3 tech stocks to buy after the Fed’s interest rate hike
Stocks fell further this week after the US Federal Reserve announced a 0.75% interest rate hike, the biggest since the mid-1990s. inflation, but it is a blunt instrument that could also send the economy into recession. Stocks react accordingly. https://www.cnbc.com/2022/06/15/fed-hikes-its-benchmark-interest rate-by-three-quarters-of-a-point-the-biggest-increase-since-1994.html
Despite all the uncertainty, however, long-term investing is far from dead. In fact, there could be real bargains if you plan to buy and hold on for at least a few years (but the longer the better). Three Fool.com contributors think Amazon (AMZN 2.47%), T-Mobile (TMUS 2.66%)and Albemarle (ALB 4.88%) are a buy after the Fed raised rates again. Here’s why.
Just another ordinary speed bump for Amazon
Anders Bylund (Amazon): Let’s go back to a fairly recent story. The federal funds rate was a meager 0.30% in the summer of 2016. Inspired by a stronger economy, the Fed launched a rate hike campaign in December, leading to a reading of 2.40% at the end of 2018.
E-commerce giant Amazon took these rate changes in stride, posting price gains of 165% over the same period:
I’m not saying higher interest rates were good news for Amazon at the time. The company was taking on $15 billion in additional debt at the time, funding its takeover of grocery chain Whole Foods Market. If Amazon had even had an interest in keeping rates low, now would have been the perfect time.
What I am saying, however, is that Amazon has created a powerful business model that will work well in virtually any economy, any market environment, and any interest rate trend. This stock tends to beat the broader market over the long term.
This is especially true these days, as the once meager results have gained superpowers through the cloud computing business of Amazon Web Services (AWS). Seventy-four percent of Amazon’s operating profits came from AWS in 2021, up from 59% in 2020. Even though online retail is hitting a brick wall (which it didn’t and probably won’t happen anytime soon), AWS will continue to generate massive cash profits.
As a high-growth investment, Amazon’s stock has been dragged down in recent months. The shares are trading around 40% lower year-to-date, and I take this as an invitation to invest in a terrific blue-chip stock. Either way, Amazon should deliver stunning stock returns for the next decade or five, just as it did during the subprime lending crisis, the bursting of the dotcom bubble, and the first year of the pandemic. of coronavirus.
This investment keeps rolling with the punches and comes back stronger on the other side of every challenge. It’s no different this time around, and it’s a smart move to buy Amazon stock when it’s cheap.
A necessary value product with growing profits and little concern for inflation
Billy Duberstein (T-Mobile): Don’t make a mistake. We may be able to avoid a recession, but that’s a long way off now. We’re probably going to have some sort of economic downturn to get inflation under control.
That means looking for defensive stocks that trade at reasonable valuations, and that’s why I’m going with my favorite telecom – T-Mobile. Why T-Mobile? First of all, T-Mobile has a long reputation for offering the best value in the mobile space.
For example, T-Mobile just unveiled its latest “Un-carrier” move on Thursday, unveiling deep travel discounts. T-Mobile offers free high-speed data in 210 countries, plus free in-flight connectivity and streaming on all major airlines. It also offers exclusive discounts with Priceline for hotel bookings, as well as $0.25 per gallon of gas at Shell (SHEL -4.71%) gas stations until Labor Day.
Yet unlike the 4G era, in which it had an admittedly inferior network, T-Mobile is now the leader in 5G coverage. While other cable companies also offer low-cost mobile plans when paired with expensive wired internet, these cable companies still use Verizon (VZ 0.39%) like their wholesale wireless network. Based on strong recent results, T-Mobile has no problem attracting customers, with strong net additions last quarter.
This year, T-Mobile is expected to complete most of its network integration with Sprint, which the company acquired in early 2020. Once completed, T-Mobile will have decommissioned 35,000 cell sites and its profits are expected to soar. sharply. Management expects between $7.1 billion and $7.6 billion in free cash flow this year, but that is expected to double or nearly double next year. In its 2021 analyst day, T-Mobile forecast free cash flow of $13 billion to $14 billion in 2023. This growth comes from its lead in 5G, its foray into rural areas, and mobility. business, where it has traditionally been underrepresented relative to its peers. T-Mobile’s $155 billion market capitalization means it only trades around 11 to 12 times its 2023 free cash flow estimate.
Meanwhile, T-Mobile is also looking at its 5G wireless broadband offering, which it hopes will compete with big cables. Given that 5G home broadband costs just $50 a month, well below that of cable companies, it could also find a receptive audience for value-seeking consumers. After all, wireless Internet and broadband are necessary utilities these days, and consumers will need them even in lean times.
Also, T-Mobile’s cost structure isn’t really affected by inflation. There may be some wage pressure, but most of its operating costs are for things like tower leases, which are usually at fixed rates under long-term contracts.
Overall, T-Mobile has a value offering, a necessary product, and relative immunity to inflation on the cost side. It’s a defensive title to own for this type of environment.
With gasoline soaring, demand for electric vehicles isn’t going away any time soon
Nicholas Rossolillo (Albemarle): The price of gasoline is one of the hottest segments of consumer spending that drives up inflation. Gasoline was up nearly 49% year-over-year in May 2022, according to the U.S. Bureau of Labor Statistics. Consumers across the country are grappling with gasoline that costs $5 a gallon or sometimes more to fill up. Not everyone can get their hands on an electric vehicle (EV), but I expect high gas prices to keep EV demand high.
Of course, gas isn’t the only inflated product category. New car sticker prices are also very high, up almost 13% year-on-year in May. Electric vehicles themselves and the expensive batteries needed to power them are undoubtedly contributing to this trend. For better or worse, however, lithium (a key compound in the manufacture of electric vehicle batteries and electronic device batteries in general) is in demand but in short supply. That’s why I accumulated shares of Albemarle.
Let me acknowledge that this is not a cheap stock. Although management recently updated its 2022 outlook on high lithium prices and new production coming online, the shares are trading at more than 13 times the expected 2022 adjusted EBITDA (earnings before interest). , taxes, depreciation and amortization). Also keep in mind that Albemarle isn’t the only company scrambling to bring new lithium production online to meet growing demand for EV batteries. Other companies are playing in this sandbox, and more supply could help ease the market price of lithium.
Another risk is that automakers and their battery technology partners are experimenting with materials other than lithium. It could also cause problems for Albemarle at some point. Additionally, Fed rate hikes make financing future production projects a bit more expensive. So I’ll say it again: Albemarle isn’t cheap, and it’s possible its development pipeline will run into issues down the line.
Still, I think the global shift to electric vehicles will take a decade or more, and during that time Albemarle will have the opportunity to grow with it. Rather than betting on which EV maker will win, I think Albemarle can be a winner as it helps supply the entire rapidly changing automotive industry.