Top Rated Stocks of the Week - August 12, 2024

As we head into a seasonally quiet period for the markets, several important economic indicators will be in focus this week, particularly around inflation. The Producer Price Index (Tuesday), Consumer Price Index (Wednesday), Import/Export Prices (Thursday), and the preliminary University of Michigan Consumer Sentiment Survey (Friday) will all be closely watched. While hotter-than-expected or in-line data is not expected to disrupt expectations for a 25 basis point cut by the Fed in its September meeting, cooler data could increase expectations for a 50 basis point move.

With this economic backdrop in mind, let's dive into a comprehensive analysis of three top-rated stocks to watch this week:

1. Amazon (AMZN)

Amazon ($AMZN(AMZN)) recently announced mixed Q2 earnings results, with the slowdown in advertising revenue growth particularly disappointing investors. The stock was down almost 20% from its recent all-time high. However, the bull case for Amazon remains intact, primarily due to the strength of its AWS cloud business.

Key Points

• AWS grew an impressive 19% year-over-year last quarter, making up 69% of the company's operating income.

• Amazon is making significant strides in improving efficiency and expanding profit margins in its e-commerce operations.

• The company's growing base of Prime subscribers continues to drive customer loyalty and recurring revenue.

• Amazon is enhancing its content offerings, particularly in sports streaming, which could drive further Prime membership growth.

Challenges

• Slower growth in advertising revenue compared to competitors like Google and Meta.

• Potential conflicts of interest between Amazon's private label products and third-party sellers on its platform.

• Intensifying competition in e-commerce from social media platforms and alternative apps.

Amazon trades at a Forward PE multiple of just over 35x, which may seem high but is justified by its strong growth prospects. When adjusting for expected EPS growth (using the Forward PEG ratio), Amazon trades at a 50% premium to fair value, which is not unusual for popular tech stocks.

Despite some near-term challenges, Amazon's strong position in cloud computing, e-commerce, and streaming content, along with its efforts to cut costs and improve margins, make it an attractive long-term investment at current levels.

2. Alphabet (GOOGL)

Alphabet ($GOOGL(GOOGL)) ($GOOG(GOOG)) was recently ruled an illegal monopoly in search and text advertising markets. However, the company plans to appeal the ruling, and the most likely scenario following this decision may not materially impact the company long-term.

Key Points

• Google's core search business grew nearly 14% last quarter, while YouTube ad revenue rose 13%.

• The company continues to see strong growth in cloud computing, with Google Cloud showing acceleration and meaningful margin expansion.

• Alphabet's capital allocation is improving, with the initiation of a dividend and accelerated buybacks.



Potential Scenarios Following the Antitrust Ruling

• Base Case: Google can no longer pay to be the default search engine, but users are likely to choose Google anyway due to its superior quality.

• Bear Case: Google can no longer tie its search engine to Android or pay for default status, potentially impacting its market share.

• Bull Case: The ruling results in a large fine but allows Google to continue its current practices.

Alphabet trades at 21 times forward earnings and 18 times 2025 earnings, which is significantly below historical levels and below the market average. This attractive valuation, combined with Alphabet's strong portfolio of businesses, makes it a compelling investment opportunity.

While there is uncertainty surrounding the stock due to regulatory developments and the rise of AI-driven search platforms, Alphabet's wide moat and portfolio of extraordinary assets (YouTube, Android, GCP) make it an attractive buy at current levels.

3. Restaurant Brands International (QSR)

Restaurant Brands International ($QSR(QSR)), which owns brands like Tim Hortons, Burger King, Popeyes, and Firehouse Subs, is facing some near-term pressure from weakening consumer spending. However, the company is making significant moves to expand its presence in key markets.

Key Points

• Tim Hortons is making a significant push in the Canadian market, with a strong position among Generation Z consumers.

• Burger King is undergoing a rebranding and remodeling effort in the US, which could improve its competitive position.

• Popeyes is expanding into European markets, although this move faces challenges in southern European countries with strong local food cultures.

• The company has an asset-light business model, with most of its restaurants owned or leased by franchisees.



Challenges

• Weakening consumer spending, particularly among low-income consumers who are a key demographic for fast-food chains.

• Intense competition in the Chinese market, where QSR brands face strong local and international rivals.

• High marketing costs, particularly for Burger King, which spends 25-28% of revenues on marketing compared to McDonald's 10%.

Financial Health

• QSR has a higher debt level compared to competitors but maintains positive equity.

• The company offers an attractive 3.3% dividend yield and has been consistently buying back shares.

• Cash distribution through dividends is at the highest level among peers, attracting dividend investors.

Based on a discounted cash flow model, QSR could have over 30% upside from current levels. The stock trades at a premium to peers despite higher debt levels, likely due to its dividend stability and buyback program.

While facing near-term headwinds, QSR offers an attractive dividend yield and potential for long-term growth through international expansion. The stock could be a good fit for investors looking for dividend stability and share buybacks, with potential upside as consumer conditions improve.

Overall Market Outlook

As we navigate through this period of economic uncertainty, these three stocks offer different value propositions:

• Amazon represents a growth play with a strong position in cloud computing and e-commerce.

• Alphabet offers a blend of growth and value, with a wide moat in digital advertising and emerging strength in cloud services.

• Restaurant Brands International provides a more defensive option with steady dividend income and potential for international growth.

Investors should carefully consider their risk tolerance and investment goals when evaluating these options. While all three stocks face challenges, they also offer compelling long-term value for investors willing to look past near-term volatility. As always, it's crucial to conduct thorough research and consider your personal financial situation before making any investment decisions.