Margaret Samuel, president of Toronto-based Enriched Investing, names four technology stocks whose share prices have settled into more comfortable levels.
As Russia’s invasion of Ukraine has increased fear around the world, volatility in global equity markets has spiked. No one, probably not even Russian President Vladimir Putin, can predict with certainty the path that this geopolitical event will take.
Nonetheless, this downdraft creates buying opportunities. For example, a number of stocks in the technology, communications and industrial areas that have had lofty valuations and have been avoided by long-term value investors are settling into more comfortable levels. It may be wise from a long-term perspective to start to nibble at these equity investments, even though we likely will not know at the time when the bottom of the market has been reached.
We look at Honeywell International Inc., Hewlett Packard Enterprise Company, Meta Platforms Inc. and NVIDIA Corp.
Honeywell International Inc. (NASDAQ—HON)
Honeywell International Inc., which generates $34.4 billion in annual revenue and delivered $6.0 billion in operating cash flow in 2021, is a technology and manufacturing stock. Aerospace, the first of the company’s four segments, supplies products, software and services for aircraft and vehicles that it sells to original equipment manufacturers (OEMs) and other customers. In its 2021 fourth-quarter report, Honeywell reported revenue of $2.9 billion and continued improvement in commercial flight hours, that its defence budget is stable, and that its original equipment demand is strong.
The second segment, Performance Materials and Technologies, earned $2.6 billion revenue in the fourth quarter of 2021. It develops and manufactures performance chemicals and materials, process technologies and automation solutions. In this segment, sustainable technology solutions are supported by increased demand for sustainability and efficiency.
The third segment, Safety and Productivity Solutions, provides products and software to customers that manage productivity, workplace safety and asset performance. It generated $1.75 billion revenue in the fourth quarter of fiscal 2021. With excessive 50 per cent growth in 2021, this segment is expected to return to profitability while there is lower demand for masks related to COVID.
The fourth segment, Honeywell Building Technologies, generated $1.4 billion fourth quarter revenue and provides products, software, solutions and technologies that helps building owners and occupants to ensure their facilities are safe, energy efficient, sustainable and productive. The demand for this segment’s solutions is increasing with the return to public spaces and increased spending for infrastructure. Trading at a PEG ratio of 1.85, Honeywell has a healthy Return on Equity of more than 30 per cent. Paying a dividend of 2.08 per cent, it is likely to continue paying one as indicated by its conservative payout ratio of less than 48 per cent. Indeed, over the last 11 years Honeywell increased its dividend 12 times.
The chairman and CEO of Honeywell, Darius Adamczyk, noted on February 3, 2022, that the company is addressing inflationary pressures before they reduce margins by implementing “swift pricing actions”, and that together with disciplined cost management, its year-over-year earnings per share increased by 14 per cent. Mr. Adamczyk also asserts that with the company’s focus on growth, the creation of the world’s most advanced quantum computing company, Quantinuum, a strong backlog, and operational steps to mitigate inflation and supply chain challenges, he is confident Honeywell is “well positioned to continue to perform” for its employees, customers and share-owners “in the short and long term”. Investors may wish to consider any price volatility that may cause this company’s stock price to decline in the prevailing geopolitical uncertainty as buying opportunities for the long term.
Hewlett Packard Enterprise Company (NYSE—HPE)
Hewlett Packard Enterprise Company, which generates $27 billion revenue, and in fiscal 2021, $1.6 billion of free cash flow, is an edge-to-cloud platform-as-a-service company. The company’s segments include Compute (which generated $3.2 billion in the fourth quarter of fiscal 2021), High Performance Computing, Mission-Critical Solutions ($1 billion), Storage ($1.3 billion), Intelligent Edge ($.8 billion), Financial Services ($.89 billion), and Corporate Investments and Other ($.35 billion). The Compute segment and the HPC MCS segment provide servers. The Storage segment distributes workload-optimized storage product and service offerings. The Intelligent Edge segment creates wired and wireless local area network (LAN), switching, and networking. The FS segment provides flexible investment solutions, such as utility, financing, and leasing programs. The Corporate Investments and Other segments include the Communications and Media Solutions business (CMS) that offers software and related services.
With a PEG ratio of 2.37, Hewlett Packard is not unreasonably expensive compared to its growth rate, and generates a return on equity of about 19 per cent. An attractive dividend of 3.0 per cent is likely sustainable with a conservative payout ratio of less than 19 per cent.
The president and CEO of Hewlett Packard Enterprise Company, Antonio Neri, stated on November 30, 2021, that the company is “at the center of several compelling mega-trends, the explosion of data at the edge, the mandate for a cloud experience everywhere, and the need to extract value from data to generate insights” and that the company’s “differentiated edge-to-cloud strategy uniquely” positions Hewlett Packard Enterprise Co. “to capitalize on these trends and capture growing profitable markets”. As such, purchase of this stock at fire-sale prices driven by the prospect of intensified war initiated by President Putin may present an opportunity for investors to participate in profit built on visionary preparation for future technological developments.
Meta Platforms Inc. (NASDAQ—FB)
Meta Platforms Inc., formerly Facebook, Inc., is focused on building products that enable people to connect and share through mobile devices, personal computers, virtual reality headsets, and in-home devices. Its segments include Family of Apps (2021 $116 billion), comprising WhatsApp, Messenger, Instagram, Facebook and other services. In addition, the Facebook Reality Labs segment (2021 $2 billion) offers virtual and augmented reality-related consumer content, software and hardware. WhatsApp is a messaging application that is used by people around the world to communicate and transact. Messenger is a messaging application for people to connect with friends, family, groups, and businesses across platforms and devices. Instagram helps people to express themselves through photos, videos, and private messaging, and connect with and shop at businesses and creators. Facebook enables people to connect, share and communicate with each other on mobile devices and personal computers. Meta Platforms is currently trading at a value stock PEG ratio of 1.14. With a profit margin of 33.38 per cent and a Return on Equity of 31.10 per cent, while having fallen in price by about 20 per cent in the last year, there may be some significant upside in the stock, which would compensate for its lack of a dividend.
On February 2, 2022, Meta founder and CEO Mark Zuckerberg listed the company’s seven investment priorities for 2022: reels, community messaging, commerce, ads, privacy, AI and, of course, the metaverse. Zuckerberg asserted that: “We had a solid quarter as people turned to our products to stay connected and businesses continued to use our services to grow.” He also emphasized that he was “encouraged by the progress we made this past year in a number of important growth areas like Reels, commerce, and virtual reality, and we will continue investing in these and other key priorities in 2022 as we work towards building the metaverse. While these initiatives will require short-term investment, Zuckerberg stated he is “confident that leaning harder into these trends is the right short-term trade off to make in order to get long-term gains”.
While short-term investments may exacerbate volatility caused primarily by geopolitical pressures, investing in this company while the stock price has corrected may be a way to benefit from plans and preparations to build a foundation upon which to launch platforms based on these future trends.
NVIDIA Corp. (NASDAQ—NVDA)
Generating 12-month revenue of almost $27 billion, Nvidia Corporation is an artificial intelligence computing company. Its growth is driven by six major market forces: gaming, artificial intelligence, data center, artificial intelligence on 5G, autonomous systems, and omniverse. Omniverse allows creators to connect 3D design applications to supercharge their work with AI and physics.
Nvidia operates four core businesses. First is Gaming, which generated 46 per cent ($12.5 billion) of revenue in fiscal 2022, with a strong market position and technology leadership. Second is Data Center, which generated 40 per cent ($10.6 billion) of fiscal 2022 revenue and leads in deep learning or artificial intelligence used by all major cloud computing providers and is a supercomputing leader. Third is Professional Visualization, generating 8 per cent ($2.1 billion) of fiscal 2022 revenue with more than 90 per cent market share of graphics for workstations and positioned in diversified end markets including media, entertainment, architecture, engineering, construction and the public sector. Nvidia’s fourth core business is Automotive, which generated 2 per cent ($0.57 billion) of fiscal 2022 revenue. While historical revenue for this business was driven largely by infotainment, future growth is expected to be based on Autonomous Vehicles, where NVIDIA has a strong partnership ecosystem that includes Jaguar, Range Rover, Volvo and Mercedes-Benz. In fact, on February 16, 2022, NVIDIA’s President and CEO, Jensen Huang, stated that NVIDIA’s shared-software revenue opportunity with both Mercedes-Benz and Jaguar Land Rover “will scale with the size of their NVIDIA-powered fleet, which, combined, can exceed 10 million cars over a decade.”
Trading at a PEG ratio of 3.19, and a forward PE ratio of 43.29 times, NVIDIA is hardly a value stock, but with a little more market volatility may get closer to being one. It has a profit margin of 36.23 per cent and a return on equity of 44.83 per cent.
While fear consumes the market and drives stock prices down, astute investors with long-term horizons may consider investing in the stocks highlighted in this article while their prices are depressed.
Margaret Samuel, MBA, LL.B., CFA is President, CEO and Portfolio Manager of Enriched Investing Incorporated. She can be contacted at email@example.com. She or clients of Enriched Investing™ may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain forward-looking statements that may not prove to be accurate. Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the April 2022/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •5/18/22 •