For those that have been too busy to read up on the news lately, currently the whole worlds Economy is in a very pessismistic mood swing. Central banks around the world are raising interest rates to battle the negative effects of inflation. This in turn, lowers the M2 money supply in the economy, and puts the countrys economy in a recession. The US stock market crashed 18% in 2022, almost putting the whole stock market in a bear market. With such negative news on air, is this still a good time to invest stocks?
Over the last 72 years, the stock market has corrected (10%+) every 2 years once, been in a bear market (20%+) decline every 7 years. That is extremely often! But over the course of the 72 years, the average return is 10.51% per annum! By investing $100 a month consistently for the past 72 years into the S&P500 index $Vanguard S&P 500 ETF(VOO)$ , you would have put in a total of $86500, but ur investment value at the end of the 72 years is $16.08 Million. It always pays off to be a long term investor.
In fact, bear markets is the best time to make money! According to Warren Buffet, be greedy when others are fearful! During market crashes, you are able to buy businesses at a very low price. If the shopping mall offers 50% discount, everyone gets excited. When the stock market does, people get scared. Its similar in the sense that you get good deals during this "discount period".
However, to invest during market declines and get the best return, there is a secret formula to it. Investors should always take into account:
-How cash-rich the business is
-Whether the business is defensive in nature
-Whether its free-cash-flow generative
For the year of 2023, I strongly recommend buying this 3 stocks that has high pontential of beating the market average. (Disclaimer: I have positions in these companies)
1. Berkshire Hathaway
$Berkshire Hathaway(BRK.B)$ is an American conglomerate. Under them, they have many business segments- Insurance, Railroad, Manufacturing, Utilities and stock investment portfolio. Their business is extremely diversified and has been producing a free cash flow of around $26 Billion annually. This diversified business model makes them very defensive. The company makes money during both economic booms and bust. Their investment portfolio is worth 350 Billion. Through that they own many different global companies, like 5.8% of $Apple(AAPL)$ , 11.9% of Bank of America, 20.4% of American Express, 9.4% of $Coca-Cola(KO)$ and many more. As all this companies make money, Berkshire indirectly gets a paycheck through the dividends. The best part of Berkshire, is that they have a cash cushion of $129 Billion. During this economic slowdown, they are able to buy more undervalued companies into their conglomerate. Based on a 10% discount rate and 2% growth rate for the next 10 years, the intrinsic value per share is $410, trading at a 30% undervalued price.
2. CGN Power
$CGN POWER(01816)$ is a utility company that produce electricity through 25 nuclear power plants in China. They The company is owned by the Chinese Goverment and they currently supply 2.5% of China's electricity. As the whole world goes net caron zero by 2040, CGN power is a main player in renewable energy.
The company mainly produces and sells electricity, its a defensive industry that makes money in good or bad economy times, electric is always needed. The company produces a free cash flow of B a year, and it has grown a CAGR 12% PA from 2012-2022. CGN will still continue to grow as they they have another 9 nuclear power plant in construction. They also have around HKD 15 billion in cash, representing about 10% of their market cap.
Based on a conservative 2% FCF growth rate for 10 years and 10% discount rate, the intrinsic Value of CGN Power is 3.41 HKD/share, and its currently undervalued by 85%.
3. China Unicom
$CHINA UNICOM(00762)$ is one of the 3 main telco companies in China, and they are owned by the Chinese Goverment. Telco industry is a defensive industry as everyone will need to use their mobile network. This company co-build their network together with China Telecom to save on CAPEX. Its a cash cow company. They produce roughly 41 Billion in Free cash Flow in 2021. And they have 46.25 Billion of cash balance, representing 30% of their market cap. Based on 2% growth rate and 10 discount rate, the intrinsic value is 15.84 HKD. Its currently trading at a undervalued price of 60%.
This 3 cash cow companies are my top 3 stock picks for the year 2023. Happy investing and stay bullish!♥️
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