3 Reasons My Retirement Portfolio Just Invested $100,000 Into 3 Amazing Blue-Chip Bargains (2024)

The end of the pandemic means that money has begun rotating from growth to value.

Concerns about rising interest rates have caused the tech bubble to significantly deflate.

• the tech-dominated Nasdaq has already closed down 10.3% from record highs, officially indicating a correction

Many reputable analysts think the tech correction may not be over.

Part of the rotation from growth to value has been due to better relative fundamentals, as the economy recovers, and cheaper valuations.

However, as these value stocks move into the top quintile of price momentum and growth stocks move out, the rotation might accelerate even further. This could be quite disruptive to portfolios and lead to another round of deleveraging like in January." - Morgan Stanley

Basically, Morgan Stanley's head of US equity strategy is saying that momentum funds, which have been the best performing strategy of the last decade, might soon shift their focus to value rather than growth.

• because value is the new momentum play

Over the last 6 months, momentum has badly underperformed value.

• momentum tracking funds usually use 3 or 6-month time frames and rebalance every 3 to six months as well

Ned Davis Research and Societe Generale have both recently put out reports saying that if 10-year Treasury yields hit 2% the Nasdaq could be expected to potentially fall into a bear market.

(Source: MarketWatch)

The Nasdaq's recent peak forward PE was 33.5, historically extremely high.

Thus, using historical earnings risk premium spread correlations, these analysts estimate that tech stocks could potentially fall 20% to 25% from here, if 10-year yields spike very quickly.

In addition, Friday, March 19th is quadruple option expiration.

• which can result in increased negative volatility
• as much as -5% for the S&P 500 the day of, or the day after, expiration

So given this potential for the tech correction to turn into a tech bear market, it may surprise you to learn that I've recently bought about $100,000 worth of three high conviction companies.

Amazon (AMZN)

• 7 Reasons I'm Investing $1 Million Into Amazon
• invested about $30,000

Alibaba (BABA)

• 6 Reasons Alibaba Is Set To Soar And Too Cheap To Ignore
• invested about $20,000

Magellan Midstream Partners (MMP)

• 9% Yielding Magellan Is Set To Soar And Too Cheap To Ignore
• invested about $50,000

There is, of course, a method to my madness, sound long-term facts, and reasoning that underpin such high conviction buys.

You're neither right nor wrong because other people agree with you.

You're right because your facts are right and your reasoning is right - that's the only thing that makes you right.

And if your facts and reasoning are right, you don't have to worry about anybody else." - Warren Buffett

So let me tell you the three reasons I've been backing up the truck on Amazon, Alibaba, and Magellan.

My goal is to help you decide whether these three companies might be a good fit for your own diversified and prudently risk management portfolio.

Reason 1: The Best Economy In 37 Years

The passage of the $1.9 trillion American Rescue Plan (ARP) is likely to prove historic for the economy.

• adjusted for inflation, the New Deal (over 10 years) costs about $780 billion
• in 2020, about $4 trillion in stimulus was passed
• in total, we're now close to $6 trillion, about 8 New Deals

This most recent stimulus is 54% targeted to individuals, a record for modern stimulus.

What do blue-chip economists (one of the 16 most accurate on earth according to MarketWatch) think this means for the economy in 2021?

Economists led by Seth Carpenter expect US gross domestic product to grow 7.9% from the fourth quarter of 2020 to the fourth quarter of 2021. Growth on a calendar-year basis will total 6.6%, a larger-than-usual difference due to depressed first-quarter gains.

The economy will continue to expand at a robust pace in 2022 as a new fiscal support measure further boosts the recovery, the team projected." - UBS

UBS is hardly the only blue-chip economist team to get more bullish about 2021 and 2022's outlook.

Morgan Stanley has lifted its forecasts for 2021 economic growth in the US, citing a collection of encouraging trends for its brighter outlook.

Gross domestic product is now expected to grow by 8.1% on a fourth-quarter-by-fourth-quarter basis, up from 7.6%, the team led by Ellen Zentner said in a Tuesday note. Growth for 2022 was revised 0.1 percentage points lower to 2.8%." - Business Insider

The forecasts may differ in precise estimates, but the picture they are painting is one of the best economic growth in almost four decades.

Goldman Sachs is calling for 2021 US GDP growth of 6.9%, the fastest since 1984...

All of this means that US GDP growth could rival or perhaps even surpass that of China...for the first time since 1976." - CNN

Moody's has revised up its base-case economic forecast to the most optimistic for 2021-2022.

• 6+% growth in 2021 and 5% growth in 2022

Moody's prediction is based on a $1.5 trillion infrastructure plan passing later this year.

If these blue-chip economists are right, we're likely facing the best economy we'll ever see in our lifetimes.

• potentially stronger than the tech boom (at least for the first 2 to 3 years)

What does this mean for corporate earnings?

FactSet S&P 500 Consensus Earnings

(Source: Dividend Kings S&P 500 Valuation & Total Return Potential Tool)

Analysts currently expect three consecutive years of double-digit earnings growth.

• 62% earnings growth in 3 years

S&P 500 Earnings Growth By Year

(Source: Multipl.com)

It's been a decade since we've seen such strong earnings growth.

• every week those estimates are rising steadily

Unlike most years, where analysts cut expectations going into earnings season, the good economic and pandemic news just keeps forecasts rising steadily higher, week after week.

In a research note late Sunday, Goldman Sachs’ analysts said they expect the proposal will be worth at least $2 trillion—and potentially even double that—over the next 10 years based on previous proposals and estimates of how much investment will be necessary to shore up U.S. infrastructure." - Forbes

While a mega-infrastructure bill is going to be more challenging to pass than the ARP, the potential impact on the economy and corporate earnings is nothing short of sensational.

All told, Bank of America estimates Biden's $2 trillion deficit-financed infrastructure plan could yield a GDP boost of between 2% and 9% in the short run and "considerably more" in the long run, adding that each 1% move in U.S. GDP growth should translate into roughly 3% to 4% growth in the earnings of S&P 500 companies." - Forbes, emphasis added

If Bank of America and Goldman are right (both are blue-chip economist firms) the between $2 and $4 trillion in infrastructure spending could be coming in the next 4 to 10 years.

• potentially fueling up to 4% to 18% GDP growth in the short term
• and up to 72% earnings growth
• on top of the 62% that analysts already expect
• up to 178% total earnings growth
• the best corporate earnings boom in 20 years

Against this potential fundamental backdrop, literally the best we'll likely ever see in our lifetimes, the investing opportunities are incredible.

This is why, buying top-quality blue-chips, set to benefit from strong economic growth and the end of the pandemic, is such a reasonable and prudent decision.

Reason 2: Hyper-Growth At A Reasonable Price

Amazon and Alibaba are my highest conviction growth recommendations right now.

• the deep dive articles I linked to above explain why

(Source: FactSet Research Terminal)

The more than 50 analysts each that cover AMZN and BABA, collectively know these companies better than anyone other than management.

• 6 rating agencies also cover their risk profiles
• the consensus opinions of all 57 to 64 experts go into the DK safety and quality scores for Amazon and Alibaba

Factoring in the complex risk profile both companies face, the best available evidence, based on the most reliable data and collective opinion of those who understand these companies best, is that both will grow like rockets in the coming years.

But wait a second! Didn't I start this article by saying that respected analysts were saying that tech stocks could fall another 15% to 20%?

• that's a risk of what MIGHT happen in the short term IF long-term interest rates spike to 2% very quickly

When you have the ability to buy world-class quality hyper-growth blue-chips at very low valuations, that's a Buffett-style fat pitch.

Wait for a fat pitch and then swing for fences." - Warren Buffett

How fat of a pitch are Amazon and Alibaba right now?

Amazon Market-Determined Fair Value

(Source: FAST Graphs, FactSet Research)

Amazon is about 29% undervalued for 2021's consensus fundamentals.

What kind of returns does that offer today's investor?

Amazon 2023 Consensus Return Potential

(Source: FAST Graphs, FactSet Research)

Operating cash flow provides the most conservative fair value and total return potential estimates for Amazon. And yet still shows the potential for 18% annual returns for the next three years.

Guess what the 36% overvalued S&P 500 might deliver?

S&P 500 2023 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

If earnings grow as expected and the market returns to historical modern-era fair value by 2023, stocks will basically go nowhere.

• Amazon has about 22X the consensus return potential of the S&P 500 over the next three years

Amazon 2026 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

If Amazon grows as expected through 2026 and returns to historical mid-range fair value of 25X operating cash flow, then investors would see 220% returns or 22% annually.

• more than triple your investment over the next five years
• with one of the highest quality blue-chips on earth
• with an AA- stable credit rating
• which indicates about 0.55% 30-year default/bankruptcy risk
• risk-adjusted expected returns of 16.63% CAGR vs 2.51% for the S&P 500

S&P 500 2026 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

• Amazon's 5-year consensus return potential is 4X that of the S&P 500
• Its risk-adjusted expected returns almost7X as high

What about Alibaba?

Alibaba Market-Determined Fair Value

(Source: F.A.S.T. Graphs, FactSet Research)

Alibaba is the most undervalued hyper-growth company on Wall Street.

• 44% discount to fair value
• a return to fair value by March 2023 delivers 109% returns

Alibaba 2023 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

• If BABA grows as expected through 2023 and returns to historical fair value, then investors would see 105% total returns and 42% annually
• 52X more than the S&P 500's 3-year consensus return potential

Alibaba 2027 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

• over the next five years, analysts believe BABA could deliver 331% returns or 27% annually
• 5X the S&P 500's consensus return forecast
• 19.4% CAGR risk-adjusted expected returns = almost 8X that of the S&P 500

Buying good businesses at bargain prices is the secret to making lots of money." - Joel Greenblatt

Reason 3: Fundamentals For A Rich Retirement

Ok, so it's hopefully now clear why I bought $50,000 worth of Amazon and Alibaba in the last month. But why did I buy $50K worth of Magellan?

Magellan Market-Determined Historical Fair Value

(Source: F.A.S.T. Graphs, FactSet Research)

Magellan 2023 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

• MMP's safe 9.1% yield, deep discount, and modest growth expectations mean it has 33.4% CAGR consensus return potential through 2022
• vs -5.8% CAGR for the S&P 500

Magellan 2026 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

• analysts think MMP has 16% CAGR total return potential over the next five years
• 3.5X more than the S&P 500

MMP's very long-term return potential is 9.1% yield + 4% CAGR growth consensus (2% to 6% historical margin of error adjusted consensus range) 13.1% CAGR.

(Source: FactSet Research Terminal)

If MMP grows as expected, then it has the potential to deliver long-term returns on par with the greatest investors in history.

However, the real reason I always match growth stock buys with MMP buys is simple financial science.

Yield, growth, and value are the holy trinity of total returns. Literally, these are the only fundamental metrics that determine stock returns over time.

Amazon and Alibaba have the growth and value, but their 0% current yields leave much to be desired.

Magellan has the yield and the value, but 4% growth is merely good for increasing income at 2X the rate of inflation.

BUT what happens when you combine AMZN and BABA with MMP in equal amounts?

• AMZN + MMP = 4.6% yield + 22.5% CAGR growth consensus + 33% undervalued
• BABA + MMP = 4.6% yield + 15% CAGR growth consensus + 40% undervalued

If you saw a company with these fundamentals would you buy it? Hopefully, the answer is yes, and in significant amounts.

50% MMP, 25% AMZN, 25% BABA Total Returns Since 2015

(Source: Portfolio Visualizer)

• 11.7% yield on cost = safe income minting machine
• despite all 3 companies being in corrections or bear markets, this 50/50 max safe yield/hyper-growth at a reasonable portfolio has crushed the market since 2015
• from bear market lows returns literally on par with Buffett in his prime

These historical returns are not surprising, given the optimized fundamentals of combining hyper-growth with safe ultra-yield.

Dividend Sensei Real Money Phoenix Portfolio Fundamentals

(Source: Dividend Kings Real Money Phoenix Portfolio Tracking Tool, updated daily)

• if you know of an ETF yielding 3.5% with 17% long-term growth consensus then buy it
• they don't exist, you can only get such incredible fundamentals through active stock picking and a relatively concentrated portfolio

That includes backing up the truck on wonderful hyper-growth blue-chips, as well as the highest safe yield on Wall Street.

Bottom Line: When It's Raining Gold I Reach For A Bucket, Not A Thimble

When it's raining gold, reach for a bucket, not a thimble.” -Warren Buffett

Today I buy what others won't, so tomorrow I earn returns others can't." - Paraphrase of Football legend Jerry Rice

I can't tell you where long-term interest rates will top, no one can.

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

What I can tell you is that the fundamentals for Amazon, Alibaba, and Magellan are strong, and expected to get a lot stronger in the coming years.

What's more, today you can buy this incredible quality, hyper-growth, and safe yield, at extremely attractive valuations.

• sky-high margins of safety = low risk/high probability investment ideas

If tech sells off even more, then I will buy more Amazon, Alibaba, and Magellan.

If it doesn't, then I'll continue to accumulate shares of Amazon and Magellan at a modest monthly rate.

But either way, when it comes to maximizing safe income over time, as well as total returns, it's hard to beat Amazon, Alibaba, and Magellan right now.