Whether it's just a Santa Claus rally, a sigh of relief from falling inflation, or a sign that investors are not particularly concerned about a recession, the stock market indices are knocking on the door of record highs.
This is great for stock portfolios but makes it much more difficult to find solid bargains. For instance, Microsoft trades near its all-time high, and its price-to-earnings (P/E) ratio of 36 hasn't been seen since the tech bubble of 2021. It isn't alone.
With CDs and bonds offering 5% yields, some investors are sitting more on cash or trimming their stock holdings as the market becomes increasingly expensive. This could be a smart move. Stock market pullbacks are tricky to time (or else we would all be rich, right?), but they will inevitably come.
When they do, it's good to have a wish list of terrific companies to buy. Here is mine.
The AI enabler
The artificial intelligence (AI) market is exploding. Companies are dedicating significant funding to generative AI (things like chatbots), speech recognition, robotic process automation, and more. Nvidia's (NVDA 6.18%) powerful graphics processing units (GPUs) and other hardware and software make this possible. Its most significant problem in 2023 wasn't marketing but rather making enough products to keep up with booming demand.
Here is a visual that really brings Nvidia's dominance to light:
OEM = original equipment manufacturer.
As you can see on the top left, data center revenue exploded last quarter to $14.5 billion on an unbelievable 279% growth. The other huge takeaway is in the top-right corner: $9.2 billion in net income -- a 50% margin. Nvidia's margins are a Business 101 lesson on supply and demand. Demand is so high that Nvidia has incredible pricing power and, hence, industry-leading margins.
None of this is a secret, so the stock is up more than 230% in 2023, and the forward P/E ratio is nearly 40. Nvidia is poised for many years of success, but much of this is priced in. However, if the market pulls back and drags Nvidia stock down with it, I'll be first in line to pick up shares.
A cybersecurity leader
I've been bullish on cybersecurity lately because it's indispensable. Rain or shine, recession or shine, companies cannot afford not to spend for top-notch cybersecurity. Palo Alto Networks (PANW 0.91%) is a leader in network, cloud, and endpoint security, and its stock is up over 110% year to date (YTD). Total sales rose 25% in fiscal 2023, reaching $6.9 billion, and another 20% in Q1 fiscal 2024.
Palo Alto's cloud-based next-gen security platform is driving growth. This platform's annual recurring revenue (ARR) reached $3.2 billion last quarter on 53% year-over-year (YOY) growth. Another 34% increase is forecast for this fiscal year. The terrific performance hasn't gone unnoticed. The stock trades near its highest price-to-sales (P/S) ratio since 2016, as shown below.
PANW PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Palo Alto is a much stronger company now, so it deserves a higher multiple. However, the price is still high. A market dive would be an excellent time to consider this stock.
The future of surgery
Surgeons worldwide use robotic-assisted, minimally invasive surgical systems to produce better patient outcomes. The Mayo Clinic confirms that these procedures cause fewer complications, less discomfort, less time in the hospital, and less scarring for patients. The global system of choice is the da Vinci Surgical Systems made by Intuitive Surgical (ISRG 0.59%).
More than 13 million procedures have been performed with da Vinci, including 1.8 million in 2022. Procedures have grown 15%, compounded annually, since 2019. The number of procedures is the key to Intuitive's success because more than 75% of its revenue is recurring from instruments, accessories, and services.
It's a classic "razor-and-blades" model. The razor seller doesn't make much money on the razor, but it makes hay selling the replacement blades repeatedly. This is the key to Intuitive's long-term success as the market becomes saturated with its machines.
Intuitive has terrific financials. It produced $5.2 billion in sales through Q3 and $1.3 billion in operating income, a strong 25% margin. The company's balance sheet is a fortress: $7.5 billion in cash and investments and zero long-term debt. Intuitive trades in the range of its highs from the tech bubble in 2021, with a 79 P/E ratio, shown below.
ISRG data by YCharts. PE Ratio = price-to-earnings ratio.
Just like Palo Alto and Nvidia, it's a great company but expensive stock. Intuitive should definitely be on an investor's wish list if the market hits a rough patch.
Market downturns often appear when we least expect and can recover quickly, as the market did after the March 2020 COVID-19 crash. Sell-offs are opportunities for investors, and you don't want to be caught flatfooted when it happens. That's why having a shopping list in advance is vital.
