In the investing game, the rules may no longer apply. Billionaire hedge fund manager Ray Dalio warns that the Federal Reserve has set the market up for a significant fall in the near-term.
Noting that inflation is far too high, and that the Federal Reserve is moving aggressively against it, Dalio predicts general drawdown, if not a recession, and likely sooner than later.
"It looks like interest rates will have to rise a lot (toward the higher end of the 4.5% to 6% range). This will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it," Dalio opined.
Even if rates only rise to the low end of Dalio's predicted range, 4.5%, that would still, in his view, bring on a 20% drop in stocks.
So, what should investors do? One solid choice comes to mind, for investors: getting into the blue chip stocks. These companies stand on firm foundations, have a reputation for generating cash and profits, and they have earned 'household name status' through leading their industries. They don't always outperform the market, but they do have the resources - in finance and other areas - to hold their own in any economy.
And those attributes drew the attention of Dalio, who may be gloomy, but is also doubling down on blue chips.
With this in mind, we've used the TipRanks database to take a closer look at two of Dalio's picks. Importantly, these blue chip stocks all received enough support from Wall Street analysts to earn a Strong Buy consensus rating. Even better, they both outperformed the market by a wide margin this year.
CVS Health Corporation (CVS)
The first stock we'll look at definitely meets the definition of a blue chip. CVS is well-known for its chain of pharmacy stores, which have become a staple in the US retail industry, focusing on consumer health care, hygiene products, basic groceries, and pharmacy services. The company brought in $292 billion in total revenues last year, and its 1H22 results show that it is on track to beat that total in the current year.
The company's 1H22 revenue came in at $157.4 billion, up 11% year-over-year. The top line for Q2 alone exceeded $80 billion; it, too, was up 11% y/y. On earnings, CVS reported an adjusted EPS of $2.40. This was down slightly (less than 1%) from the year-ago result of $2.42.
CVS has a solid cash position, with $9 billion in cash from operations in Q2. The company repaid $1.5 billion in long-term debt, and reported having $12.4 billion in cash and liquid assets on hand as of the end of Q2.
These sound results supported CVS's common share dividend, of 55 cents per share. This was last paid out on August 1. The annualized rate, of $2.20, gives a yield of 2.1%, in line with the average among S&P-listed firms. During the second quarter, CVS returned $74 million to shareholders through the dividend.
In a move that shows CVS's confidence, the company earlier this month entered an agreement to acquire Signify Health for $8 billion. Signify has a network of 10,000 clinicians across all 50 states of the Union, and can bring that to CVS's network of stores and Minute Clinics.
To this end, while the overall markets have fallen this year, CVS shares are slightly in the green.
It's no wonder then, that this blue chip would attract the attention of Ray Dalio. Dalio's Bridgewater fund bought 1.935 million shares of CVS during Q2, increasing its holding in the company by 160%. Bridgewater first bought into CVS back in 2017, and its current holding, of 3,146,236 shares is valued at more than $321 million.
Turning now to the analysts, CVS stock boasts a strong fan base, which includes JPMorgan's Lisa Gill.
The analyst is impressed by the company's recent Signify acquisition, noting: "In our opinion this brings CVS closer to their goal of managing more lives through value based care (VBC) relationships. With 2.5M unique patient visits in home and virtually we believe SGFY brings incremental opportunities for CVS to manage the patient for optimal outcomes. With a network of virtual and in-person options CVS has the opportunity to truly bend the cost curve in a value based care environment, thus creating a win/win/win environment for the patient/payor/CVS."
"We remain positive on shares of CVS as we believe they are uniquely positioned as we continue to shift towards VBC with cost/quality/convenience as the pillars in a VBC/Consumer environment," Gill summed up.
Gill's outlook is bright for this company, and she backs it with an Overweight (i.e. Buy) rating and a $130 price target that implies a one-year upside potential of ~30% for the stock. (To watch Gill's track record, click here)
Dalio and Gill are not alone among the bulls on this one, as 9 of the 11 recent analyst reviews on CVS give the pharmacy chain a Buy rating, outweighing the 2 Holds for a Strong Buy consensus viewpoint. (See CVS stock forecast on TipRanks)
T-Mobile US (TMUS)
The second blue chip stock we'll look at is T-Mobile, a name you're sure to recognize. The company is a major player in the US wireless service sector, and holds a strong position in the expanding network of 5G coverage. T-Mobile currently has more than 109 million subscribers, with some 88 million of those being postpaid customers. Customer retention numbers and customer gain numbers in the recent 2Q22 report were solid; the company added 1.7 million postpaid customers in the quarter, for its highest quarterly total ever, and beating the numbers put up by rivals AT&T and Verizon.
T-Mobile did see a net loss in 2Q22, of $108 million, or 9 cents per share - but those losses did not slow the company down. The quarterly financial release showed that the net loss was due to one-time charges related to the 2020 merger with Sprint; those charges are now well behind the company, which can focus solely on moving forward. T-Mobile started that path by beating its chief rivals for customer acquisition in Q2, registering the lowest quarterly customer churn rate of the three largest US wireless providers.
The company's solid customer performance translated into stable, high, revenues. The top line of $19.7 billion was in-line with the year-ago number, and revenues in the past two years have held in the range between $19.7 billion and $20.7 billion. T-Mobile's net cash from operations was up 11% year-over-year, to $4.2 billion, and free cash flow was up 5% y/y, to $1.8 billion. Looking forward the company raised its guidance on free cash flow, and on net postpaid customer adds, and on earnings.
Investors liked the increased guidance, and took the one-time net loss in stride, and have pushed TMUS shares into a strong position this year. The stock has outperformed the overall markets by a wide margin, and registered a 21% year-to-date increase.
So there is plenty here to catch the eye of Ray Dalio. The billionaire's fund picked up an additional 167,283 shares of TMUS in Q2 to add to its existing holding, expanding it by 54%. Bridgewater first opened its T-Mobile position in 4Q21, and the fund now owns 481,462 shares in the company, worth an impressive $67.38 million.
Cowen analyst Gregory Williams, covering this stock, sets out a bullish bottom line, writing: "We view the print and upside 2022 guidance as a validation of our thesis, where T-Mobile is best positioned in the Wireless group from not only a microeconomic perspective (best network, best value, greenfield growth adjacencies), but also a macroeconomic and stock perspective (leaning on Sprint synergies for FCF/share step ups, providing earnings visibility). Despite the 'crowded long,' momentum continues for further beats/raises, in true T-Mobile form. As such, we continue to view T-Mobile as best positioned in this challenging environment as fundamentals continue to hum…"
Williams didn't just write up an upbeat outlook; he backed it up with an Outperform (i.e. Buy) rating and a $187 price target that showed his confidence in a 33% upside for the year ahead. (To watch Williams' track record, click here)
Sometimes, a stock's position is unequivocally strong - and it gets a unanimous Buy from the Street. In this case, the unanimous Strong Buy consensus is based on 15 positive analyst reviews. TMUS has an average price target of $175.86, implying a 26% gain from the current trading price $139.64. (See TMUS stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.