Gold as an investment

12 Growth Blue-Chip Bargains I'm Buying Hand Over Fist

Sep 30, 2022

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Warren Buffett famously said to be "greedy when others are fearful."

He also said, "It's better to be approximately right than precisely wrong."

In other words, when it's raining blue-chip bargains from the sky, it's time to buy, buy, buy.

Could the market fall further? Sure, though barring a recession probably not much more.

This article explains why we might be near the bear market bottom.

And here's a bit more evidence.

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Daily Shot

Technically speaking the market is now as oversold as it was in the 2018 recession scare bear market (-20% decline).

It's also about as oversold as the 2011 recession scare bear market (-21.6% decline).

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Daily Shot

Hedge funds are often the "dumb money" on Wall Street (and yet they charge up to 2% and 20% in fees).

Why? Because many use something called a risk-parity strategy.

What that means is that when volatility is rising (stocks are falling fast) they sell.

When volatility is falling (stocks are rising) they buy.

It's the exact opposite of what the greatest investors in history (like Buffett) have made their and investors' incredible long-term fortunes by doing.

In recent months hedge funds have been dumping stocks by the tens of billions.

Warren Buffett? $41 billion in net stock buys in Q1 2022.

Why does that matter?

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Charlie Bilello

Because we're in the 2nd worst start to the year in US history.

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CNN

Market sentiment is at pants-pooping terror levels.

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CNN

This is what bargain hunters love to see.

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Daily Shot

Buying when investor sentiment is at 30-year lows certainly qualifies as contrarian.

And this is why the greatest long-term investor in history is buying stocks with both hands.

And so am I.

On May 12th, 2022, the SP 500 hit -19.8%, essentially a bear market.

And that's why I put my correction plan into action.

That meant buying 19 of the world's best Ultra SWANs, 50% value/yield, and 50% hyper-growth.

Last time I showed you the seven high-yield Ultra SWANs I bought, so now let's look at the hyper-growth Ultra SWANs I just added to during this historic bear market (speed not magnitude).

12 Hyper-Growth Ultra SWAN Bargains I Just Bought For My Retirement Portfolio

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Dividend Kings Zen Research Terminal

I've linked to articles providing more information about each company's safety, quality, investment thesis, growth potential, risk profile, valuation, and total return potential.

Why these 12 companies in particular?

World-Class Safety And Quality You Can Trust In Any Economy

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Dividend Kings Zen Research Terminal

These are some of the world's highest quality companies, high, high quality?

For context, here's how they compare against the dividend aristocrats.

Better Safety And Quality Than The Aristocrats

Metric Dividend Aristocrats

12 Hyper-Growth Ultra SWANs

Quality 87% 97% Safety 89% 98% Dependability 84% 97% Long-Term Risk Management Industry Percentile 67% 79% Average Credit Rating A- Stable A- Positive Outlook Average 30-Year Bankruptcy Risk 3.01% 1.62% Average Dividend Growth Streak (Years) 44.3 24.2 Average Return On Capital 100% 161% Average ROC Industry Percentile 83% 82% 13-Year Median ROC 89% 153%

(Source: DK Research Terminal)

These are some of the highest quality and safest companies on earth.

How safe? SP estimates they average a 1.62% 30-year bankruptcy, almost 50% lower than the dividend aristocrats.

Seven of these hyper-growth Ultra SWANs pay dividends. How safe are those dividends?

Rating Dividend Kings Safety Score (161 Point Safety Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 - unsafe 0% to 20% over 4% 16+% 2- below average 21% to 40% over 2% 8% to 16% 3 - average 41% to 60% 2% 4% to 8% 4 - safe 61% to 80% 1% 2% to 4% 5- very safe 81% to 100% 0.5% 1% to 2% 12 Hyper-Growth Ultra SWANs 98% 0.5% 1.10% Risk Rating Low-Risk (79th industry percentile risk-management consensus) BBB+ Stable outlook credit rating 4.4% 30-year bankruptcy risk

20% OR LESS Max Risk Cap Recommendation (Each)

(Source: DK Research Terminal)

The average dividend cut risk in an average recession since WWII is about 1 in 200. In a severe Pandemic or Financial Crisis level downturn, it's about 1 in 91.

As for quality?

Ben Graham considered a 20-year dividend growth streak to be an important sign of exceptional quality.

These Ultra SWANs average 24 years.

Joel Greenblatt considered return on capital to be his gold standard proxy for quality and moatiness.

  • ROC = annual pre-tax profit/ the money it takes to run the business

The aristocrats average an incredible 100% ROC.

  • SP 500 14.6%
  • the average aristocrat's investments pay for themselves within one year vs 7 for the SP 500

These Ultra SWANs average 162% ROC, 62% better than the aristocrats.

  • 11X that of the SP 500
  • their average investments pay for themselves in 7 months

The aristocrat's ROC is in the 83rd percentile of their industries, these Ultra SWANs are in the 82nd.

And their ROC is higher than their 13-year median, indicating rising wide moat profitability.

In other words, both Ben Graham and Joel Greenblatt, two of the greatest investors in history, would consider these to be among the world's safest and highest quality companies.

  • SP and eight other rating agencies agree

Wonderful Companies At Wonderful Prices

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Dividend Kings Zen Research Terminal

The SP 500 is now 2% historically undervalued.

These Ultra SWANs are 23% undervalued.

The SP 500 trades at 16.8X forward earnings, and these Ultra SWANs 21.9%.

But thanks to over 20% growth, their PEG ratios are 1.1, half that of the SP 500's 2.0.

In fact, their ROC/PEG, a single metric that incorporates quality, value, and growth, is 161%.

  • 22X the SP 500's 7%

Analysts expect 59% total returns in the next year, while 33% returns would be justified by fundamentals.

Return Fundamentals That Can Help You Retire In Safety And Splendor

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Dividend Kings Zen Research Terminal

The Nasdaq has a 0.9% yield and 14.3% long-term consensus growth rate.

That's 15.2% long-term returns (same as the 10 and 20-year average).

These Ultra SWANs have 20.5% growth and a 21.4% long-term total return consensus.

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Years To Double Your Inflation Risk-Adjusted Wealth

10 Year Inflation And Risk-Adjusted Expected Return

Adam's Planned Correction Buys 4.1% 19.2% 23.3% 16.3% 13.8% 5.2 3.63 12 Hyper-Growth Ultra SWANs 0.9% 20.50% 21.4% 15.0% 12.4% 5.8 3.23 Nasdaq (Growth) 0.9% 14.3% 15.2% 10.6% 8.1% 8.9 2.17 Dividend Aristocrats 2.2% 8.9% 11.1% 7.8% 5.2% 13.8 1.66 SP 500 1.6% 8.5% 10.1% 7.1% 4.5% 15.9 1.56

(Sources: Morningstar, FactSet, Ycharts)

These Ultra SWANs offer better long-term return potential than almost every strategy on Wall Street.

In fact, their 15% risk-adjusted expected returns are what Private Equity and Cathie Wood's ARKK strive to achieve over the long-term.

  • You can achieve these returns without any of the speculative risks of ARKK
  • or a 7 to 15-year lockup with Private Equity and high fees

What could these kinds of returns mean for you?

Inflation-Adjusted Consensus Return Potential: $1,000 Initial Investment

Time Frame (Years) 7.4% CAGR Inflation-Adjusted SP Consensus 8.7% Inflation-Adjusted Aristocrat Consensus 18.9% CAGR Inflation-Adjusted 12 Hyper-growth Ultra SWANs Consensus Difference Between Inflation Adjusted 12 Hyper-growth Ultra SWANs Consensus And SP Consensus 5 $1,432.29 $1,514.08 $2,371.35 $939.06 10 $2,051.47 $2,292.44 $5,623.31 $3,571.84 15 $2,938.30 $3,470.93 $13,334.84 $10,396.54 20 $4,208.51 $5,255.26 $31,621.59 $27,413.08 25 $6,027.82 $7,956.89 $74,985.91 $68,958.08 30 $8,633.61 $12,047.36 $177,817.94 $169,184.33

(Source: DK Research Terminal, FactSet)

Even if these companies only grow as expected for the next decade, that's a potentially nearly 6X inflation-adjusted return.

Time Frame (Years) Ratio Aristocrats/SP Ratio Inflation-Adjusted 12 Hyper-growth Ultra SWANs Consensus And SP Consensus 5 1.06 1.66 10 1.12 2.74 15 1.18 4.54 20 1.25 7.51 25 1.32 12.44 30 1.40 20.60

(Source: DK Research Terminal, FactSet)

That means potentially tripling the market over the next decade and outperforming by far more over time.

What evidence do we have that these companies can deliver anything close to 21% Buffett-like returns?

Historical Returns Since June 2006 (Annual Rebalancing)

The future doesn't repeat, but it often rhymes." - Mark Twain

Past performance is no guarantee of future results, but studies show that blue-chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.

valuation is almost allx that matters for long-term stock returns

Bank Of America

So let's take a look at how these Ultra SWAN bargains have performed over the last 16 years when over 91% of total returns were the result of fundamentals, not luck.

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(Source: Portfolio Visualizer Premium)

Analysts expect 21% long-term returns and these Ultra SWANs delivered 22.4% over the last 16 years.

That's far more than the 15% the Nasdaq delivered (vs 15.3% LT total return consensus today) and the 10% of the SP 500 (10.1% CAGR LT total return consensus).

These Ultra SWANs delivered 2X the negative-volatility adjusted total returns (Sortino Ratio).

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(Source: Portfolio Visualizer Premium)

Over the past 16 years:

  • SP 500 delivered 3.1X inflation-adjusted returns
  • Nasdaq 6.4X inflation-adjusted returns
  • these Ultra SWANs 17.5X inflation-adjusted turns
  • 3X better than the Nasdaq and 6X better than the SP 500

And let's not forget about their income (small but rapidly growing).

Portfolio 2007 Income Per $1,000 Investment 2021 Income Per $1,000 Investment Annual Income Growth Starting Yield 2021 Yield On Cost Nasdaq $4 $50 19.77% 0.4% 5.0% 12 Hyper-Growth Ultra SWANs $20 $186 17.27% 2.0% 18.6%

(Source: Portfolio Visualizer Premium)

The Nasdaq's dividends have grown at 20% over the last 14 years while these Ultra SWANs have delivered 17% annual income growth.

Their starting yield of 2% has now become a yield on cost of 18.6%, almost 4X that of the Nasdaq.

What about future income growth?

Analyst Consensus Income Growth Forecast Risk-Adjusted Expected Income Growth Risk And Tax-Adjusted Expected Income Growth

Risk, Inflation, And Tax Adjusted Income Growth Consensus

16.5% 11.5% 9.8% 7.3%

(Source: Portfolio Visualizer Premium)

Analysts expect 16.5% long-term income growth in the future.

Adjusting for the risk of these companies not growing as expected, inflation, and taxes that's 7.3% real expected annual income growth.

Now compare that to what they expect from the SP 500.

Time Frame SP Inflation-Adjusted Dividend Growth SP Inflation-Adjusted Earnings Growth 1871-2021 1.6% 2.1% 1945-2021 2.4% 3.5% 1981-2021 (Modern Falling Rate Era) 2.8% 3.8% 2008-2021 (Modern Low Rate Era) 3.5% 6.2% FactSet Future Consensus 2.0% 5.2%

(Sources: SP, FactSet, Multipl.com)

What about a 60/40 retirement portfolio?

  • 0.5% consensus inflation, risk, and tax-adjusted income growth.

In other words, these hyper-growth Ultra SWANs offer:

  • 3.5X the market's expected real income growth
  • 15X better long-term inflation-adjusted income growth than a 60/40 retirement portfolio

This is the power of hyper-growth Ultra SWAN bargain hunting in a bear market.

Bottom Line: When Blue-Chip Bargains Are Raining From The Sky, It's Time To Bend It Like Buffett And Buy, Buy, Buy

I can't tell you whether or not this bear market has bottomed.

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Charlie Bilello

The average bear market, both recessionary and non-recessionary since 1928 is a 36% peak decline, though that includes the Great Depression's 86% collapse.

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Daily Shot

The average non-recessionary bear market since 1965 is a 21% peak decline, very close to where we are now.

The average recessionary bear market since 1965 is a 36% decline.

According to Bank of America, looking at all Wall Street history, since 1792 years, 140 bear markets have averaged a 37% peak decline.

  • the causes of each bear market are slightly different
  • but blue-chips can only get so cheap
  • and human psychology never changes

And that's why no one can predict when a bear market will start, how long it will last, or how fast it will be.

But the severity? Well, that is far more predictable.

Morgan Stanley, a blue-chip economist team (one of the 16 most accurate according to Market Watch) was forecasting for the bear market to bottom in May, at approximately -20%.

Now they've updated their models and are most bearish.

According to his base scenario of "fire and ice," he expects the SP 500 to slide in the near term before climbing to 3,900 points next spring -- which is still about 2.5% below current levels -- on slowing earnings growth and elevated volatility.

"We continue to believe that the US equity market is not priced for this slowdown in growth from current levels," Wilson said in a note on Tuesday. "We expect equity volatility to remain elevated over the next 12 months." He recommends defensive positioning with overweight in health care, utilities, and real estate stocks...

The SP 500 may be at risk of further downside toward 3,600 points -- down 10% from the Tuesday close -- before reaching a historically important technical support level. The 200-week moving average since 1986 has seen the US benchmark bounce back during all major bear markets, except for the tech bubble and the global financial crisis." - Bloomberg

Morgan Stanley now expects stocks to fall to -28% from all-time highs, sometime this year, before recovering to 3,900 by spring of 2023.

Fourteen times the SP 500 has completed the requisite 20% plunge that defines a bear market in the last 95 years. In just two of those episodes did the American economy not shrink within a year: 1987 and 1966. It works the other way around, too. Among 15 recessions over the span, only three weren't accompanied by a bear market." - Bloomberg

The SP has closed at -20% 14 times since 1927 but it's achieved a bear market intraday many times more.

  • 2011 and 2018 the most recent examples

It's easy to see such info and get scared that a major crash is coming.

But remember two things.

Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."

- Peter Lynch

First, forecasts are probabilistic in nature. While it's fine to use forecasts from reputable sources and historical averages to estimate what MIGHT happen, prudent risk management requires being able to handle extreme scenarios.

Second, let's consider what Morgan Stanley's forecast of a -28% bear market would actually mean.

  • stocks fall 10% more
  • a historically normal bear market (for all 140 bear markets since 1792)

You might be tempted to sell everything and buy back 10% lower.

Risking missing out on a post-bear market rally.

Let's say that we do bottom at -28%, and you sell now and perfectly time the bottom and get a 10% lower price on your portfolio.

Do you know what that actually means?

  • 11% higher total return over several decades
  • 0.2% higher annual returns over 30 years

Let's say you're invested in the SP 500, which has a 10.1% CAGR long-term return consensus.

Does 0.2% higher annual returns really make a difference?

What if you're invested in the Nasdaq with a 15.2% CAGR long-term consensus return potential? Does 0.2% higher annual returns really change your financial fortune?

What if you're invested in these 12 hyper-growth Ultra SWANs with 21.4% long-term return potential? 0.2% per year is a rounding error.

What if we get a recession and the stock market ends up falling 36% before bottoming?

  • 20% lower

Do you know what selling everything and buying 20% lower means?

  • 25% higher returns over decades
  • 0.75% THEORETICAL higher annual return

The point is that no one can consistently time the market bottoms, the best we can do is be approximately right.

It's better to be approximately right than precisely wrong." - Warren Buffett

In October 2008 Buffett wrote a WSJ op-ed recommending investors start buying stocks.

He kept buying even as the market fell another 35% in the 3rd worst market crash in history.

Did Buffett try to time the market? No.

Did Charlie Munger (also one of the best investors in history)? No.

Did Peter Lynch? No.

Did Joel Greenblatt? No.

Did John Templeton? No.

Did Bill Miller? No.

Among the greatest investors in history, guess how many were market timers? Zero.

That's because, according to Fidelity, 98% of market timers fail.

  • 1% manage to make enough to live off

Why is that? Because according to JPMorgan, just 3% of 12-month stock returns are explained by fundamentals.

  • 97% is due to sentiment and luck
  • why I ignore 12-month analyst price targets

And over 30+ years, the retirement time frame, do you know what % of total returns are explained by fundamentals? 97% according to Fidelity.

Or to put it another way:

  • in the short-term luck is 33X as powerful as fundamentals
  • in the long-term fundamentals are 33X as powerful as luck

This is why I don't bother trying to time the market with my portfolio, DK portfolios, or my recommendations.

NO ONE knows what the market will do in the next few weeks, months, or even the next year or two.

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Charlie Bilello

But do you know the one certainty on Wall Street? Stocks always go up over time.

The only way that will change is a permanent collapse in the economy created by an apocalypse.

  • in which case we'll be too dead to care about our portfolios

To be invested in the market is to believe in a future of growing sales, earnings, and dividends.

And that's why I just bought LOW, MA, MSFT, GOOG, ADBE, ASML, AMZN, ADSK, TSM, ADDYY, CMG, and QCOM.

  • 0.9% very safe yield (same as the Nasdaq's)
  • 20.5% long-term growth consensus vs 14.3% Nasdaq
  • 20.4% CAGR long-term return potential vs 22% returns since 2006
  • 23% historically undervalued
  • quality superior to the dividend aristocrats
  • A- positive outlook credit ratings = 1.6% long-term fundamental risk

Buying the world's best hyper-growth stocks in a bear market and investor sentiment is at 30-year lows is as close to a guarantee of long-term riches as you can find on Wall Street.

Luck is what happens when preparation meets opportunity." - Roman philosopher Seneca the Younger

Volatility isn't risk, it's the source of future returns." - Joshua Brown, CEO of Ritholtz Wealth Management

I am not interested in speculating about what the market will do in the next year.

I am very interested in taking advantage of incredible bargains and making my own luck on Wall Street.

Because, through disciplined financial science, you can achieve your rich retirement dreams.

If you focus on the five fundamentals of investing success, you have nothing to fear from any bear market or recession.

  1. portfolio risk management (asset allocation)
  2. safety and quality of your companies
  3. starting yield
  4. growth
  5. valuation

Nail these fundamentals and retiring in safety and splendor isn't a function of luck, just time, discipline, and patience.

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