The U.S. stock market hasn’t followed the script in 2021. The S&P 500 index returned 26% through Dec. 16, well ahead of the roughly 10% gain projected, on average, by strategists at the start of the year.
Many expected value stocks to finally best their growth counterparts after a decade of underperformance. But after a strong start this year, value is ending in a familiar place, about five percentage points behind growth, based on the large-cap Russell 1000 index.
Every December, we identify 10 promising stocks for the new year. Our picks for 2022 have a value tilt and reflect input from Barron’s writers, in particular Eric J. Savitz, Al Root, and Nicholas Jasinski.
The selections: Royal Dutch Shell (ticker: RDS.B), IBM (IBM), Johnson & Johnson (JNJ), Hertz Global Holdings (HTZ), Amazon.com (AMZN), Visa (V), Berkshire Hathaway (BRK.A and BRK.B), Nordstrom (JWN), AT&T (T), and General Motors (GM). Nine are new; Berkshire is the only holdover.
Our 2021 picks narrowly trailed the S&P 500, returning 26.9% on average, less than a percentage point behind the benchmark average. We nabbed some big gainers in Alphabet (GOOGL), Goldman Sachs Group (GS), Eaton (ETN), and Apple (AAPL), but flopped with Merck (MRK), gold miner Newmont (NEM), and Madison Square Garden Entertainment (MSGE).
The backdrop for stocks could be tougher in 2022 after three consecutive years of big gains—the S&P 500 returned 31.5% in 2019 and 18.4% in 2020. The Federal Reserve is widely expected to raise interest rates in 2022. That could help value stocks finally win out over their growth counterparts.
Here are Barron’s 10 stock picks for 2022, in alphabetical order:
Amazon.com
Amazon.com ’s dominance in two major businesses makes it a rarity. It has a 40% share of the U.S. e-commerce market and about half of the lucrative cloud-computing sector, through Amazon Web Services. An estimated 85 million U.S. households are Prime members.
The stock, recently at $3,377, has trailed the market in the past year. It still isn’t cheap, trading for 66 times projected 2022 earnings, but none of its megacap internet peers has better prospects. Amazon’s fastest-growing businesses, like AWS and advertising, have high margins.
Evercore analyst Mark Mahaney sees 20%-plus annual revenue gains and expanding margins over the next two to three years. He has an Outperform rating on Amazon, with a price target of $4,300.
Barron's Stock Picks for 2022
We have identified these 10 as among the best candidates to outperform the market next year.
| Company / Ticker | Recent Price | YTD Change | 2021E EPS | 2022E EPS | 2022E P/E | Dividend Yield | Market Value (bil) |
|---|---|---|---|---|---|---|---|
| Amazon.com / AMZN | $3,377.42 | 4% | $41.11 | $51.37 | 65.7 | None | $1,713 |
| AT&T / T | 23.71 | -18 | 3.38 | 3.17 | 7.5 | 8.8% | 169 |
| Berkshire Hathaway / BRK.A | 454,550.00 | 31 | 17,466.30 | 18,928.50 | 24.0 | None | 673 |
| General Motors / GM | 58.39 | 40 | 6.73 | 6.93 | 8.4 | None | 85 |
| Hertz Global Holdings / HTZ | 21.01 | -22* | 4.02 | 2.55 | 8.2 | None | 10 |
| IBM / IBM | 125.93 | 5 | 10.05 | 11.04 | 11.4 | 5.2 | 113 |
| Johnson & Johnson / JNJ | 173.01 | 10 | 9.83 | 10.38 | 16.7 | 2.5 | 455 |
| Nordstrom / JWN** | 20.05 | -36 | 1.27 | 1.99 | 10.1 | None | 3 |
| Royal Dutch Shell / RDS.B | 42.82 | 27 | 4.86 | 6.19 | 6.9 | 3.9 | 166 |
| Visa / V*** | 214.37 | -2 | 5.91A | 7.04 | 30.5 | 0.7 | 467 |
*Since July 1. **Estimates for Jan. 2022 and Jan. 2023 fiscal year ends. ***Sept. fiscal year end. E=estimate. A=actual.
Source: FactSet
Mahaney calls Amazon the “TAMiest” of the megacap internet companies because of the huge opportunities in retail and cloud computing, while offering “the best mix shift in tech.” TAM refers to “total addressable market.”
With more than $60 billion in annual sales, Amazon Web Services could be worth $1 trillion alone. That means investors are paying about $700 billion for the rest, which includes the leading online retail business, offline shopping (including Whole Foods Market), advertising, media (Amazon Prime Video, Audible), and logistics, including warehouses, trucks, and planes.
Two potential pluses for 2022 would be a spinoff of AWS or a long-awaited stock split.
AT&T
There is a price for everything, including AT&T, which recently hit a 13-year low. The stock, now around $23, is off 18% in 2021 and amounts to a cheap play on the depressed telecom and media sectors.
The shares have been hit lately by renewed concerns about competitive conditions in the wireless market. The bull case is that AT&T will become a simpler company with less debt after it combines its WarnerMedia business with Discovery (DISCA) in a deal due to close in mid-2022. A more focused management could deliver strong results after years of distraction from overpriced acquisitions.
And the wireless business could get more rational, considering that there are only three leading players: AT&T, Verizon Communications (VZ), and T-Mobile US (TMUS).
AT&T now yields 9%; that should fall to about 6% after a planned dividend reduction following the WarnerMedia deal. Here’s the math: AT&T plans to pay out about 40% of $20 billion in projected 2023 free cash flow. That equates to a roughly $1.10 annual payout. That should translate into a 6% yield after reflecting the current value of Discovery stock that will be received by AT&T.
The company may spin off Discovery to holders or exchange the Discovery stock for AT&T shares with holders in a split-off. Whatever the mechanism, AT&T should have one of the highest yields in the S&P 500.
Berkshire Hathaway
When Berkshire Hathaway CEO Warren Buffett made his initial equity gift to the Bill & Melinda Gates Foundation in 2006, he wrote that Berkshire’s stock is an “ideal asset to underpin the long-term well-being of a foundation.”
“The company has a multitude of diversified and powerful streams of earnings, Gibraltar-like financial strength, and a deeply imbedded culture of acting in the best interests of shareholders.”
That’s still the case 15 years later.
The Class A stock, at about $454,550, is up 31% this year. Buffett refuses to pay a dividend, but Berkshire has ramped up its stock buybacks and should repurchase more than 4% of its shares this year. It trades for 1.35 times our estimate of year-end book value, a cheap level, given that its businesses are probably worth much more than their carrying values.
Berkshire’s stake in Apple (AAPL) alone is worth $160 billion, following the iPhone maker’s recent run-up.
General Motors
Tesla (TSLA) may not be the only winner as the auto industry transitions to electric vehicles. General Motors is as well positioned as any of its peers and is valued at less than a tenth of Tesla, at $85 billion. GM, at about $58, trades for eight times projected 2022 earnings.
Led by CEO Mary Barra, GM has lofty plans to roughly double its annual revenue to about $300 billion by 2030. That includes $90 billion in sales of electric vehicles, up from a projected $10 billion in 2023. GM is expected to soon unveil its all-electric Silverado.
How Did We Do This Year?
Pretty well, all things considering. Our 10 picks for 2021 narrowly trailed the S&P 500, returning 26.9% on average.
| Company / Ticker | Price 12/18/20 | Price 12/16/21 | Total Return |
|---|---|---|---|
| Alphabet / GOOGL | $1,726.22 | $2,888.90 | 67.4 |
| Apple / AAPL | 126.66 | 172.26 | 36.8 |
| Berkshire Hathaway / BRK.A | 337,900.00 | 454,550.00 | 34.5 |
| Coca-Cola / KO | 53.74 | 58.65 | 12.6 |
| Eaton / ETN | 116.08 | 168.80 | 48.3 |
| Goldman Sachs Group / GS | 242.13 | 397.37 | 67 |
| Graham Holdings / GHC | 482.69 | 571.77 | 19.6 |
| Merck / MRK* | 75.83 | 75.91 | 3.7 |
| Madison Square Garden Entertainment / MSGE | 80.75 | 62.86 | -22.2 |
| Newmont / NEM | 60.50 | 59 | 1.2 |
| AVERAGE | 26.9% | ||
| S&P 500 | 27.6% |
*Total return includes value of Organon spinoff.
Source: Bloomberg
Investors are skeptical that GM can manage a tricky EV transition and achieve anything close to its ambitious goals, but the stock already discounts a lot of doubt.
“GM has built a scalable platform and is a leader in both autonomous vehicles and batteries,” says investor Ross Margolies of Stelliam Capital Management.
General Motors’ controlling stake in Cruise, a top player in autonomous driving that plans to roll out robo-taxis in the coming years, is worth about $17 billion based on the latest minority investment. GM talks about generating $50 billion of revenue from Cruise by 2030.
A GM bull, Morgan Stanley’s Adam Jonas has a $75 price target on the stock, and conservatively ascribes no value to its legacy car business.
GM enthusiast Ryan Brinkman at J.P. Morgan looks at it differently, saying that investors effectively are getting Cruise and other newer businesses for free, based on the high profitability of its sales of pickups and sport utility vehicles powered by internal combustion engines.
Hertz Global Holdings
Rental cars are the best business in travel now, as auto shortages have led to strong pricing and high used-car prices.
Hertz Global Holdings and rivals Avis Budget Group (CAR) and privately held Enterprise—which control a combined 95% of the U.S. market—are cleaning up after years of mediocre returns.
Jeffries analyst Hamzah Mazari has said, “What once was a dysfunctional oligopoly with no pricing power is a functional oligopoly with pricing power.” Anyone who has rented a car since the spring can probably attest to that.
Hertz, which emerged from bankruptcy in June, is in great shape for 2022. It will have a clean balance sheet with minimal net debt (excluding asset-backed securities) after the payoff of high-rate preferred stock, and is taking profitable initiatives like the purchase of 100,000 Teslas by the end of 2022 and a deal to sell used cars through Carvana (CVNA).
Hertz shares, at about $21, are inexpensive, trading for less than nine times projected 2022 earnings. J.P. Morgan analyst Brinkman has an Overweight rating and a $30 price target, citing “strong industry tailwinds and a multitude of company-specific drivers.”
IBM
IBM could be one of the big turnaround stories of 2022. Barron’s highlighted the company’s improving outlook in a recent cover story, calling it “ Microsoft Jr.”
Under CEO Arvind Krishna, IBM has spun off a pedestrian business of managing data centers into Kyndryl Holdings (KD), refocused on the cloud and artificial intelligence, and vowed to start growing again for the first time in about a decade.
Wall Street is skeptical about IBM’s prospects, but one bull, BofA Global Research’s Wamsi Mohan, has compared Krishna to Satya Nadella, the Microsoft CEO who transformed the company over the past seven years.
IBM, whose shares trade around $126, is valued at 11 times projected 2022 earnings. And it has the highest dividend yield in the Dow Jones Industrial Average, at 5.3%.
If Krishna is successful in boosting sales and margins while making IBM relevant again, there could be a lot of upside in a largely forgotten stock.
Johnson & Johnson
Johnson & Johnson is shaking off its stodgy image as it moves to develop a broad and underappreciated drug portfolio and spin off its consumer business.
The stock, now priced around $173, trades for a reasonable 17 times projected 2022 earnings of $10.38 a share and has a secure 2.5% dividend yield.
The world’s largest healthcare company recently spent a day highlighting opportunities among its existing drugs and its pipeline. These include Darzalex for multiple myeloma, Tremfya for psoriasis, and Rybrevant for lung cancer.
Johnson & Johnson aims to expand its pharmaceutical sales by 5% annually, to $60 billion, by 2025 and have 13 drugs with annual sales of $1 billion or more.
Some analysts came away impressed. Citi Research’s Joanne Wuensch lauded the “breadth and depth” of the drug portfolio. She has a Buy rating and $192 price target. J&J is also a big producer of medical devices.
The spinoff of the consumer products business, which includes Tylenol, Listerine, and Band-Aids, may not add a lot of value, however. And the company’s potential legal liability for talc and opioids remains a risk.
Some investors would like to see Johnson & Johnson ramp up a small buyback program, given its earnings power and conservative balance sheet. J&J boasts one of only two triple-A credit ratings among U.S. corporations. Microsoft has the other.
Nordstrom
Nordstrom looks like a cheap play on high-end retailing. At about $20, the stock trades for about 10 times projected 2022 earnings and for just 50% of sales, based on its enterprise value (market value plus net debt), a discount to nearly all of its peers.
Evercore analyst Omar Saad is among the few Wall Street bulls on Nordstrom. He sees a favorable risk/reward. He projects $2.20 in 2022 earnings and says the stock could hold at about $20, even if profits fall to $1.50. In a bullish scenario in which margins and sales outpace expectations, Nordstrom could earn $4 a share and the stock could top its high of $46 in March.
The company gets 40% of its sales online and has rationalized its physical footprint to about 100 full-service stores, while using small neighborhood stores in urban areas for online pickups, returns, and alterations.
Given its family control, Nordstrom is apt to resist any attempt by activist investors to spin off its online business along the lines of what Macy’s (M) and Kohl’s (KSS) are facing.
Still, a deal for the company isn’t out of question, given a digestible market value of little more than $3 billion.
Royal Dutch Shell
Energy supplies could be tight and prices high for years. Royal Dutch Shell stands to capitalize as one of the world’s top energy operations. It trades at a significant discount to its U.S. peers, Exxon Mobil (XOM) and Chevron (CVX).
Shell’s U.S.-listed shares trade around $43, just seven times projected 2022 earnings, against a price/earnings ratio of 11 for Exxon and 12 for Chevron. Shell yields 3.9%, less than Exxon or Chevron. Shell, however, has a conservative payout ratio at about 30%, after a sharp dividend cut in 2020.
Shell is “one of the cheapest large-cap stocks in the world,” wrote activist investor Dan Loeb of Third Point, which has taken a stake.
Its best business may be the world’s largest liquefied natural-gas operations, which requires only modest annual capital expenditures.
Loeb’s push for a breakup of Shell looks like a long shot, but it’s possible that the company will take public a part of the world’s biggest network of service stations.
Bernstein analyst Oswald Clint praised the energy giant’s recent move to simplify its corporate structure by domiciling in the United Kingdom and collapsing its two share classes into one. Clint sees the company’s stock buybacks ramping up in 2022 and has a price target of $63 on the American depositary receipts.
Shell’s discount to its U.S. rivals reflects the intense pressure in Europe to scale back its oil and gas operations. That remains a risk, but Shell is committed to its core business.
Visa
Visa is the juggernaut of the payments business, processing over $13 trillion in transactions during its fiscal year ending in September.
The stock, at about $214, looks appealing after a 15% decline from a 52-week high in July.
Visa trades for about 30 times projected earnings of about $7 a share in its current fiscal year. While not cheap, its multiple looks reasonable, considering its lucrative global duopoly with Mastercard (MA), the shift away from cash, new services, and the prospect of double-digit annual revenue and earnings gains. Merchants may gripe about interchange fees, but Visa remains indispensable.
Visa sees revenue rising in the “high end of midteens” in its current fiscal year, and analysts forecast 20% growth in earnings per share. The company continues to see recovery from depressed pandemic activity.
David Rolfe of Wedgewood Partners, a Visa holder, says, “Visa will get a big boost when borders reopen—but even after that normalizes, Visa should be able to grow volumes and revenue at double digits.”
Morgan Stanley analyst James Faucette has an Overweight rating and a $280 price target on the stock.
Write to Andrew Bary at andrew.bary@barrons.com
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