roughly 14% during the past month and I believe this dip provides a nice buying opportunity.

Another compounder that I'm adding to the portfolio is Intercontinental Exchange ( ICE ) .

I recently highlighted this company in my article, " 12 Stocks I Hope To Buy If The Market Crashes ".

It, alongside Visa, were the only two stocks at the top of my buylist that are currently undervalued.

Here's what I said about the company's operations:

"Intercontinental Exchange is another company that operates in the financial services industry. By now, you may be tired of reading about these types of stocks. But this is a company that has posted positive annual EPS growth each of the last 20 years and anytime I see a streak like that in place, I become very interested in owning shares. ICE's most notable asset is probably the New York Stock exchange, but it also acquired Ellie Mae and Black Knight in recent years, pushing its business into the mortgage space (alongside its equity, fixed income, commodity futures, forex, and ETF exchange businesses). ICE is the largest provider of mortgage technology in the US now, which I'm very bullish on because I believe that the mortgage/real estate business is due for a modernization and digitizing the mortgage process will provide ICE with a long-term tailwind (that statement is coming from a former Realtor who believes that the residential real estate industry is antiquated and probably doesn't need to exist in its current form). Before I mentioned the toll booth model with Visa and Mastercard…well, ICE benefits from a similar system with its exchange business. It collects fees based upon transaction volume on its exchanges and therefore, this is a rare company that benefits from market volatility, whether it's positive or negative. The same thing can be said here for prices in the housing market. That agnostic approach to market direction is why ICE's bottom-line growth has been so reliable and frankly, I sleep well at night knowing that one of my holdings is doing well (operationally speaking), even when investor sentiment is poor."

ICE shares currently trade for 22x and I believe a 24-25x multiple is probably fair.

Even after their 19% year-to-date returns, I think ICE offers 10%+ upside to my $138/share price target.

That's solid enough for me when we're talking about one of the most reliable bottom-line compounders in the entire stock market.

What's more, the outlook here gets more attractive the further out I look down the road…which is typically the case when I'm talking about a blue chip compounder.

Lastly, in the Compounders section, I added UnitedHealth Group ( UNH ) .

The healthcare sector as a whole has underperformed in 2023 and I wanted to add a blue chip from this space to the million-dollar portfolio in the event of mean reversion during 2024.

However, instead of going with a bio-pharma stock, I decided to go with UNH, the largest health insurance company, because of its incredibly reliable growth.

UnitedHealth has to deal with regulatory pressure and an ever-changing insurance landscape from a legislation point of view; however, I prefer those uncertainties to the ever-present threat of patent cliffs that bio-pharma companies face.

And despite all of the changes that we've seen to the health insurance landscape in America over the last couple of decades, UNH continues to adapt, evolve, and thrive.

This company has grown its EPS on a y/y basis during 19 out of the last 20 years.

Over this 20-year period, UNH's EPS CAGR is nearly 15.2%.

Take a step back and think about that. The fact is, I want to own shares of any company that can post such reliable - and strong - EPS growth.

And with that rapidly compounding EPS in mind, it shouldn't come as a surprise that UNH has outperformed the market over the long-term as well.

During the last decade, UNH shares are up by 594% (compared to the S&P 500's 155% growth during the same period).

Looking ahead, analysts expect to see UNH continue along its double digit earnings growth trajectory.

Consensus growth estimates for 2024 and 2025 are currently 12% and 13%.

UNH's 10-year average P/E ratio is 19.5x. I think 19x forward is a fair price to pay here, resulting in my fair value estimate of $530/share.

Today, UNH is trading for $515.91, which only implies an upside of 3% or so. However, this is one of those wonderful companies that I'm always happy to buy when it's trading at a fair price and therefore, I was pleased to include UNH in the new million-dollar portfolio because over the long-term I think this one has the potential to continue to generate double digit total returns.

In the Cyclicals category I decided to take advantage of another recent dip, adding FedEx ( FDX ) to the portfolio.

FedEx is the only company in this list of picks that I don't own in my personal portfolio (however, it is climbing up my watch list in light of its recent sell-off).

Shares fell 12% after earnings disappointed investors; however, when I look at the results, I think this was an overreaction.

The major concerns around the stock are based upon macro speculation moving forward in 2024, rather than the stock's actual results.

There are fears that the economy will slow down next year and that would hurt FedEx, which is economically sensitive.

But, despite concerns about total demand, FDX's operational efficiency plans should allow the company to increase margins, and therefore profits, moving forward.

FDX cut its top-line growth estimates looking ahead; however, that didn't stop management from maintaining its EPS guidance in the $17.00-$18.50 range.

Admittedly, that's a broad range, but even at the bottom end, we're looking at 13.6% EPS growth potential.

Right now, the consensus estimate for FDX's 2024 EPS is $17.75 (essentially, the midpoint of guidance). That represents 19% EPS growth relative to 2023's $14.96 total.

And analysts don't expect that trajectory to change much in 2025 either.

Right now the consensus EPS growth estimates for FDX in fiscal 2025 and 2026 come in at 24% and 15%, respectively.

After their double digit post-earnings sell-off, FDX shares trade for just 14.9x blended earnings.

If the company is able to come anywhere close to Wall Street's consensus over the next 2-3 years, I think there is significant upside ahead.

Even with a 15x multiple on 2024 estimates (meaning, multiple expansion to FDX's long-term average P/E of 16.8x isn't playing a role in this upside projection), we're looking at a 12-month price target of $265 or so.

That implies an upside potential of 8.1% (which rises to 10%+ once the company's 2.05% dividend is factored into total returns).

And if you're willing to look a bit further down the road, the upside here continues to accelerate because of such strong EPS growth prospects.

15x the current consensus EPS estimate for fiscal 2025 is nearly $330/share.

And last, but certainly not least, I'm adding another well known, beaten down company to this portfolio: Starbucks ( SBUX ) .

In late November/early December, SBUX shares went on a record breaking 12-day losing streak.

SBUX shares are down by 8.4% during the last month.

They haven't participated in the broad market rally because of concerns about rising competition in the coffee/caffeine drink area, ongoing unionization related issues in the US, and headwinds in the Chinese market (which is the company's largest growth market right now).

These concerns are real; however, I don't think they're going to stop this company from compounding its bottom-line.

SBUX has produced positive annual EPS growth during 17 out of the last 20 years.

It got crushed during the pandemic when people stopped going to work and visiting coffee shops; however, even with 2020's -58% EPS growth rate factored into the equation, SBUX's 20-year EPS CAGR is 16.4%.

SBUX has posted double digit EPS growth during 16 out of the last 20 years. And looking ahead, analysts believe this trend is likely to continue.

Right now the consensus EPS growth estimates for SBUX in fiscal 2024, 2025, and 2026 are 17%, 17%, and 15%, respectively.

Because of the headwinds that SBUX faces, I'm basing my fair value estimate here on a multiple (24x) that is far below SBUX's long-term average (31.8x).

I highlighted that 24x threshold in pink on the chart above.

As you can see, it has served as strong support for shares throughout the last decade and that gives me peace of mind when buying into weakness.

The fact that SBUX sells one of the only addictive products that is legal across all age groups - caffeine - factors into my bullish thesis and this historical EPS growth.

The Wall Street Journal recently published a report highlighting what may be a caffeine addiction problem throughout the US, especially in younger age groups.

Social media (TikTok) is driving demand for new-age caffeinated drinks and Gen Z is already addicted to the substance.

McDonald's recently branched out into the "fast drinks" category with its CosMc's brand. Other fast food chains have joined into the fun as well, hoping to compete with the likes of SBUX.

But, to me, SBUX remains king of the caffeine throne and therefore, I was pleased to add shares to this portfolio.

Furthermore, I liked the idea of adding another caffeine play to the portfolio because it's sort of hedge to the potential negative impact of the GLP-1 drug craze to the other food/beverage stocks that I've already included.

Anti-obesity drugs might result in lower demand for Frito Lay products at PepsiCo, but energy drinks are expected to benefit from this trend.

Even though people are eating less, they still have to drink liquids to survive.

Yes, simple H20 would do the trick, but I don't think that's the route the average consumer will take.

Less food is likely going to embolden consumers to splurge on drinks…especially if lower caloric intake results in lower energy levels.

I even thought about adding an energy drink pure play like Monster Beverage ( MNST ) or Celius ( CELH ) to this portfolio because of their outsized growth prospects moving forward; however I decided against it because Coca-Cola and PepsiCo already provide exposure to those companies (KO owns ~20% of MNST and PEP owns ~8.5% of CELH).

If I were trying to turn $1 million into $1 billion here, then those are the sorts of positions I would include.

However, I suspect that most people in this theoretical situation don't have billion-dollar goals.

Instead, they'd be trying to grow their $1 million into the $2-$3 million that would afford a comfortable retirement.

And therefore, I decided to stick with my dividend growth blue chips when it came to the caffeine addiction thesis. Their multiples are much lower and they provide reliable passive income.

Furthermore, I continue to believe that their distribution networks contribute heavily to their wide competitive moats.

Consumer tastes change over time and there's nothing that any company can do to stop it. But global distribution and strong retailer relations gives KO & PEP access to the most consumers and therefore, if/when they decide to make a move on a product/brand, they can be sure that it will have the shelf space required to generate attractive ROI's moving forward.

So, with KO, PEP, and SBUX I think I have my bases covered in the caffeine market. Even in the event of a macro economic slowdown, I don't think consumers are going to pivot away from their favorite caffeinated drinks. And therefore, these 3 companies provide nice upside potential as relatively low beta, defensive anchors.

Conclusion

Overall, I think this is a collection of high quality stocks that provide market-beating upside potential, a market-beating dividend yield (on average), and financial flexibility to take advantage of macro weakness in the future.

To me, this is the type of set up that allows investors to have their cake and it eat too (with regard to capturing macro upside potential while maintaining dry powder).

As I said earlier, I own nearly all of these stocks in my personal portfolio. I sleep well at night with exposure to blue chips like these and therefore, when thinking about how I'd invest $1 million today, this type of well balanced portfolio construction is what I'd feel comfortable with.

For further details see:

How I'd Invest $1 Million Today