To say that the stock market was unstoppable in 2019 would be quite the understatement. The benchmark S&P 500 and tech-heavy Nasdaq Composite wound up gaining 29% and 35%, respectively, for the year, which for the S&P 500 is about four times its average annual return, inclusive of dividends and adjusted for inflation.
The big question is: Can the rally continue in 2020?
While there’s no doubt that investors remain on heightened recession alert following the brief inversion of the yield-curve in late August, there aren’t any red flags suggesting the U.S. economy is in trouble. Nevertheless, it wouldn’t be surprising to see investors focus on established or brand-name large-cap stocks (those valued between $10 billion and $200 billion) in 2020 to mitigate this risk a bit.
As we move headlong into the new year, here are four no-brainer large-cap stocks you’ll want to own.
This should come as little surprise given how much I’ve beaten the drum on robotic-assisted surgical system develop Intuitive Surgical (NASDAQ:ISRG) of late. Although the company won’t be earning itself any love from value investors — it’s valued at 42 times next year’s earnings per share — growth investors are bound to appreciate a host of competitive advantages.
Intuitive Surgical wrapped up its third quarter with 5,406 of its da Vinci surgical systems installed worldwide. If you add up all of this company’s competitors, you wouldn’t get anywhere near 5,406 installed systems. For two decades, Intuitive Surgical has been able to effectively build rapport with the medical and surgical community. And given the high price of these systems, along with the training given to surgeons, Intuitive Surgical doesn’t have to worry about client churn.
The real beauty of this business model is that it’s built in razor-and-blade fashion. You might think that the da Vinci system, which costs up to $2.5 million, is how Intuitive Surgical makes its money, but these are costly machines to produce, leading to so-so margins. The bulk of the company’s profits are derived from instrument sales with each procedure, and from servicing the da Vinci system. As Intuitive Surgical’s installed base grows, so will these higher-margin secondary revenue streams.
Want returns you can bank on? While there are no stock market guarantees, payment processor Square (NYSE:SQ) should have a solid rebound year in 2020.
Probably the most impressive aspect of Square is how well its payment solutions are resonating with larger businesses. Though its payment facilitation is most often associated with smaller and start-up businesses, the company noted that gross purchasing volume (GPV) from large sellers grew 34% year-over-year in the third quarter, with large sellers accounting for 55% of the company’s total GPV. This ability to attract big businesses makes Wall Street’s forecast of a tripling in sales from $1.6 billion to $4.8 billion between 2018 and 2022 very believable.
Square has also done a bang-up job of using fintech innovation to drive secondary sources of growth. The company’s Cash App ecosystem has delivered margin improvement in each of its first two years, with net revenue growth of 115% in the most recent quarter. While certainly not inexpensive on paper at 65 times next year’s EPS, it becomes a potential must-own large-cap stock when you factor in its supercharged growth rate.
It’s not only going to be growth stocks that attract investors in 2020. Value stocks are squarely coming into focus, and rare-disease drug developer Alexion Pharmaceuticals (NASDAQ:ALXN) deserves to be a hot commodity.
The promise and peril of Alexion has always lied with its blockbuster drug Soliris. Responsible for the lion’s share of Alexion’s sales, Soliris and its numerous indications have fueled growth, but also raised concerns about eventual generic competition and/or a loss of exclusivity. That’s where Ultomiris comes into play. Ultomiris aims to tackle the same indications where Soliris is approved, but with a few differences. Ultomiris is a protein that’s recycled within a patient’s body, and it’s given as a larger dose than Soliris. Translation: It only needs to be administered every eight weeks as opposed to two weeks with Soliris. In other words, Alexion has innovated its way into maintaining rare-disease drug dominance in a handful of indications.
From a value perspective, the Soliris/Ultomiris combo, along with other compounds, such as Strensiq, gives Alexion the ability to grow revenue by the high single-digits to low double-digits per year. Even though that might seem low for a rare-disease drug developer, it’s excellent when you consider that Alexion is valued at less than 10 times next year’s EPS and sports a PEG ratio of only 0.65 (anything below 1 is viewed as “undervalued”).
There’s probably not a more exciting growth trend in the tech sector this year than the ongoing rollout of 5G networks. Infrastructure upgrades that allow for significantly faster download speeds should lead to a massive upgrade cycle for smartphones and Internet of Things (IoT) devices. Among the many stocks that stand to benefit, I view Qorvo (NASDAQ:QRVO) as being at the front of the pack.
Qorvo is a provider of radio-frequency (RF) solutions for smartphones and IoT devices. Maybe most important is the fact that Qorvo’s RF solutions are mainstays in the Apple iPhone. Apple maintains dominant market share in the U.S., and is slated to roll out a redesigned 5G-capable iPhone later this year. This suggests that Qorvo will not only see a substantive uptick in RF solution orders well in advance of this launch date, but that the ongoing upgrade cycle should lead to heightened demand for probably the next three to five years.
Believe it or not, even with this big uptick in sales growth on the horizon, Qorvo continues to trade as a borderline value stock. Currently priced at 17 times next year’s EPS, it’s my belief that Wall Street hasn’t fully accounted for the hundreds of millions of devices that Qorvo’s solutions could potentially be in over the next three years.