Why Facebook And Alphabet Are Still The Perfect “No-Brainer” Stocks…
As my colleague Brad Briggs mentioned yesterday, we had a slew of earnings results from Big Tech last week.
And over at my premium service, Top Stock Advisor, we own two of the big ones: Facebook and Alphabet.
As Brad mentioned, I’m also a big fan of the “no-brainer” play. Said another way, our core mission is a lot like Buffett’s — to find wonderful businesses trading at fair prices.
Don’t get me wrong, we still take our fair share of shots on “big upside” plays over at Top Stock Advisor. But you need to have this part of your portfolio locked in first. And the best part about it? Stocks like this can still end up doing quite well for you over the long run.
That’s never been more true than in the case of Facebook and Google parent Alphabet, as I’ll show you in a moment. But first, let’s take a look at the results from each company to understand why these juggernauts still deserve a place in your portfolio…
Facebook’s Impressive Quarter
When we talk about the large tech companies on the market, we often end up talking about these large sales numbers so much that we can become numb to just how impressive they are. It’s not easy for a trillion-dollar company to really move the sales needle. Yet, Facebook continues to do so.
The company is on pace to generate more than $118 billion in sales this year, which would represent a 37% increase from the $86 billion it made in 2020.
For its second quarter, Facebook pulled in more than $29 billion in revenue with earnings per share of $3.61. Both topped analyst expectations.
Facebook’s $29 billion in quarterly revenue was a staggering 55.6% increase over the same period a year ago. It also pulled in more than $13.2 billion in cash flow, giving it a cash flow return on invested capital of 36.5%.
Despite yet another excellent quarter, shares of Facebook slid after the earnings release. Management warned that its sales growth rates for the third and fourth quarters will decelerate as they will be compared to unusually strong quarters in 2020.
I’m not terribly worried if sales growth slows to a lower double-digits figure over the next two quarters because I’m convinced the prospects of Facebook remain bright. In fact, I think FB is still a “buy” for new investors because shares aren’t wildly overvalued.
The stock trades for about 26 times earnings, which is below its historical five-year average of 35.7, and also below the S&P 500’s price-to-earnings (P/E) multiple of about 34. Its price-to-sales multiple, as well as its enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple, are both trading below historical averages.
If you are looking to start a position in Facebook or add to an existing one, now is a good time. Since adding Facebook to my portfolio in June 2016 shares have ripped off a nice 202% return.
Alphabet (Google) Keeps Chugging Along
The story is similar for Alphabet (Nasdaq: GOOGL). The company reported earnings on July 27 and posted sales of $61.9 billion and earnings per share of $27.26 per share. Both of these figures blew away analyst expectations, beating by 10.1% and 41.7%, respectively.
The $61.9 billion in sales was an increase of 62.2% over the same quarter a year ago. Cash flow jumped 56.4% to $21.9 billion for the quarter. That gives the company a cash flow return on invested capital of 33.3%.
It’s also crazy to think that the Google parent has more than $135 billion in cash lying around in its corporate coffers.
Alphabet is also trading for reasonable prices at these levels, with a P/E multiple of about 29.
It’s already done well for us over at Top Stock Advisor, up 136% since I recommended it in May 2019. For comparison, the S&P 500 is up 56% over the same period.
Like Facebook, I also consider Alphabet a “buy” at current prices. I’m not going to bore you with the details. You know Google. You know it is THE big player in search and online advertising. And that’s not going to change anytime soon. The point is, Alphabet is an outstanding business. It’s trading for reasonable valuations, and should be a strong performer over the coming years.
The point is, we’ve done very, very well with both Facebook and Alphabet. And I don’t expect that to change. In all honesty, all four of the Big Tech giants (Facebook, Apple, Alphabet, Amazon) should deserve serious consideration for nearly every person’s portfolio.
Unfortunately, in my experience, most individual investors tend to shy away from these names. Part of the reason seems to be that people feel like they’re too “obvious” or “easy”. I get it… When we bought these two stocks, I have to admit, part of me felt like we had already missed the boat. But as I constantly tell my Top Stock Advisor readers, our bread and butter is finding wonderful companies trading at fair prices.
That’s exactly what we got back then, and it’s worked out wonderfully for us. And the good news is that investors still have that chance today.
Editor’s Note: If you’re looking for more solid recommendations, our colleague Nathan Slaughter just released a new report about five “bulletproof” income stocks to buy right now.
These five securities have proven to be so strong, so reliable, and so generous… that they can be counted on, no matter what happens with the economy.
Each of them yields over 5% right now. And each one of them has provided us with fantastic long-term returns. And like the stocks mentioned today, we have little doubt that they’ll continue to do so for years to come.