The past four years have been nothing short of an adventure for investors. Over that span, the three major stock indexes have vacillated between bull and bear markets on a couple of occasions, with growth-focused indexes, like the Nasdaq 100, enduring the wildest swings.
After shedding a third of its value during the 2022 bear market, the high-flying Nasdaq 100, which is comprised of the 100 largest non-financial companies listed on the Nasdaq exchange, has gained 46% on a year-to-date basis, as of the closing bell on Dec. 7.
Image source: Getty Images.
Although this is a monstrous rally, the Nasdaq 100 remains a few percentage points below its all-time closing high, set nearly two years ago. Put another way, bargains can still be found for investors willing to seek them out. Just keep in mind that not all 101 components of the Nasdaq 100 are necessarily worth buying (one company has two classes of shares, thus 101 components and not 100).
What follows is the Nasdaq 100 stock that's a screaming buy in December, as well as the Nasdaq 100 component that's priced for perfection and worth avoiding.
The Nasdaq 100 stock to buy hand over fist in December: Sirius XM Holdings
Among the 100 companies to choose from, the one that can confidently be purchased hand over fist in December is satellite-radio operator Sirius XM Holdings (SIRI).
Every publicly traded company has challenges it's contending with, and Sirius XM is no exception. For Sirius XM, the growing likelihood of U.S. economic weakness, coupled with rapidly rising interest rates, have the potential to weigh on its share price.
A handful of money-based metrics and predictive tools suggest U.S. economic growth could slow or shift into reverse in 2024. Sirius XM relies on new auto sales to turn promotional listeners into self-pay subscribers. It's not uncommon for consumers to pare back their discretionary spending during recessions.
The other potential concern is that Sirius XM is carrying more than $9.3 billion in short-and-long-term debt on its balance sheet. Future refinancing activity and/or acquisitions could be notably costlier with interest rates rising at their fastest pace in four decades.
Despite these challenges, Sirius XM brings well-defined competitive edges and sustained catalysts to the table, which make it a no-brainer buy in December.
To start with, it's the only authorized satellite-radio operator. Let me be clear that this doesn't mean the company is free of competition. It's still fighting for listeners with terrestrial and online radio providers. But as the only authorized provider of satellite-radio services, Sirius XM holds superior pricing power that other radio operators lack.
To add to this point, Sirius XM's operating model is markedly different than its competitors. Terrestrial and online radio companies rely on advertising for much of their revenue. By comparison, Sirius XM generated nearly 78% of its net sales through the first nine months of 2023 from subscriptions. During economic downturns, advertisers are quick to pare back their spending. Consumers, on the other hand, are far less likely to cancel a relatively low-cost monthly service. In other words, Sirius XM is better positioned to navigate a difficult economic climate.
Sirius XM Holdings also brings a level of cost predictability to the table that traditional radio operators lack. Though expenses tied to talent acquisition and royalties are going to fluctuate on a quarterly basis, transmission and equipment costs are relatively fixed. Sirius XM can continue to steadily grow its subscriber base without increasing its transmission expenses, which looks to be a recipe for long-term margin expansion.
Best of all, Sirius XM stock is cheaper than it's ever been. Investors can buy shares right now for 15 times forward-year earnings, which compares to an average forward price-to-earnings (P/E) ratio of 22 over the past five years.
Deliveries for the all-new Cybertruck began at the end of November. Image source: Tesla.
The Nasdaq 100 stock to avoid in December: Tesla
On the other hand, one of the core stocks that's powered the Nasdaq 100 higher by 46% year to date is the top stock to avoid in December. I'm talking about North America's leading electric-vehicle (EV) maker, Tesla (TSLA -1.11%).
Just as the best stocks to buy face headwinds, even stocks to avoid have potential upside catalysts. For Tesla, nothing is more exciting at the moment than the rollout of the Cybertruck. Deliveries began at the end of November, with production expected to really ramp up in 2024. CEO Elon Musk has previously touted that Tesla collected over 1 million refundable deposits for the Cybertruck. If consumers follow through with their purchases, it would be a definite boost for Tesla's bottom line.
Tesla is also successfully riding its first-mover advantages. It's the only pure-play EV maker that's generating a generally accepted accounting principles (GAAP) profit. In fact, it's expected to report its fourth consecutive year of GAAP profits in 2023.
Although Tesla has a storied history of proving naysayers wrong, a number of headwinds are now fully stacked against the company.
One of the bigger issues for Tesla is the price war it kicked off earlier this year with other EV manufacturers. Though it was rumored that production efficiencies were behind Tesla's price cuts, Elon Musk noted during Tesla's annual shareholder meeting in May that demand dictates the company's pricing strategy. More than a half-dozen price reductions across its four production models (3, S, X, and Y) clearly indicates that demand is weak and inventory levels are climbing. Global vehicle inventory has increased more than 400% over the past two years.
More importantly, Tesla's pricing strategy is clobbering its operating margin. Over the trailing year, ended Sept. 30, Tesla's operating margin has been more than halved to 7.6% from 17.2%. Despite having a market cap that's equal to most major automakers on a combined basis, Tesla's operating margin is no better than the auto industry average of around 8%.
Another problem for Tesla is that it's struggled to become more than just a car company. Though its Energy Generation, Storage, and Services segments are, collectively, generating a gross profit, these are low-margin divisions. Tesla is heavily reliant on selling and leasing EVs to make money, and that aspect of its operations is struggling mightily amid increased competition.
I'll quickly also add that more than 40% of Tesla's pre-tax income during the September-ended quarter derived from unsustainable sources -- interest income on its cash and regulatory auto credits.
But the top reason to avoid Tesla in December is Elon Musk. Tesla's CEO has a terrible habit of overpromising and underdelivering that dates back more than a decade. Everything from promised Level 5 full self-driving (FSD) to a $25,000 mass-produced sedan have yet to come to fruition, but appear to be fully baked into Tesla's valuation.
Auto stocks traditionally trade at 6 to 8 times forward-year earnings. Tesla is nearing a multiple of 65 times its forward-year P/E. This makes it an easy stock to avoid in December.
