The Wealth Builder’s Toolkit: Top 3 Stocks to Supercharge Your Portfolio
I’m tasked with coming up with three stocks to buy that will supercharge your portfolio. These are companies whose stocks will build wealth over time.
Call it patient capital. Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) makes the grade. But that’s an obvious choice.
To come up with the three names, I’ll use three criteria reflecting quality businesses with rock-solid financials that generate sustainable growth.
Criteria # 1: The company has a strong balance sheet. That’s especially important in today’s higher interest rate environment. What’s a strong balance sheet? I prefer businesses with net cash or, at the very least, net debt less than 25% of their market capitalization.
Criteria # 2: The company has an above-average return on invested capital (ROIC). This is defined, according to MarketWatch’s Philip van Doorn, as “its profit divided by the sum of the carrying value of its common stock, preferred stock, long-term debt and capitalized lease obligations.”
Criteria # 3: The company has a CEO who’s been in their job for at least five years, preferably longer. A long tenure is generally the sign of someone who can lead through different economic cycles.
While there are plenty of quality smaller companies, I’ve limited my selections to stocks with a market cap of at least $10 billion.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) qualifies with $2.32 billion in net cash, an average ROIC over the past 12 quarters of 55.39%, and Fortinet CEO Ken Xie has held the top job since co-founding the company in October 2000 with his brother Michael Xie.
The cybersecurity company has over 680,000 global customers, generating more than $1.5 billion in quarterly billings from its 50+ enterprise cybersecurity products. It reports earnings on Nov. 2 after the markets close. The company is expected to deliver $1.35 billion in revenue — 20% higher year-over-year (YOY) — with earnings per share of $0.36 (10% higher YOY).
Of the 30 analysts covering its stock, 21 rate it a Buy or Strong Buy, with a $72.41 target price, 27% higher than where it’s currently trading. FTNT shares are up 294% over the past five years, over 3x the Nasdaq.
“Fortinet has been GAAP profitable and free cash flow positive every year since its IPO in 2009,” states pg. 5 of the company’s September 2023 presentation.
The company aims to deliver annually on the “Rule of 40”, defined as the combination of revenue growth and non-GAAP operating margin. In 2023, it expects it to be 48%. While down from 60% in 2022, it’s still well above 40%. Since 2009, it has met the rule in all but three years.
Apple (AAPL)
Apple (NASDAQ:AAPL) qualifies with $46.8 billion in net debt, an average ROIC over the past 12 quarters of 52.26%, and CEO Tim Cook has held the top job since 2011.
It’s hard to add anything new to what’s already been written about the iPhone maker in recent years. So, I’m returning to something I said about Apple in July 2014.
“I see growth investors coming back to AAPL stock when it can consistently deliver gross margins of 40% or more while also growing top-line revenue by double digits. If the iWatch and iTV along with a bigger iPhone 6 are all well-received, it’s a certainty that growth investors will return to the flock,” I wrote on July 25, 2014.
How’d that work out?
In the nine months ended July 1, 2023, its gross margin was 43.8%, 20 basis points higher than a year earlier. While top-line revenue will likely fall in 2023 due to lower sales across all its products, offset by higher services revenue, it has increased annual sales by double digits multiple times since 2014.
While we’re still waiting on an Apple TV and Apple Car, the iWatch and iPhone have certainly delivered for shareholders.
Apple reports Q4 results on Nov. 2 after the close. It won’t be pretty, but consider 2023 a reset year for the company. I’m sure Warren Buffett does.
AutoZone (AZO)
AutoZone (NYSE:AZO) qualifies with $10.2 billion in net debt (23% of its market cap), an average ROIC over the past 12 quarters of 38.60%, and CEO Bill Rhodes has held the top job since 2005.
It’s not been a stellar year for AZO stock. It’s up just 1.9% year-to-date and down more than 2% over the past 52 weeks. However, AutoZone shares are up 226% over the past five years, more than 4x the S&P 500.
Of the 27 analysts covering its stock, 12 rate it a Buy or Strong Buy, with a $2,849.75 target price, 15% higher than where it’s currently trading.
In 2023, it generated $17.46 billion in revenue, 7.4% higher than in 2022, with an operating profit of $3.47 billion, 6.1% higher than a year earlier. These are workmanlike, unspectacular numbers, so its shares are trading at 2.71x sales, its lowest multiple since 2020.
The retailer of automotive aftermarket parts expects 2024 to be a better year. It finished fiscal 2023 (August 26) with 6,300 stores in the U.S., 740 in Mexico and 100 in Brazil. As Rhodes said in its Q4 2023 press release, “[W]e continued to be pleased with our International stores’ performance and we are excited about future growth prospects across both Mexico and Brazil.”
The need for replacement parts is never going away. That’s about as good a guarantee as you’ll get in business. Its quality management takes care of the rest.
AutoZone is the sleeper stock of the three.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
