Stocks notched another leg down this week after the U.S. Federal Reserve announced a 0.75% interest rate hike — the largest since the mid-1990s. The goal with this monetary tightening is to bring down inflation, but it’s a blunt instrument that could also send the economy into a recession. Stocks are reacting accordingly. https://www.cnbc.com/2022/06/15/fed-hikes-its-benchmark-interest rate-by-three-quarters-of-a-point-the-biggest-increase-since-1994.html
In spite of all the uncertainty, though, long-term investing is far from dead. In fact, there could be some real bargains out there if you plan to buy and hold for at least a few years (but the longer the better). Three Fool.com contributors think Amazon (NASDAQ: AMZN), T-Mobile (NASDAQ: TMUS), and Albemarle (NYSE: ALB) are a buy after the Fed hiked rates again. Here’s why.
Just another ordinary speed bump for Amazon
Anders Bylund (Amazon): Let’s look back at some fairly recent history. The federal funds rate was a measly 0.30% in the summer of 2016. Inspired by a strengthened economy, the Fed started a rate-boosting campaign in December, leading up to a 2.40% reading by the end of 2018.
E-commerce giant Amazon took those rate changes in stride, posting share-price gains of 165% over the same period:
I’m not saying that the higher interest rates were good news for Amazon back then. The company was picking up $15 billion of additional debt at the time, financing its buyout of the Whole Foods Market grocery chain. If Amazon even had any interest in keeping rates low, that would have been the perfect time.
What I am saying, however, is that Amazon has created a powerful business model that will do well in pretty much any economy, market environment, and interest rate trend. This stock tends to beat the broader market in the long run.
That’s even more true nowadays as the formerly skimpy bottom line has gained superpowers from the Amazon Web Services (AWS) cloud-computing business. Seventy-four percent of Amazon’s operating profits came from AWS in 2021, up from 59% in 2020. Even if the online retail business runs into a brick wall (which hasn’t happened and probably won’t happen anytime soon), AWS will keep generating massive cash profits.
As a high-growth investment, Amazon’s stock has been dragged down in recent months. Shares are trading roughly 40% lower year to date, and I see that as a wide-open invitation to invest in a tremendous blue-chip stock. Come what may, Amazon should deliver market-stomping stock returns for the next decade or five, just as it did through the subprime lending crisis, the popping of the dot-com bubble, and the first year of the coronavirus pandemic.
This investment keeps rolling with the punches and coming back stronger on the other side of every challenge. It’s no different this time, and it’s a smart move to pick up some Amazon stock while it’s cheap.
A necessary value product with increasing profits and little inflation worry
Billy Duberstein (T-Mobile): Make no mistake. We may be able to avoid a recession, but it’s a long shot now. Likely, we are going to have some sort of economic downturn to get inflation under control.
That means looking for defensive stocks that trade at reasonable valuations, and it’s why I’m going with my favorite telecom — T-Mobile. Why T-Mobile? First, T-Mobile has long had a reputation for providing the best bang for the buck in the mobile space.
For instance, T-Mobile just unveiled its latest “Un-carrier” move on Thursday, unveiling big discounts on travel. T-Mobile is offering free high-speed data in 210 countries, and free in-flight connectivity and streaming across all the major airlines. It’s also offering exclusive discounts with Priceline for hotel bookings, as well as $0.25 per gallon off of gas at Shell (NYSE: SHEL) gas stations through labor day.
Yet in contrast to the 4G era, in which it had an admittedly inferior network, T-Mobile is now the leader in 5G coverage. While other cable companies are also offering low-cost mobile plans when bundled with expensive wired internet, those cable companies still use Verizon (NYSE: VZ) as their wholesale wireless network. Based on recent strong results, T-Mobile isn’t having any problems attracting customers, with solid net adds last quarter.
This year, T-Mobile should finish with most of its network integration with Sprint, which the company acquired in early 2020. Once that is finished, T-Mobile will have de-commissioned 35,000 cell sites, and its profits should soar. Management predicts between $7.1 billion and $7.6 billion in free cash flow this year, but that should double or so next year. At its 2021 analyst day, T-Mobile projected $13 billion to $14 billion in free cash flow in 2023. This growth is coming from its 5G lead, incursion into rural areas, and into enterprise mobility, where it has traditionally been underrepresented versus peers. T-Mobile’s $155 billion market cap means it’s only trading around 11 to 12 times that 2023 free cash flow estimate.
Meanwhile, T-Mobile is also leaning into its 5G wireless broadband offering, which it hopes will compete with big cable. Since the 5G home broadband is only $50 per month, well below that of the cable companies, it could also find a receptive audience for consumers looking for value. After all, wireless internet and broadband are necessary utilities these days, and consumers will need them even in lean times.
Also, T-Mobile’s cost structure isn’t really affected by inflation that much. There may be some wage pressure, but the bulk of its operating costs are for things like tower leases, which are usually at fixed rates under long-term contracts.
All in all, T-Mobile has a value offering, a necessary product, and relative immunity from inflation on the cost side. It’s a defensive stock to own for this type of environment.
With gasoline sky-high, EV demand isn’t going away anytime soon
Nicholas Rossolillo (Albemarle): One of the hottest segments in consumer spending driving inflation higher is gasoline prices. According to the U.S. Bureau of Labor Statistics, gas soared nearly 49% higher year over year in May 2022. Across the country, consumers are grappling with gas costing $5 per gallon or sometimes more to fill up the tank. Not everyone can get their hands on an electric vehicle (EV), but I expect high gas prices to keep demand for EVs going strong.
Of course, gas isn’t the only inflated product category. New car sticker prices are also sky-high, up nearly 13% year over year in May. EVs themselves and the expensive batteries needed to power them are no doubt contributing to this trend. For better or worse, though, lithium (a key compound in the manufacture of EV batteries and electronic device batteries in general) is in demand but in short supply. That’s why I’ve been accumulating shares of Albemarle.
Let me acknowledge this is no cheap stock. Though management recently upgraded its 2022 outlook on high lithium prices and new production coming online, shares trade for over 13 times 2022 expected adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). Also bear in mind that Albemarle isn’t the only company scrambling to bring new lithium production online to meet growing demand for EV batteries. Other companies are playing in this sandbox, and more supply could help ease the market price for lithium.
Also a risk is that automakers and their battery-technology partners are experimenting with materials other than lithium. That could also cause some trouble for Albemarle at some point. Plus, the Fed’s rate hikes make financing future production projects a bit more expensive. So I’ll reiterate: Albemarle isn’t cheap, and there’s potential for its development pipeline to hit snags down the line.
Nevertheless, I think the global move to EVs will take a decade or more, and over that period of time Albemarle will have the opportunity to expand along with it. Rather than bet on which EV maker will win, I think Albemarle can be a winner as it helps supply the whole fast-evolving auto industry.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Amazon and T-Mobile US. Billy Duberstein has positions in Amazon and T-Mobile US. His clients may have positions in the stocks mentioned. Nicholas Rossolillo has positions in Albemarle. His clients may have positions in the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.