It's amazing what a difference a year can make on Wall Street. After tumbling into respective bear markets in 2022, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all rallied more than 20% off of their bear market lows. By one definition, this places all three indexes in a new bull market.
However, Wall Street's 180 has been particularly jaw-dropping for the growth-stock-driven Nasdaq 100 -- an index comprised of the 100 largest nonfinancial companies listed on the Nasdaq exchange. Through the first seven months of 2023, the Nasdaq 100 has firmly put the 2022 bear market in the rearview mirror and soared 44%.
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But even with this phenomenal rally, the Nasdaq 100 is still below its all-time closing high, set in late December 2021. For some investors, it means bargains still abound. For others, it signals the return of grossly overvalued equities.
What follows are two Nasdaq 100 stocks that stand out as surefire buys in August, along with another Nasdaq 100 component that would be best avoided by investors.
Nasdaq 100 stock No. 1 that's a surefire buy in August: Sirius XM Holdings
The first Nasdaq 100 component that makes for a screaming buy in August is satellite-radio operator Sirius XM Holdings (SIRI). Sirius XM has been a favorite among traders since it underwent a mammoth short squeeze two weeks ago. With 31% of its float held short, as of July 14, the recipe was there for pessimistic investors to be pushed out of their positions.
But let's make one thing clear: Sirius XM stock is worth buying, and it has absolutely nothing to do with the recent short squeeze or the amount of short interest in the company's stock. Rather, there are four catalysts that should entice investors to pounce.
To begin with, Sirius XM is a legal monopoly. Though it does face tangible competition for listeners with terrestrial radio and online channels, it's the only licensed satellite radio operator. When push comes to shove, being a legal monopoly gives the company exceptional subscription pricing power.
The second reason to be optimistic about Sirius XM is what I refer to as the "numbers game." Although radio operators have been clobbered in recent quarters by a slowdown in ad spending, the U.S. economy spends a disproportionate amount of time growing. It means ad-driven businesses spend more time reaping the rewards of an expanding economy than playing defense.
A third catalyst for Sirius XM is the company's revenue mix. Even though ad spend should notably improve in the coming years, advertising only accounted for 17.5% of net sales in the March-ended quarter. Comparatively, nearly 79% of the company's total revenue comes from high-margin subscriptions. Whereas advertisers are quick to pare back their spending during periods of economic weakness, subscribers are less likely to cancel. The stickiness of a subscription-driven operating model means Sirius XM is better positioned to navigate choppier waters than other radio operators.
Lastly, Sirius XM brings a degree of cost predictability to the table that other radio operators can't match. Despite revenue share and royalty expenses shifting from quarter to quarter, the company's transmission fees and equipment costs are highly transparent and predictable. No matter how many new subscribers the company nets, transmission costs won't rise. This looks to be a recipe for a higher operating margin over time.
Nasdaq 100 stock No. 2 that's a surefire buy in August: Vertex Pharmaceuticals
A second Nasdaq 100 stock that stands out as a surefire August buy is none other than biotech company Vertex Pharmaceuticals (VRTX -0.06%).
Without question, the single biggest headwind for Vertex is its lack of sales diversification. Based on what the company told investors in early May, Vertex anticipates generating $9.55 billion to $9.7 billion in net product sales this year. Every cent will come from therapies aimed at treating cystic fibrosis (CF), a genetic disease characterized by thick mucus production that can obstruct the airways of the lungs and ducts of the pancreas.
However, this lack of diversification is also a blessing. Vertex has developed four generations of treatments approved for CF patients by the U.S. Food and Drug Administration (FDA), and there are currently no competing drugs in the space. Since CF is considered an orphan disease (i.e., a disease affecting fewer than 200,000 people), Vertex possesses exceptional pricing power and has little concern about its ongoing cash flow.
Vertex is currently working on its fifth-generation combination treatment for CF. Its predecessor, Trikafta, targets the most-common mutation (f508del) and was given the green light by the FDA five months ahead of its scheduled review date.
Nevertheless, Vertex is working to expand its pipeline beyond CF. One of the more exciting compounds in development is exagamglogene autotemcel (exa-cel), a gene-editing therapy developed in cooperation with CRISPR Therapeutics to treat severe sickle cell disease and transfusion-dependent beta thalassemia. If approved, exa-cel has the potential to reach an estimated $1 billion in annual sales by 2028.
Investors shouldn't overlook Vertex's cash-flow generation, either. The company closed out March with over $10.4 billion in cash, cash equivalents, and marketable securities. In a given year, Vertex's cash pile can grow by more than $3 billion. This provides plenty of capital for the company to conduct novel research, forge collaborations, make acquisitions, and buy back its stock. In February, the company's board OK'd a share repurchase program worth up to $3 billion.
With sustained high-single-digit/low-double-digit annual sales growth and its cash flow well protected, Vertex has the look of a no-brainer buy in August.
The all-electric Model 3 is Tesla's flagship sedan. Image source: Tesla.
The Nasdaq 100 stock that's worth avoiding in August: Tesla
On the other hand, not all Nasdaq 100 companies are necessarily worth buying. High-flying electric vehicle (EV) manufacturer Tesla (TSLA -1.11%) is the perfect example of a stock that investors would likely be best avoiding in August.
There's little question that Tesla deserves some degree of valuation premium, given its first-mover advantages in the EV space. The company produced nearly 480,000 EVs in the second quarter, which puts it well on track to reach its target of 1.8 million EVs produced in 2023.
Additionally, no other pure-play EV maker is generating a generally accepted accounting principles (GAAP) profit. Tesla has delivered three straight years of GAAP profits and looks to be on its way to making it a fourth consecutive year in 2023.
But this is where the praise for Tesla ends.
One of the biggest issues for the company is increasing competition weighing on its automotive gross margin. Tesla has enacted a half-dozen price cuts in the U.S. since the start of the year, which CEO Elon Musk confirmed during the company's first-quarter question-and-answer session with investors was in response to demand.
With Tesla slashing prices on its EVs to keep inventory levels manageable, the company's automotive gross margin is getting clobbered. Excluding renewable energy credits, the company's automotive gross margin shrank to 17% in the June-ended quarter.
Another problem for Tesla is that it's been unable to shed its label as "just a car company." While its supercharger network is quickly becoming a U.S. standard, the company's energy, generation, and storage segment saw sales decline by 1% on a sequential quarterly basis in Q2 2023. The point being that Tesla is overwhelmingly reliant on selling and leasing EVs for its profits, while energy storage and services are low-margin ancillary segments.
With Tesla being weighed down by the same competitive/margin headwinds impacting other auto stocks, its valuation comes into greater focus. Although it's the North American EV market share leader, a multiple of 86 times Wall Street's forecast earnings per share in 2023 is a tough pill to swallow. Since the auto industry is highly cyclical, auto stocks typically trade at high-single-digit earnings multiples.
The final concern is the company's CEO, Elon Musk. Putting aside that Musk seems distracted by his numerous side projects (SpaceX, Boring Company, and X, the social media platform previously known as Twitter), he has a knack for overpromising and underdelivering. For instance, Tesla shareholders have baked Musk's fully autonomous driving predictions into Tesla's valuation without the company placing a single robotaxi on the road. The longer Musk's laundry list of promises remains unfulfilled, the likelier Tesla's lofty share price will deflate.
