Equity markets are among the most powerful wealth creators in the world. While it is tempting to buy highfliers like DraftKings or Moderna, going with high-quality, less-volatile stocks with strong leadership can help limit downside risk.
The goal is not to shoot for the moon and gamble, but rather to maximize one's risk-adjusted return. The key is to grow capital without incurring unnecessary risk. AT&T (T 0.05%), CVS Health (CVS -1.22%), and Planet Fitness (PLNT 0.54%) offer three ways to do just that.
Under former CEO Randall Stephenson, AT&T completed gigantic acquisitions of DIRECTV and Time Warner. DIRECTV has been a problem, with subscriber numbers falling quarter after quarter. The worst, however, may already be behind AT&T.
For one thing, this past quarter marked the end of AT&T's marketing campaign to draw in new customers via large discounts. With subscription prices normalizing for DIRECTV, the service's profit margin should begin increasing again. The pivot away from discounts certainly chased some customers off, but those remaining should be stickier than in previous quarters.
Moreover, AT&T's new streaming service, HBO Max, will help offset recent pain at DIRECTV. With beloved shows like Friends and South Park, new originals, and live news and sporting events to be added by year's end, the cord-cutting service packs a lot of punch. Don't worry about the underwhelming start to AT&T's streaming endeavor: The content is not yet available to popular services like Roku and Amazon Prime. As AT&T addresses those issues, HBO Max could be a powerhouse for earnings longer term.
Elliott Management, a reputable activist firm, owns a $3.2 billion stake in the company. It supports new CEO John Stankey's vision to reorganize AT&T's sprawling assets by endorsing him after a long search. Elliott believes that shares of the media titan could double to $60 by the end of 2021. While the pandemic could certainly delay that optimistic outcome -- and it's merely a price target from one investment firm -- it is still encouraging.
A $60 price target does not look totally unreasonable. AT&T changes hands today at just over nine times earnings and eight times free cash flow, far cheaper than competition such as T-Mobile. Yet AT&T's telecom business is rock solid, highly profitable, and moving into a 5G upgrade cycle. Strong cash flow from the telecom business enables AT&T to maintain a roughly 7% dividend and target investments toward improving the new HBO Max streaming service.
2. CVS Health
CVS boasted impressive 8% revenue growth and adjusted earnings growth of 19% (along with 40% GAAP earnings growth) this past quarter. CEO Larry Merlo expects some of this growth to fade as supply-hoarding customers return to normal consumption patterns. Still, CVS indicated that less than 50% of the acceleration in growth was attributable to COVID-19 hoarding, suggesting that its healthy growth may be somewhat sustainable.
To ensure continued growth, Merlo is being very proactive. CVS's new health hubs offer Americans a more affordable alternative to routine doctor visits. CVS is offering health services like blood pressure tests, physicals, and immunizations at thousands of locations nationally. This new line of business is attractive in that e-commerce cannot replace medical examinations as easily as it can replace shopping at a clothing store.
Furthermore, CVS' telehealth service grew by 600% during the pandemic, with prescription deliveries growing by 1,000% (yes, 1,000%). Now that customers are more familiar with the remote services, it is reasonable to think that a good chunk of that new business will remain post-COVID. CVS stock trades at roughly nine times earnings and eight times free cash flow. With CVS's revamped store footprint and thriving telehealth services, the long-term trend for CVS stock should be higher.
3. Planet Fitness
Similar to CVS, Planet Fitness benefits from a brick-and-mortar model that cannot be seamlessly emulated by e-commerce. A pillow is more convenient to purchase online than thousands of dollars in heavy, bulky workout equipment that may never get used. It makes more sense for folks looking to be more physically active to spend $10 per month at Planet Fitness than to go all in on a personal gym.
While some brick-and-mortar chains are plagued by high fixed costs, Planet Fitness is not, thanks to franchising nearly all of its locations. As a result, things seem to be looking up for the popular gym chain.
Many of its locations are now open once more, and signups are even with last year despite no current marketing efforts. When marketing campaigns restart, customer additions could accelerate further. CEO Chris Rondeau echoed that sentiment by spending about $5 million of his own money in March to buy Planet Fitness shares at prices ranging from $50-$67 a share. With the stock currently sitting at $57.11, that is certainly nice to see.
Planet Fitness survived the Great Recession and gained market share during that period. Its industry-low costs and zero-judgment environment represent a perfect combo for people who want an affordable workout but are not obsessed with fitness. Gym memberships will be directly correlated with the economic reopening. As the virus fades, Planet Fitness's cost advantage will persist. This formula should continue to work well for Planet Fitness, and the stock should respond positively.
For starting a portfolio today, picking high-quality organizations with strong leadership and strong fundamentals is key. That will never change. AT&T, CVS, and Planet Fitness all offer shareholders valuable assets and long-term tailwinds. With volatility and chaos dominating market headlines, stick with quality names still offering substantial upside. You will be happy you did.