With stocks well off their 2023 highs, bonds down for the year, and investors hanging on the Federal Reserve’s every word, it can be tough to decide where to invest new money. To help out, we’ve asked some of Barron’s top writers to share their best ideas. (Barron’s policy prohibits writers from investing in industries they cover.)
For this special report, we asked each writer to envision an investor who has a few million dollars in a well-diversified portfolio and then comes upon an extra $100,000 to invest. These are our best ideas for your next $100,000, not your first $100,000. These aren’t “play money” gambits. They are sound investment ideas for serious investors.
Retail Must-Haves
—Teresa Rivas
Much as youth is wasted on the young, windfalls seem wasted on the reckless and impulsive. I imagine how smart a recipient I would be, should fate provide me with an unexpected bonanza. No flashy mansions, please—I’ll take modest returns and long-term security. Rather than a wild weekend with my money, I want a long-term relationship.
If a spare $100,000 were suddenly burning a hole in my pocket, I would opt for long-term compound earnings growers, with a dividend to sweeten the pot.
With that in mind, I’d take a stroll down the aisle at
Walmart
(ticker: WMT). At a time when the biggest retailers keep getting bigger, and technology increasingly affects shopping, Walmart keeps winning. It turned its pandemic bounce into a permanent advantage, and has been attracting even higher-income shoppers thanks to its subscription service and low prices at a time of high inflation. It may never be chic, but it also won’t offer the disappointment of a Target/designer collaboration that sells out minutes after midnight.
But because this extra windfall is your chance to buy companies that aren’t necessarily cheap but that you’ve always wanted, I’ll share a few more long-term favorites. Please consider:
Chipotle Mexican Grill
(CMG). It has been on the upswing for a long time, with little sign of slowing down. It doesn’t pay a dividend, but what is extra money for if not to scratch the “what if” itch, however briefly? Plus, every time I buy a burrito, it will be like putting cash back in my pocket.
Costco Wholesale
(COST). It just celebrated its 40th anniversary—and what a four-decade run it has had. The warehouse club boasts a cadre of loyal, well-heeled bargain hunters, a cult following for its private-label brands, and an impressive stock chart.
Finally, consider
e.l.f. Beauty
(ELF). This affordable cosmetic stock doubled and doubled again since I wrote about it in 2021. It’s pricey now for sure, but the heart wants what the heart wants. And with $100,000 to play with, the wallet can afford it.
Covid Vaccine Plays
Covid is receding as a concern for most Americans, and that has depressed the shares of Covid vaccine makers
Moderna
(MRNA) and
BioNTech
(BNTX). Covid vaccine sales are expected to drop sharply this year, with Moderna projecting it could generate $7 billion from the product this year, down from $18 billion in 2022.
Moderna makes the No. 2 Covid vaccine, while Germany’s BioNTech collaborates with
Pfizer
(PFE) on the leading global vaccine. At about $103 recently, Moderna stock is down 43% this year, making it one of the worst performers in the S&P 500 index. It peaked at nearly $500 in 2021. BioNTech stock, recently at about $110, is off 27% this year.
At those levels, investors with some new money to put to work could find bargains in both Moderna and BioNTech. They have ample cash reserves and promising drug pipelines that aren’t reflected in their stock prices.
Their cash alone could offer what legendary value investor Benjamin Graham called a margin of safety. Moderna had $14.6 billion of cash and investments on its balance sheet at the end of the second quarter, or about 35% of its $40 billion market capitalization. BioNTech is even more flush, with nearly $20 billion of cash and investments, or 75% of its market cap. BioNTech has more cash relative to its size than nearly any large company in the world.
BioNTech and Moderna are dependent on Covid vaccines for their revenue now, but they have big plans. BioNTech focuses on cancer and infectious diseases. Moderna believes its messenger RNA technology is distinctive and gives it a powerful advantage over traditional drug companies. It is aiming for the launch of 15 new products by 2025, including one combining vaccines for flu, Covid, and respiratory syncytial virus, or RSV, in a single shot.
BioNTech remains profitable, trading for about 20 times projected 2023 earnings, while Moderna is operating at a loss, with red ink of $4 a share expected this year. It probably could be in the black if it scaled back its heavy research spending.
“The market views [Covid vaccine makers Moderna and BioNTech] as one-trick ponies. What the market is missing here are huge cash piles and genuine R&D platforms and pipelines.”
Other once-hot Covid plays, including
Zoom Video Communications
(ZM) and
Peloton
(PTON), have crashed in the past two years—understandable, as habits have changed since the peak of the pandemic. But the need for vaccines isn’t going away, and new variants could be severe.
“The market views them as one-trick ponies” and tired ones, at that, says Michael Pye, an investment analyst at Baillie Gifford, the largest Moderna investor and one of the top BioNTech holders. “What the market is missing here are huge cash piles and genuine R&D platforms and pipelines.”
I suggest investors take a closer look.
—Andrew Bary
Electric-Vehicle Picks
I like to invest thematically in things I like to follow and learn about. Anyone reading me frequently (thank you) realizes that I love cars, both battery- and gasoline-powered versions. Assuming that my investment portfolio were well diversified and I leaned heavily on a financial advisor for the majority of wealth management, my incremental $100,000 would go there.
But you have to do thematic investing smartly. Each new stock investment still has to be shares of a solid business. The theme is always just a cherry on top. There are plenty of stocks that fit an attractive theme that are lousy businesses.
I believe
Tesla
(TSLA) is a solid business. It has leading technology and an enormous lead over most of the competition. I wouldn’t put more into Tesla today. Barron’s recommended Tesla in January, and the stock is up more than 100% since then. Now with shares at about $260, I’d recommend holding on to your original position if you have one, or simply owning Tesla via an exchange-traded fund based on the S&P 500, where it makes up about 2% of the index.
I wouldn’t suggest piling into
Rivian Automotive
(RIVN), either. It doesn’t make money yet. Rivian has a lot going for it, but I’m a traditional value guy, or value-who-likes-themes-and-some-growth guy. I prefer cash flow and profits.
Now you know what I wouldn’t buy. How about what I would buy? More
Eaton
(ETN),
Ford Motor
(F),
BMW
(BMYY), and
Albemarle
(ALB). All four are leveraged to the EV and electrification themes. Eaton makes a lot of the electrical components needed to expand the grid as the number of EVs on the road grows. The stock is close to its 52-week high and trades at about 21.7 times estimated 2024 earnings. A little pricey, but things are good.
Albemarle is one of the world’s largest miners of lithium, the key metal that goes into EV batteries. Albemarle stock is down about 49% from its 52-week high, falling along with lithium prices. But lithium prices, like other commodities, will normalize eventually, so I’d suggest adding shares when things look bad.
Ford stock is down about 21% over the past three months, pressured by contentious labor negotiations with the United Auto Workers. I am holding out hope that Ford will be an EV winner, even though the stock, at less than seven times estimated 2025 earnings, is priced for not winning in EVs.
Hope, of course, is a lousy investing strategy. Still, Ford’s efforts to introduce EVs that align with its core brand offerings, such as EV Mustangs and EV pickups, mirror the strategy of the traditional auto maker that has probably done the best job of introducing EVs—BMW.
BMW has a wide range of EVs that all, frankly, look like BMWs. It sold some 88,000 fully electric cars in the second quarter, accounting for 14% of total sales. That is how you transition from gas to electric.
—Al Root
IBM Is an AI Play
Amid 2023’s mania for stock plays on the generative artificial intelligence trend, investors have overlooked one that is arguably among the most compelling plays on both AI and cloud computing: the 112-year-old tech giant
IBM
(IBM).
Almost two years ago, I wrote a cover story for Barron’s on the outlook for Big Blue, asserting that the company was showing signs of a turnaround after a decade of shrinking revenue. The catalyst was the 2020 decision to elevate Arvind Krishna to CEO, replacing Ginni Rometty, who retired from the top job after an eight-year run. IBM shares have appreciated 53% with Krishna at the helm, but there should be further gains ahead.
When Krishna took over, he refocused IBM on two areas: hybrid cloud computing and artificial intelligence. Krishna was talking about AI long before OpenAI launched ChatGPT in November, triggering the tech sector’s current obsession. And IBM’s AI roots run deep: It was more than a decade ago that the company’s Watson AI platform appeared on Jeopardy and crushed the game’s best players.
Meanwhile, Krishna took steps to streamline IBM’s business, including spinning out the company’s low-margin managed services business as an independent public company called
Kyndryl.
He also sold the Watson Health business, which had focused on applying AI to healthcare end markets, a move that confused some investors into thinking IBM had given up on AI entirely.
But IBM has doubled down on AI, with a new platform introduced this year called WatsonX. The new plan is to provide large language models and other AI tools to key IBM vertical markets, like financial services and manufacturing. BofA Securities analyst Wamsi Mohan explains that WatsonX is designed to help customers “quickly train and deploy custom AI capabilities while retaining control of their data.” His view is that IBM has “an underappreciated AI portfolio,” and I think he’s right.
IBM has no interest in producing a general-purpose large language model along the lines of those from
Alphabet
(GOOGL), OpenAI,
Meta
(FB), and others. Krisha sees public-facing AI apps as just a small portion of the opportunity. “It’s like an iceberg,” he told me in June, with chatbots such as
Microsoft
Bing and Google Bard above the waterline. “There are more use cases that are not going to benefit from a large public model.”
IBM shares are dirt cheap, at about 14 times estimated 2024 earnings and about two times projected sales—and they have one of the highest dividend yields in the tech sector, at 4.7%. The stock this year is about flat, sharply underperforming the broader market. It doesn’t require artificial intelligence to see the appeal here—just old fashioned investor smarts.
—Eric J. Savitz
Bond-Ladder Benefits
I’m a hands-off investor, and bond ladders, which are constructed of bonds with staggered maturities, always seemed to involve more work than I was willing to put into my portfolio. But with Treasury yields near 16-year highs, the strategy bears another look. Plus, exchange-traded funds can make the laddering process easier to manage.
The case for bonds looks compelling right now, as markets have absorbed the Federal Reserve’s message that interest rates will remain higher for longer than investors had initially expected. Stocks tumbled in September when that reality sunk in, and bond prices fell. Yields, which move inversely to prices, climbed to levels not seen since 2007. The 10-year Treasury bond recently yielded 4.6%, down from its recent 16-year high of 4.8%.
Bond yields may rise further, but with a ladder, you hold the bonds to maturity, which means you can essentially ignore the swings in bonds’ underlying prices. If rates rise, you get to take advantage of higher yields as the shorter-term bonds mature and you reinvest the proceeds in new bonds.
There are many ways to structure a bond ladder, which can be built with Treasuries, corporate bonds, munis, or Treasury inflation-protected securities, or TIPS. Today, many bond pros see intermediate maturities as the sweet spot on the yield curve. One way to structure a $100,000 bond ladder would be to put $20,000 each in bonds maturing in three to seven years.
Dhruv Nagrath, a director of fixed-income strategy at
BlackRock,
suggests a compelling strategy for someone who plans to use a $100,000 windfall as a down payment on a second home in a few years. She could divide her money among bonds that mature during her purchasing horizon. Other investors, who are looking for continuous income in retirement, could construct a ladder with five or even 10 rungs.
ETFs can make bond laddering easier to manage than buying individual bonds. BlackRock offers defined-maturity bond ETFs, which mature (and are delisted from the exchange) in their target year. The company recently added a TIPS bond ETF suite to its lineup.
—Elizabeth O’Brien
Email: [email protected]
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