Top five categories to watch when buying shares in 2022
The Sage of Omaha, Warren Buffett, is full of great sayings, but my favourite one is probably this: "You never know who's been swimming naked until the tide runs out."
What exactly did he mean by this? The answer is that the stockmarket's currents are always shifting.
Investors who don't adjust their course run the risk of being left all alone. Stranded. High and dry. In the nude - exposed.
So, what sorts of major tides might be coming our way this year? The waters, as we know, are already pretty choppy: I am writing at a time when nations are pledging billions in climate financing; when cybersecurity investment is hitting record levels; and when investment in mining is falling.
But I may be writing at a time of relative calm compared with the tides ahead in 2022. The prudent investor needs to prepare for higher interest rates, new COVID mutations and possibly even
a major energy crisis.
What stocks might help us to swim with these tides? To my mind, the safest shoals and most promising swells can probably be found in stocks from one of these five categories.
For the first time in over a decade, interest rates are to be on the rise. This is a big deal - and one that will likely favour the largest companies.
Also called blue chip or quality stocks, megacaps are large companies that tend to be leaders in their fields; companies with a large market share, plenty of pricing power, lots of capital and a strong balance sheet. They typically carry minimal debt compared with their earnings, while also enjoying mass distribution.
What this means is that megacaps are generally more able to offset inflationary pressures. There are no guarantees, of course. But when a huge tidal wave comes crashing into shore, a big brick building seems more likely to survive than a small or half-built shack.
Some of the megacaps that you might want to consider include Alphabet, the tech giant behind so many of the products we use daily, like Google, YouTube and Chrome. The company is increasingly turning its attention to AI, solar panels, driverless cars and health technology, all of which look like growth industries.
Apple, meanwhile, has been just a sneeze away from becoming a $US3 trillion company. And its revenue lines are expected to grow as it seeks to create a car and develop its own chip technology.
Tesla is also hot on the heels of becoming a $US3 trillion company as it expands into new regions, such as India.
The company's American sales are also expected to rise, as the US rolls out regulatory credits to buy electric cars.
It may also be worth keeping an eye on Nvidia Corp, one of the world's biggest producers of computer chips and graphics processing units. It is already a titan of the gaming industry, and a record demand for chips seems likely to push its revenues even higher.
On the local front, National Australia Bank is the 21st-largest bank on the planet, with more than $800 billion in assets worldwide, while Australia's fourth biggest bank, Westpac, is a pretty stable proposition, with more than 14 million customers worldwide.
2. Next-gen medicine
COVID isn't going to go away any time soon. Or, indeed, maybe ever.
While there's reason to hope that its deadliest days are behind us, COVID will keep mutating. So, companies that come up with good, new medicines for whatever comes next will also be companies that work well for investors.
That said, next-gen medicine stocks have been outperforming the market for almost a couple of decades. Biotech has become extremely big business as it's evolved from elemental cell and gene therapy to new mRNA technology to whatever the next era may bring.
So, which next-gen companies should form your next investment? Past success is no guarantee of future success, so I would encourage investors to research as many emerging players as they possibly can, in the hunt for potential winners.
They include CSL, the world's largest blood plasma therapy business and the second biggest flu vaccine provider. It's also buying a new business that treats patients with iron deficiency. And note that, as restrictions continue to ease in the US, CSL's earnings will likely increase, because they have been impacted by lockdowns.
Pfizer is also worth a look. Now a household name, because of its Covid vaccine, it is also a leading provider of medical products designed to combat cancer, inflammation and heart disease.
Another biotech behemoth now best known for its vaccine, Moderna Therapeutics, is pioneering a new class of drugs in immunology, cardiovascular and autoimmune disease. We have no idea if they will be any good. But if they are, then you'd think its stock price will soar.
It may have seemed that COVID brought the world to a halt, but in many ways it did quite the opposite.
While schools closed, shops shut their doors and we all moved to working from home, global demand for e-commerce went through the roof. Lockdown was boom time for businesses with ships, warehouses, planes, cars, and trucks - or some more logistical role in global supply chains.
As best we can judge these things, the logistics industry has grown its earnings by 15% over the past year. And as the world moves back and forth between green and red lockdowns, it's hard to imagine a scenario in which it some form of ecommerce isn't here to stay.
Even if COVID ended tomorrow, efficiencies have a way of becoming entrenched. People who never used to shop online have now got into the comfortable habit of spending up big from their home. It's a fundamental behavioural shift that should bode well for logistics companies, industrial property groups and tech companies in this space.
As to specific companies, it may pay to keep an eye on WiseTech, a home-grown company that went global. It develops and sells cloud-based software for logistics businesses like FedEx, as well as working with warehousing companies. At the time of writing, WiseTech more or less operates as a monopoly, and also enjoys low costs and high ongoing revenue, 76% of which is recurring.
Another home-grown business is Brambles. It's a major global supplier of loading equipment, pallets and shipping containers - all products with an essential role to play in the age of ecommerce.
And with 84% of Brambles' products currently being used by the staples sector (food, beverages, for instance), there's no reason to think that they'll be hit by a drop in demand.
4. Mining and energy
The mining sector has seen corporate expenditure/investment drop considerably in recent years, despite what you may have read in the papers. So many industries have seen a supply and demand imbalance (lack of supply) and strong demand, which supports the prices of commodities (like copper, gold, lithium, gas and uranium).
Oil companies are also likely to do well this year, due to colder weather in China and Europe, while we are currently seeing iron ore experience a pick-up in demand, due to the urbanisation of India.
Meanwhile, Chinese demand is picking up too, thanks to government support (with China's government cutting interest rates) to help the property sector.
As to specific stocks, it's always wise to watch BHP. Currently the largest company on the ASX by market cap, "the big Australian" may be about to get even bigger, now that the board has decided to get rid of its dual-listing structure.
Meanwhile, the world's fourth-biggest iron ore company, Fortescue Metals, has been making an eye-catching shift toward hydrogen. Currently scouring the globe for investment opportunities in hydrogen and renewable power, it's aiming to become a clean energy powerhouse in only 10 years.
Ampol is also an option. One of Australia's biggest sellers of petrol, its stock seems cheap compared with its earnings, while it pays a dividend yield of 3.7%.
Every day, in every way, the world seems to depend more on the web. But as this dependence on internet and cloud technology skyrockets, the demand for cybersecurity products isn't too far behind.
Worldwide spending on such products is predicted to increase to almost $US250 billion by 2023.
These companies also offer defensive and growth characteristics, as they benefit from regular earnings.
As for specific companies that investors might want to consider, CrowdStrike is one of the world's leading providers of cyber security. And it also seems like a reliable earner, at least in the short term, given that 92% of its revenue currently comes from subscriptions. It was recently chosen as one of the platforms to support the United States "executive order", which manages the federal government's operations.
Cisco Systems is a historically popular investment, while on the local front you may want to consider Tesserent. It's Australia's largest cybersecurity provider, with 40% of its revenue coming from the federal government. Its shares are certainly cheap compared with equivalent companies in the US and elsewhere, but be aware that it only generates $12.5 million in free cash flow and at the time of writing does not make a profit.
Want to check out our top 50 stocks for 2022? Pick up the February issue of Money or order yours online.
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