In the investment game, the rules may no longer apply. Billionaire hedge fund manager Ray Dalio warns that the Federal Reserve has primed the market for a significant short-term decline.
Noting that inflation is too high and that the Federal Reserve is moving aggressively against it, Dalio predicts a general recession, if not a recession, and likely sooner rather than later.
“It looks like interest rates will have to rise a lot (towards the higher end of the 4.5% to 6% range). This will reduce private sector credit growth, which will reduce private sector spending and therefore the economy with it,” Dalio commented.
Even if rates only rise to the low end of Dalio’s projected range of 4.5%, that would still, in his view, lead to a 20% drop in stocks.
So what should investors do? One solid option comes to mind for investors: getting into blue chip stocks. These companies stand on solid foundations, have a reputation for generating cash and profits, and have earned “household status” by leading their industries. They don’t always outperform the market, but they have the resources – in financial and other sectors – to hold their own in any economy.
And those traits caught the eye of Dalio, who may be brooding but also doubles down on blue chips.
With that in mind, we used the TipRanks database to take a closer look at two of Dalio’s picks. Importantly, all of these blue chip stocks received enough support from Wall Street analysts to earn a strong buy consensus. Even better, both have outperformed the market by a wide margin this year.
CVS Health Corporation (CVS)
The first stock we’ll look at certainly meets the definition of a blue chip. CVS is known for its chain of drugstores, which have become a staple in the US retail industry, focusing on consumer healthcare, hygiene products, grocery staples, and pharmacy services. The company generated total revenue of $292 billion last year, and its 1H22 results show it’s on track to surpass that total this year.
The company’s 1H22 revenue reached $157.4 billion, up 11% year-over-year. The top line for the second quarter alone exceeded $80 billion. It also increased by 11% year-on-year. On the earnings side, CVS reported adjusted EPS of $2.40. This was down slightly (less than 1%) from the previous year’s result of $2.42.
CVS has a solid cash position, with $9 billion in cash from operations in the second quarter. The company paid down $1.5 billion in long-term debt and reported having $12.4 billion in cash and liquid assets available at the end of the second quarter.
Those healthy results supported CVS’s common stock dividend of 55 cents per share. This was last paid on August 1st. The annual rate of $2.20 yields 2.1%, in line with the average among S&P-listed companies. During the second quarter, CVS returned $74 million to shareholders through the dividend.
In a move that shows CVS’s confidence, the company earlier this month signed a deal to acquire Signify Health for $8 billion. Signify has a network of 10,000 clinicians in all 50 states and can bring it to CVS’ network of stores and Minute Clinics.
To that end, while overall markets have fallen this year, CVS shares are slightly in the green.
So it’s no wonder that this blue chip would catch the eye of Ray Dalio. Dalio’s Bridgewater fund bought 1.935 million CVS shares during the second quarter, increasing its stake in the company by 160%. Bridgewater first bought into CVS in 2017, and its current holding of 3,146,236 shares is valued at more than $321 million.
Turning now to analysts, CVS stock boasts a strong fan base, which includes JPMorgan’s Lisa Gill.
The analyst is impressed by the company’s recent acquisition of Signify, noting, “In our view this brings CVS closer to their goal of managing more lives through value-based care (VBC) relationships. With 2.5 million unique home patient visits and essentially we believe SGFY offers additional opportunities for CVS to manage the patient for optimal outcomes. With a network of virtual and in-person options, CVS has the opportunity to truly bend the cost curve in a value-based care environment, creating a win/win/win environment for the patient/payer/CVS.”
“We remain bullish on CVS shares as we believe they are uniquely positioned as we continue to shift toward VBC with cost/quality/convenience as pillars in a VBC/Consumer environment,” Gill summarized.
Gill’s outlook is bright for this company and he backs it with an Overweight (i.e. Buy) rating and a $130 price target which suggests ~30% one-year upside potential for the stock. (To follow Gill’s history, Click here)
Dalio and Gill aren’t alone among the bulls on this, as 9 of 11 recent analyst reviews for CVS give the drugstore chain a Buy rating, beating the consensus 2 Holds for a Strong Buy. (See CVS stock forecast on TipRanks)
T-Mobile USA (TMUS)
The second blue chip stock we’ll look at is T-Mobile, a name you’ll definitely recognize. The company is a major player in the US wireless service sector and has a strong position in the expanding 5G coverage network. T-Mobile currently has more than 109 million subscribers, with approximately 88 million of them being contract customers. Customer retention numbers and customer gain numbers in the recent 2Q12 report were flat. the company added 1.7 million postpaid customers in the quarter, its highest quarterly total ever, and beating the numbers posted by rivals AT&T and Verizon.
T-Mobile posted a 2Q20 net loss of $22.108 million, or 9 cents per share – but those losses didn’t slow the company down. The quarterly financial release showed that the net loss was due to one-time charges related to the 2020 merger with Sprint. these charges are now far behind the company, which can focus solely on progress. T-Mobile began this run by beating its main competitors for customer acquisition in Q2, posting the lowest quarterly customer churn rate of the three largest US wireless carriers.
The company’s consistent customer performance translated into consistent, high revenue. The $19.7 billion top line was in line with last year’s number, and revenue over the past two years has ranged between $19.7 billion and $20.7 billion. T-Mobile’s net cash from operations rose 11% year-over-year to $4.2 billion, and free cash flow rose 5% year-over-year to $1.8 billion. Looking ahead, the company raised its guidance on free cash flow, net postpaid customer additions and earnings.
Investors liked the increased guidance and took the one-time net loss and pushed TMUS shares into a strong position this year. The stock outperformed the overall markets by a wide margin and is up 21% year-to-date.
So there’s plenty here to catch Ray Dalio’s eye. The billionaire’s fund acquired an additional 167,283 shares of TMUS in the second quarter to add to its existing holding, expanding it by 54%. Bridgewater first opened its position in T-Mobile in 4Q21 and the fund now owns 481,462 shares of the company’s stock, valued at $67.38 million.
Cowen analyst Gregory Williams, who covers this stock, is bullish, writing, “We see the print and bullish 2022 guidance as validation of our thesis that T-Mobile is best positioned among the Wireless group not only from a micro perspective (better network, best value, greenfield development neighborhoods), but also a macro and equity perspective (builds on Sprint synergies for FCF/equity upgrades, providing earnings visibility). Despite the “overcrowded” momentum continues for further beats/raises, in true T-Mobile form. Therefore, we continue to view T-Mobile as the best position in this challenging environment as fundamentals continue to hum…”
Williams didn’t just write an optimistic outlook. he backed it with an Outperform (i.e. Buy) rating and a $187 price target that indicated his confidence in a 33% upside for the next year. (To follow Williams’ history, Click here)
Sometimes, a stock’s position is undeniably strong – and it gets unanimous buys from the street. In this case, the consensus consensus of Strong Buy is based on 15 positive analyst reviews. TMUS has an average price target of $175.86, suggesting a 26% gain from the current trading price of $139.64. (See TMUS stock prediction on TipRanks)
To find good ideas for trading stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.
Denial of responsibility: The views expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.