2023-12-26 17:00:00 ET
Summary
- It's time to look back at my top picks from 2023 and see what went right and what lessons were learned.
- The market rebounded smartly as the economy proved stronger than many expected.
- Will the Santa Claus rally put a damper on 2024?
Time is more valuable than money. You can get more money, but you cannot get more time. - Jim Rohn, "America's Foremost Business Philosopher."
It's hard to believe another year has gone by. Time really is the ultimate enigma. 2023 was another fascinating year in the market. The recession that so many were sure was coming never materialized. Earnings didn't tank. Nvidia ( NVDA ) was a revelation, rising more than 200%. Microsoft ( MSFT ) is making all-time highs, and artificial intelligence ((AI)) talk has drowned out a lot of the rest.
The Nasdaq QQQ Trust ( QQQ ) and the S&P 500 ETF Trust ( SPY ) posted total returns of 54% and 26%, respectively, as shown below.
Let's look at what went right, the lessons learned, and where these stocks stand now.
Top 2023 Picks Review
The market tanked in 2022 after the pandemic stimulus washed through the system and resulted in record inflation and a hawkish Federal Reserve. The 2023 article highlighted these qualities:
I used several criteria for this year's (2023) list, taking into account the current market and long-term opportunities.
They are:
Secular opportunity: Persistent tailwinds that contribute to future profits.
Substantial stock buyback program or dividend yield. Since the market may continue to decline, a significant buyback program will allow the company to take more shares off the table, leveraging our future gains.
Impressive free cash flow that feeds buybacks, dividends, a strong balance sheet, research and development, and more.
I look at cash flow first. It is generally a better judge of a company's operational success than net income. I love share buybacks, which get more effective when the stock falls. It gives long-term shareholders a cushion and leverages returns when the stock recovers.
Here are my picks and their 2023 returns:
- Builders FirstSource ( BLDR ): +154%
- CrowdStrike ( CRWD ): +144%
- Alphabet ( GOOG )( GOOGL ): +60%
- Visa ( V ) +26%
- Texas Instruments ( TXN ) +4%
The average return is 78% thus far. Am I pleased? Yes. Satisfied? Never.
Builders FirstSource
Builders FirstSource has transformed from a regional lumber supplier to a national powerhouse, generating more than half its revenue from value-added (higher-margin) products like manufactured windows, doors, millwork, etc.
It has been a favorite of mine since the blockbuster 2021 merger with BMC.
It is one of my most successful long-term picks, as shown below:
It isn't widely followed. The articles I have written on it garner far fewer readers than average. But nothing is boring about nearly tripling an investment in 2-3 years.
Builders FirstSource went on an M&A spree after the BMC merger, swallowing up regional lumber yards, mills, and others in the fastest-growing areas, like Arizona, Texas, parts of the East Coast, and the Pacific Northwest. It serves 48 of the top 50 markets.
The M&A expands revenue and capabilities and creates cost synergies that lead to margin expansion and record free cash flow ((FCF)), as shown below.
These metrics dipped recently (and expectedly) due to soaring mortgage rates, but this is a short-term headwind on a long-term journey.
The immense crash in home building, shown below, caused by the 2008 housing crisis, will take years (decades?) to fix.
The country is short millions of single-family homes; how many millions depends on the source. The recent decline in housing starts exacerbates the shortage, triggering more home-building in future years. Dropping interest rates will spark it.
The company is also advancing into digital building technology to become an indispensable part of the end-to-end process.
Builders FirstSource uses much of its free cash to repurchase stock, $3.6 billion from 2022 through Q3 2023. This amounts to a whopping 18% of the current $20 billion market cap. It has taken 41% of the outstanding shares off the market since August 2021, driving shareholder value.
Is Builders FirstSource still a buy?
The stock price is up while earnings are down in 2023, so the company's valuation metrics are up, as shown below.
The fact that the stock price is up shows that Wall Street has done its homework. The stock is not the bargain it once was, but it is still a solid company for a long-term portfolio.
CrowdStrike
CrowdStrike was the only stock last year that didn't fit the criteria. But I made an exception because ((a)) cybersecurity is a resistant industry and ((b)) the stock was a bargain.
Companies spend serious money on cybersecurity and cannot afford to cut, recession or not. CrowdStrike made the top picks and didn't disappoint, rising 145%.
CrowdStrike's outstanding performance
Annual recurring revenue ((ARR)) grew 35% last quarter to $3.2 billion, free cash flow hit a record $864 million over the trailing twelve months (TTMs), and operating leverage improved dramatically. The company plans to reach $10 billion ARR in 5-7 years and is on its way.
The recent market rally has many stocks testing the limits of their valuation. While I still see this as a long-term stock to own, the price isn't compelling, as I detail in this recent article . A small earnings miss, cracks in ARR growth, or conservative guidance could cause a significant dip overnight.
Alphabet
The debut of ChatGPT kicked Alphabet ( GOOG )( GOOGL ) into high gear - no more resting on its laurels. After more than a decade of search market dominance, there is serious competition. Alphabet unveiled generative AI (like Bard and PaLM), enhanced search features, and the highly-anticipated Gemini Pro earlier this month.
Gemini Pro will power Bard, competing with ChatGPT. Unfortunately, the public unveiling was somewhat rushed, causing a public relations gaffe. Enhancing these unveilings isn't necessary and shouldn't happen.
On the financial front, sales and operating income rose 7% through Q3, reaching $221 billion and $61 billion, respectively. Operating cash flow was more impressive, increasing 22% to $83 billion through Q3 and $106 billion over the TTMs, as shown below.
This allowed Alphabet to repurchase another $45 billion worth of stock through Q3.
The stock is slightly undervalued historically, as shown below.
Alphabet has challenges ahead but has every chance to meet them and excel. The stock earns a spot in a tech portfolio for its technology, market dominance, and terrific cash flow, but it may not make the top picks for 2024.
Visa
Visa stock returns matched the SPY this year (lost to the QQQ), but I expect it to beat the SPY in the long term. It benefits from an increasingly cashless society that will spread worldwide. It is a duopoly with incredible infrastructure, competitive advantages, and incredible margins, as shown below.
I have heard about the "end of the duopoly" for decades. If anything, Visa and Mastercard's ( MA ) stranglehold has strengthened. It isn't as simple as it may seem to dethrone them.
Visa is also somewhat immune to inflation since most revenue is based on a percentage of transaction value. Sure, if spending drops, sales will drop, but there is no evidence of this now. The population grows, cash usage falls, and Visa dominates. This stock is a buy.
Texas Instruments
They can't all be winners, and Texas Instruments brought up the rear last year. Texas Instruments and Visa were my "safe" picks, so it's no surprise they lagged behind the tech market boom.
Sales and income were forecast to fall this year as customers digested inventory on hand and liquidity was sapped from the market. The chip market is cyclical, but Texas Instruments remains profitable during down cycles, and the dividend rose for the 20th consecutive year, as depicted below.
It now pays $5.20 annually for a 3% yield. I made the case earlier this year for choosing dividend growth over yield in this article .
Texas Instruments is investing heavily in the future ($4.9 billion CapEx through Q3 vs. $3.1 billion through Q3 2022). Investors should expect this to continue, but the Chips Act will contribute capital:
We're very pleased with the progress on our manufacturing expansion. They will provide geopolitically dependable capacity to support customer growth for the coming decade...And to provide us the ability to grow at that 10% growth rate that we talked about...So, we continue to expect $5 billion of CapEx per year in 2023, 2024, 2025, and 2026.
Let me also remind everyone that these CapEx numbers are gross, meaning they do not include benefits from the ITC or grants from the CHIPs Act. So, we're actively working through the grant application process with the CHIPS program office, which we believe will be meaningful to our manufacturing operations in Texas and Utah and will help support semiconductor growth for decades to come. Funding from the CHIPS Act grants was included in our decision-making for these investments.
CapEx spending slowed stock buybacks in 2023. This will probably continue until the company sees grant funding and the chip environment strengthens. Still, it's a small amount of short-term pain for significant long-term gain. Not taking advantage of the government money available and expanding capacity would be a dereliction of duty.
Texas Instruments is a terrific stock to own long-term due to its steadily growing dividend and potential to rebound when the chip market turns. This could come sooner than later, with the Fed hinting at rate cuts in 2024.
What about 2024?
Finding compelling values into 2024 is difficult after a wicked Santa Claus rally capped 2023 gains. Several stocks that were terrific buys a month ago are too hot to handle.
At the beginning of 2023, investors were running scared; it was an excellent time to buy. Now, investors are coming back in droves, and the Fear and Greed Index has swung from Fear in January 2023 to Extreme Greed:
The index isn't infallible, but it is a decent guide.
Making wholesale changes to long-term positions may not be prudent; however, consider trimming the hedges or selling covered calls.
With that said, there are compelling companies to highlight for the New Year - stay tuned. Happy Holidays to all.
For further details see:
Top 2023 Picks Review: 78% Avg Return With Two Huge Wins