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Forget Short Squeezes! Buy These 3 High-Quality Stocks Instead

By Nicholas Rossolillo - Updated Feb 2, 2021 at 12:46PM

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Struggling businesses with soaring share prices are intriguing, but these three companies are better long-term plays.

In recent weeks, many investors have been introduced to the short squeeze, a phenomenon that's sent shares of struggling businesses like GameStop and AMC Entertainment skyrocketing. I'm not here to tell you whether or not piling onto that bandwagon is the right call. I'm here to share three solid end-of-2020 earnings reports that were largely overlooked because of the frenzy that short squeezes have set off.

I'm talking about Skyworks Solutions (SWKS -1.44%), Facebook (FB 0.71%), and Visa (V -0.71%). Each had a solid end to a less-than-desirable 2020 and look like great long-term investments

1. Skyworks Solutions: Wireless connectivity is the future

Shares of connectivity semiconductor-specialist Skyworks Solutions were up by a double-digit percentage immediately after the company's fiscal 2021 first-quarter report (the three months ended Jan. 1, 2021). And for good reason. Revenue and free cash flow increased 69% and 28%, respectively, from a year ago to $1.51 billion and $366 million. 

Illustrations of various devices and digital services inside honeycomb shaped cells.

Image source: Getty Images.

What was so great about Skyworks' last quarter -- huge year-over-year growth aside -- was how much it beat management's expectations. The outlook provided a few months ago had called for revenue as high as $1.07 billion. (Talk about knocking one out of the park!) Working from a position of strength, Skyworks' top team announced a new $2 billion share-repurchase program that will last through January 2023, worth about 7% of the company's current market cap of $28 billion.

Skyworks is riding a wave of new connectivity, hastened by the pandemic in the last year. 5G mobile networks are still being constructed, and consumers are upgrading their phones to take advantage of the improved mobility service. Skyworks enables connectivity for phones and the infrastructure itself that creates 5G signal.

The same goes for the new WiFi 6 for home and business internet connectivity. And a myriad of new devices without wires are going to market, including smartwatches, connected autos, and virtual reality gear. Outside of smartphones (Skyworks' largest end market, as supplying the Apple iPhone is a key component of sales), the company's other revenue grew 35% from last year to $326 million.

Skyworks expects another 50% year-over-year increase in sales during its fiscal 2021 Q2, and there are questions regarding the sustainability of this rapid pace of expansion. After all, tech hardware like semiconductors are a cyclical business, and eventually, sales will slow.

Nevertheless, 5G deployment is still in the early stages of development, as are other use cases for wireless connectivity. And given how quickly the current uptrend is unfolding, Skyworks' stock looks like a reasonable long-term value at just 31 times trailing-12-month free cash flow. I remain a buyer with an eye on the future potential for this leading semiconductor designer in a decade's time.

2. Facebook: 62 billion reasons to be bullish

Say what you will about Facebook, but from a purely financial standpoint, it's an incredibly well-run tech company. The social media leader's revenue and free cash flow boomed a respective 33% and 90% higher year over year to $28.1 billion and $9.22 billion in its latest quarter. Rebounding ad sales after the economic lockdown last spring and a continual migration from traditional to digital marketing sent Q4 results higher during the final months of 2020. In spite of all the controversy, monthly active users on Facebook, Instagram, and WhatsApp combined increased 14% from a year ago to 3.3 billion. 

Everything about Facebook -- from data practices to how it monetizes its platform via advertising to social media's effect on society at large -- have come under fire. As I wrote early in January, I personally think it would be a mistake to target social media without also going after traditional media, too. After all, social media's roots don't stray far from its forebears in TV, radio, and print. But where Facebook differs is that its reliance on advertising as a primary form of generating revenue can change over time like no other media company can.

Facebook is investing in e-commerce and digital payments, including launching a cryptocurrency called Diem (previously known as Libra). Work on this front is well underway and has already made social media a staple among small businesses around the globe. Facebook and its family of apps also have significant cloud-computing power at their disposal that they could monetize in new ways. And perhaps most notably, Facebook owns the Oculus virtual reality business (a Skyworks Solutions customer). Oculus is housed within the "other revenue" line item, which was up 156% during the final quarter of 2020 to $885 million.

As it evolves its business model, Facebook's most powerful asset -- and a key reason I'm still bullish -- is the $62 billion in cash and equivalents and zero debt that the company had on its balance sheet at the end of the year -- making it one of the wealthiest organizations on the planet. All of that liquidity will come in handy as the social media company evolves and matures away from an ad-based business model. Challenges certainly lie ahead, but Facebook is still very much in growth mode. 

3. Visa: A best bet on a general economic recovery

The world economy is still in the throes of COVID-19, and certain industries (travel, restaurants, etc.) may take many years to recover -- or may never be the same again. Reduced consumer-discretionary spending on such categories sent digital-payment network leader Visa's financials into reverse last year. 

Visa is quickly digging itself out of the hole, though. After a 17% decline in revenue last spring (corresponding to a 10% drop in transactions processed), the company reported only a 6% year-over-year decrease in revenue and a 4% year-over-year increase in transactions processed during the final months of 2020. Adjusted net income fell just 4% from a year ago to $3.1 billion -- an astonishing 54% profit margin. Visa doesn't just handle a sizable slice of the world's digital money movement, it holds onto a lot of it every quarter, too.

Therefore, I think Visa is a great way to bet on a gradual economic recovery rather than trying to bet on which industries most deeply impacted by the pandemic will rebound first. And along the way, Visa will continue turning a very tidy profit.

It can use this steady stream of cash to invest in further growth of the world's digital-payment infrastructure and related digital commerce like data security and financial technology. It's acquisition of fintech company Plaid was recently scrapped over regulatory litigation, but Visa will have the opportunity to invest elsewhere in the technology realm. 

Visa stock trades for a rich 44 times trailing-12-month free cash flow, but for good reason. As already mentioned, it's highly profitable. Global consumer migration from cash to digital money is still a work in progress. And Visa is a preeminent player in the financial system with a lot to gain as the world rallies from the novel coronavirus.

Visa was a top stock to own during the 2010s, and I think it will be again during the 2020s. I'm still a happy shareholder.

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Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
$101.99 (-1.44%) $-1.49
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$200.04 (0.71%) $1.42
Visa Inc. Stock Quote
Visa Inc.
$197.81 (-0.71%) $-1.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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