Happy New Year! 2020 was a wild ride to say the least, but it’s in the rearview mirror and we can all be thankful for that.
Now, I’m particularly optimistic about 2021. We’ve got a lot to look forward to this year, and it kicks off with the fourth-quarter earnings announcements in mid-January. That’s when Wall Street should begin to refocus its attention on superior fundamentals, like corporate sales and earnings.
The fact of the matter is that year-over-year sales and earnings comparisons are going to be particularly favorable in 2021. Analysts have also revised earnings estimates up by an average 10.4% in the past three months, so the fourth-quarter earnings season should be spectacular.
In this environment, the best defense remains a strong offense of fundamentally superior stocks. In Growth Investor, on average, my stocks are characterized by 41.6% annual sales growth and 204.2% annual earnings growth.
The bottom line: The New Year is a time for optimism, and my Growth Investor stocks are “locked and loaded” for another prosperous year.
So, while my investment strategy at Growth Investor is not changing in 2021, there are a few big changes on the horizon you should be aware of.
One important one is a weak U.S. dollar.
The U.S. dollar weakened considerably against other major currencies in 2020. The greenback isn’t expected to recover any time soon either, as out-of-control spending and massive federal budget deficits will continue to weigh on the U.S. dollar for the foreseeable future.
Believe it or not, a weak U.S. dollar is actually great news for the multinational and international companies that dominate the S&P 500. Keep in mind that about half of the S&P 500’s sales are from outside of the U.S., so a weak U.S. dollar boosts both sales and earnings. In other words, a weak U.S. dollar can create windfall profits for multinational companies.
Technology companies were certainly some of the biggest beneficiaries of the weak U.S. dollar in 2020, and they should continue to prosper in this environment in 2021. As a result, several of my Growth Investor stocks are well-aligned to benefit from this change in the New Year. Two of my favorites are Adobe, Inc. (ADBE) and Microsoft Corporation (MSFT).
Adobe basically controls the PDF format for documents, and it is the ideal and most-preferred format for email attachments. However, you now have to pay Adobe a license fee to modify PDF documents, and that has added nicely to the company’s top and bottom lines. For the fourth quarter, the consensus estimate calls for earnings of $2.78 per share, or 22.5% annual earnings growth, and revenue of $3.76 billion, or 21.6% annual revenue growth.
Like Adobe, Microsoft charges an annual license fee for individuals and businesses to use its software. So, all those folks—employees and students—that are working and studying remotely are now paying new license fees, and that’s been a boon for Microsoft. Analysts are anticipating that Microsoft’s earnings and sales will grow 8.4% and 9.0%, respectively, in the fourth quarter.
The Scramble for 5G Bandwidth
Another trend to watch closely is 5G wireless technology.
As the work-from-home environment will continue this year, I expect more people and businesses are going to rely on the lightning fast internet speed and low latency (basically, the time it takes to transfer data between its source and destination) that 5G offers. And they’ll do so as they seek to take part in the wave of advances in autonomous vehicles, smart factories and connected sensors that 5G will help enable.
U.S. cellphone carriers are currently scrambling to secure access to 5G wireless licenses being auctioned off by the Federal Communications Commission (FCC), and setting records as they do so.
Already, the FCC has raked in $68.9 billion after three weeks of bids for 5G licenses in the mid-band spectrum, according to the Wall Street Journal. The huge increase has crushed Wall Street’s forecasts for the auctions and blown past the $44.9 billion the FCC raised in 2015 for midrange cellular licenses that mobile carriers used to beef up their 4G offerings.
And the FCC isn’t even done yet. The next auction is scheduled for January 4. The public doesn’t know who won which licenses as the process is a secret until complete, but you can be sure the major carriers like AT&T (T) and Verizon Communications (VZ) are vying for access.
So, let’s take a quick look at how these companies rate in my Portfolio Grader.
As you can see, AT&T gets an overall “Strong Sell” and “F” grade, with an “F” for the Quantitative Grade and a “D” for Fundamentals. Verizon doesn’t fare much better, earning a D-rating for its Overall Grade and Quantitative Grade. This tells me that there’s little interest in the stock from institutional investors like hedge funds and mutual funds.
The good news is there’s a better way to play the rollout of 5G and the technologies it will enable, including several opportunities among my Growth Investor Buy Lists.
One is Taiwan Semiconductor Manufacturing Company Limited (TSM). It was the first dedicated semiconductor foundry in the world when it was founded in 1987. In other words, TSM does not develop or market any semiconductor products under its own brand. So, the company is never in direct competition with its customers. Today, Taiwan Semiconductor is the largest semiconductor foundry in the world, with a 56% market share.
Taiwan Semiconductor manufactures more than 10,760 products that use 272 unique technologies for its nearly 500 customers. The company manufactures semiconductors that are used for computers, consumer, industrial, communications and standard markets. In 2019, Taiwan Semiconductor’s total managed capacity reached more than 12 million 12-inch equivalent wafers.
As the world’s largest semiconductor foundry, it’s not too surprising that Taiwan Semiconductor is benefiting immensely from the 5G boom. Did you know that 5G phones actually have 30% to 40% more semiconductor chips than previous models? This alone has contributed strongly to the demand for TSM’s semiconductors. During the third quarter, the company achieved 46% of its sales from mobile chip sales, and it anticipates 5G demand will drive demand for 5nm chips to account for 20% of sales next year.
The launch of Apple’s (AAPL) new 5G smartphone series will certainly add demand for TSM’s chips. The company is supplying the 5nm chips for Apple’s iPhone 12 5G phones. The chipset, A14 Bionic SoC, contains 171.3 million transistors in each square nanometer, or 15 billion transistors, which compares to only 8.5 billion transistors in Apple’s iPhone 11.
Along with providing chipsets for Apple’s 5G mobile phones, TSM also develops chips for several of the other largest semiconductor companies in the world, including Qualcomm (QCOM), NVIDIA (NVDA), Advanced Micro Devices (AMD) and Huawei. Increased 5G chip demand from each of these companies is sure to add to TSM’s top and bottom lines for the foreseeable future.
In the third quarter of 2020, total revenue rose 21.6% year-over-year to NT$356.43 billion, and earnings jumped 35.9% year-over-year to NT$137.37 billion, or NT$5.30 per share. In U.S. dollar terms, TSM achieved earnings of $0.90 per ADR and revenue of $12.14 billion. The analyst community was looking for earnings of $0.77 per ADR on $11.51 billion in revenue. So, TSM posted a 16.9% earnings surprise and a 5.5% revenue surprise.
Looking forward, TSM expects fourth-quarter revenue between $12.4 billion and $12.7 billion. That forecast was nicely higher than analysts’ initial estimates. As a result, analysts have upped fourth-quarter earnings and revenue forecasts. For the fourth quarter, analysts now expect earnings of $0.93 per ADR on $12.33 billion in revenue, which represents 27.4% annual earnings growth and 18.6% annual revenue growth.
It also earns an A-rating in Portfolio Grader, with an “A” for its Quantitative Grade and “B” for its Fundamental Grade, making the stock a “Strong Buy” right now.
Preparing for 2021 Trends
But I’m just getting warmed up. In my Growth Investor January Monthly Issue, I’ve outlined four other major trends I expect will be important this year, and some of the companies best positioned to take advantage of these trends. In this Monthly Issue, I also unveil my newest buy in the cybersecurity space, as well as two Elite Dividend Payers. You can get the names and my buy advice here.
We’ve got an exciting year ahead of us, and I can’t wait to get started.
But before I go, I have to let you know about one more trend I’ve been keeping a close eye on.
The disturbing fact is that a great divide is opening up in America. On one side is a new aristocracy that’s amassing more wealth, more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.
On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.
What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.
Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.
It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.
It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.
It’s free to watch and by doing so I know you’ll be ahead of everyone else struggling to understand what is really going on.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Adobe, Inc. (ADBE), Advanced Micro Devices (AMD), Microsoft Corporation (MSFT), NVIDIA (NVDA), Taiwan Semiconductor Manufacturing Company Limited (TSM)