Image: McDonald’s has released a new beverage concept, and it looks to be a hit. Image Source: CosMcs.
By Brian Nelson, CFA
The market continues to ebb and flow with the latest Federal Reserve commentary, but we continue to be fans of the strong foundation that is the U.S. employment market and the great promise of artificial intelligence [AI] as key themes for 2024. As we outlined in our recent guest post on Seeking Alpha, we continue to be huge fans of the net-cash-rich, free cash flow generating, secular growth powerhouses found in big cap tech and the stylistic area of large cap growth (SCHG). We expect these two areas to continue to lead the markets higher, if not in 2024, through the better part of this decade. Let’s take a look at some of the latest news at Alphabet, McDonald’s, Costco, and Apple.
Alphabet (GOOG)
Among our favorite ideas and the top weighting in the simulated Best Ideas Newsletter portfolio is Alphabet. The company ended its most recently-reported third quarter of 2023 with total cash, cash equivalents and marketable securities of ~$119.9 billion versus long-term debt of just ~$13.8 billion, good enough for a huge net cash position. Alphabet probably has the best balance sheet out there given how much financial flexibility it has to defend its economic moat in search and other areas. The company’s free cash flow during the first nine months of 2023 came in at a whopping ~$61.6 billion, up from $44 billion during the same period a year ago. For the three months ended September 30, 2023, revenue growth at Alphabet was ~11%, and we expect advertising spending growth to remain strong in 2024. Shares are currently trading just shy of $140 at the time of this writing, and the high end of our fair value estimate stands at $160. We expect continued strength from Alphabet, and from our perspective, it has all of the makings of turning into one of the top performers of 2024.
McDonald’s (MCD)
McDonald’s is one of the core holdings in the simulated Best Ideas Newsletter portfolio, and we like how the company is positioned in the current market environment. Its classic value-offerings continue to resonate with consumers, and we think it has found another winning concept in CosMcs. The new, small-format, beverage-led concept is drive-thru only and opened its first location in Bolingbrook, Illinois, and according to reports, “people lined up for hours to try the new McDonald’s restaurant. The company’s menu is filled with drinks such as a Sour Cherry Energy Burst and Berry Hibiscus Sour-ade, as well as various iced teas, lemonades, slushies and frappes. CosMcs has numerous coffee-based selections and a few classic McDonald’s items, too, including a suite of McMuffins. We’re liking McDonald’s innovation in this area and think the concept has promise to be competitive in the long run against the likes of Dunkin’ and Starbucks (SBUX). Ten locations are planned initially, with two expected in the Dallas-Fort Worth and San Antonio metro areas.
Costco (COST)
Costco’s shares have blasted off this year, up nearly 50% so far in 2023, and the company’s recent quarterly report didn’t disappoint. The warehouse that attracts bulk-buyers looking for great deals in quantity put up 6.1% revenue growth, while beating the consensus expectation on the bottom line during its first-quarter fiscal 2024 results, released December 14. Adjusted comparable sales in the quarter advanced 3.9% firmwide, and the company experienced 6.1% expansion across its e-commerce operations. The executive team also pleased dividend investors by announcing a special dividend of $15 per share that will be payable January 12, 2024, to shareholders of record at close on December 28. We like Costco’s business quite a bit, but its share price’s meteoric rise the past several weeks has driven it to the very high end of our fair value estimate range of $674 per share. Long-term investors may still be rewarded by Costco, but some caution is probably in order at current levels.
Apple (AAPL)
Newsletter portfolio holding Apple has been a star performer so far in 2023, with shares up more than 55% on a price-only basis so far in 2023. We think the momentum behind iPhone sales remains robust, and we continue to look toward positive commentary regarding its Vision Pro and initiatives in artificial intelligence, of which it hasn’t said much. Apple has hit a snag with its latest Apple Watch line-up, as it contests a patent dispute with Masimo (MASI) regarding the watches’ blood oxygen features. Apple has decided to halt sales of the Apple Watch Series 9 and Apple Watch Ultra 2 on December 21, as it complies with an International Trade Commission ruling, but while the timing is unfortunate given the holiday selling season, we expect Apple to rectify the issue in short order. We also think that, while its latest suite of watches has been impressive, the big game-changer in wearables will come in the next iteration with the Apple Watch X, which is expected to add features to measure blood pressure and detect sleep apnea. Apple’s shares are nearing the $200 mark at the time of this writing, and the high end of our fair value estimate stands at $212 at the time of this writing.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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