2 Amazing Hyper-Growth Blue-Chips For Your Correction Watchlist (2024)

(Source: Imgflip)

When it comes to successful long-term investing, there are only five fundamentals that matter.

Successful investing doesn't require luck, magic, or insider information. It requires discipline, time, sound risk management, and strong fundamentals.

However, there are actually several proven strategies for exponentially growing your income and wealth.

While safe high-yield blue-chips are a personal passion of mine, the Dividend King's Phoenix portfolio, as well as my retirement portfolio, buy a balance of safe high-yield and reasonably to attractively valued hyper-growth companies.

Phoenix Portfolio Fundamentals

• Current yield on cost: 3.7%
• Current yield: 3.1% vs. 1.7% S&P and 2.2% Dividend Aristocrats
• Morningstar long-term growth forecast: 13.3% CAGR
• Weighted average forward P/E: 15.4 vs. 16.7 historical norm vs. 22.0 S&P 500
• Average discount to fair value (Morningstar estimate): 8%
• 5-year total return potential: 3.1% yield + 13.3% CAGR long-term growth +1.7% CAGR valuation boost = 18.1% CAGR vs. 4.2% S&P 500
• Risk-Adjusted Expected Return: 13.2% vs. 3.2% CAGR S&P 500 (4.2X market's expected return)

This is how we've been able to create a bunker SWAN portfolio with fundamentals to make grown men weep with joy. Not only will this portfolio deliver exceptionally safe and steadily growing income in all economic conditions and market environments, but it's 91% likely to deliver double-digit long-term returns.

That's not based on hope but on the most accurate long-term forecasting model ever devised, which is used by virtually all asset managers, including:

• BlackRock
• JPMorgan
• Brookfield Asset Management
• Oaktree Capital
• Vanguard
• Ritholtz Wealth Management (where Ben Carlson, Joshua Brown, Nick Maggiulli, and Michael Batnick all work)
• Chuck Carnevale's EDMP (earnings determine market price)
• And all the Dividend Kings

Today I wanted to share two hyper-growth SWAN stocks that I just updated for 2021 valuations and fundamentals for the Dividend Kings Master List and Research Terminal.

While neither is a potentially good buy today, both are world-class companies that can help your diversified and prudently risk-managed portfolio deliver outstanding results and deliver a prosperous retirement if bought at the right price.

Lowe's: The Ultimate Hyper-Growth Dividend King Is Modestly Overvalued

Lowe's (LOW) is one of my favorite Super SWAN Dividend Kings, that combines 5/5 dividend safety, a 3/3 wide-moat business, and exceptional management quality/dividend culture as seen by its 58-year dividend growth streak.

It's as close to a perfect dividend growth company as exists on Wall Street, and its historical returns bear this out. As Ben Graham said, over the very long term, the market almost always correctly weighs the substance of a company, and the market's verdict on Lowe's is clear.

Lowe's Total Returns Since 1986

(Source: Portfolio Visualizer)

• $1 invested in LOW is worth $320 today
• 14.7% CAGR dividend growth over 33 years turned means a 4.2% yield turned into a 387% yield on cost

Analysts actually expect Lowe's cost-cutting program and big investments into omnichannel (bricks and clicks) to drive similar growth in the future as it's experienced over the last third of a century.

But even the best company on earth needs to be purchased at a reasonable valuation to compensate you for the risk of something going wrong (and it always eventually does).

Lowe's Consensus Growth Estimates

(Source: F.A.S.T. Graphs, FactSet Research)

Lowe's has benefitted immensely from the pandemic with demand for home improvement stores exploding, resulting in analysts now forecasting 50%, 102%, and 150% growth in earnings, operating cash flow, and free cash flow respectively.

(Source: F.A.S.T. Graphs, FactSet Research)

Unfortunately, that hyper-growth is now fully priced into the stock, and a bit more.

Lowe's Historical Market-Determined Fair Value

(Source: F.A.S.T. Graphs, FactSet Research) LOW's 2021 fair value is $158 until the 5% dividend hike analysts expect in late 2021

The good news is that Lowe's isn't nearly as overvalued as many hyper-growth blue-chips that are benefiting from this pandemic. The bad news is that for the next few years, the return potential is still slightly negative.

(Source: F.A.S.T. Graphs, FactSet Research)

The good news is that analysts expect Lowe's to still significantly beat the market over the next five years, courtesy of about 2.5X faster growth, that could deliver close to 10% CAGR total returns.

Lowe's Risk-Adjusted Expected Return Calculator

(Source: Dividend King's Investment Decision Tool)

Anyone expecting Lowe's to continue roaring higher is likely to be disappointed. Mind you, it's always possible that Lowe's flies into a wild bubble and keeps roaring higher. In fact, it could potentially deliver 15% CAGR total returns over the next five years.

However, such overvaluation has never ended well for speculators who gambled that a greater fool would pay a higher multiple forever.

Lowe's Peak Declines Since 1986

(Source: Portfolio Visualizer)

From periods of very high valuation, when the stock was priced as if nothing would ever go wrong again, Lowe's has suffered no less than three 50+% crashes over the last 34 years.

Lowe's Historical Rolling Returns Since 1986

(Source: Portfolio Visualizer)

If you pay bubble-like valuations for Lowe's (which it doesn't currently have), then you can experience up to a decade of virtually zero returns, even if Lowe's delivers the rockstar growth that it's famous for.

This is the very definition of valuation risk, which many investors sadly ignore, to their sorrow.

But note how those who paid fair value for Lowe's got to enjoy 17+% CAGR growth over the decades. Those who were greedy when others were fearful, and bought at bear market lows, managed to lock in up to 29% CAGR total returns over the next 15 years, double the best market returns since 1986.

Dividend Kings Ratings On Lowe's

At $150, LOW becomes a potentially good buy, and at $158, a potentially reasonable one. Regardless of the quality of a company, or how fast analysts expect it will grow, you should never knowingly overpay for a company.

Why is that? Because analysts are not perfect and they don't have a crystal ball.

Lowe's Analyst Scorecard

LOW grows as expected, courtesy of good management guidance, about 83% of the time within a 20% margin of error. However, the analyst margins of error are up to 70% in any single year, though usually about 50% to the downside and 10% to the upside.

• 16.2% CAGR long-term growth consensus
• 8-21% margin of error adjusted consensus growth range

(Source: Portfolio Visualizer)

Lowe's historical growth rates over the last 20 years are 8-18% CAGR, meaning the analyst growth consensus range of 8-21% is reasonable. That's especially given the strong secular tailwinds the company's is facing, as well as management's strong plan to slash costs, expand margins, and buy back stock aggressively in the coming years.

However, we can't forget that Lowe's, like all companies, faces lots of short- and long-term risk factors that could drive the stock price down with incredible speed.

During the March bear market, Lowe's was cut in half, including a 25% crash on March 16th alone, when the S&P 500 fell 11% during a global margin call, the 3rd worst day in US market history.

(Source: Wikipedia)

Today, Lowe's stock is priced for nothing bad ever happening, but there are plenty of risks to the short-term share price.

Lowe's Future Volatility Risk

(Source: JPMorgan Asset Management)

According to JPMorgan's economists, in the 20-25% probability event of a double-dip recession due to this second wave, LOW could fall about 30%, during a mild 22% bear market for the S&P 500.

In future minor market pullbacks, JPMorgan expects LOW to be about 13% more volatile than the S&P 500, though during periods of economist uncertainty, potentially as much as 35%.

Phoenix Limits On Lowe's

Here are the limits I've set for the DK Phoenix portfolio as well as my retirement portfolio.

(Source: Dividend King's Limit Pricing Calculator/Phoenix Limit Tool) green = filled, blue = set

Lowe's Investment Decision Score

I never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people's default alternative.

The investment decision score is based on valuation and the three core principles of all successful long-term investors.

(Source: Dividend Kings Automated Investment Decision Tool)

Lowe's is an above-average dividend growth investment relative to the S&P 500, but I would personally wait for it to come down to a 5% margin of safety before buying it. That's what I've done with my Phoenix limits on this hyper-growth 11/11 quality Super SWAN Dividend King.

PayPal: A Wonderful Company But Trading At A Potentially Dangerous Price

PayPal (PYPL) is a growth stock the Dividend Kings bought back during the bear market at $87 and $97, at a modest discount to fair value.

• 132% total return on PYPL in about seven months

Why did we buy PayPal when it doesn't even pay a dividend? Because as long as your portfolio's yield is sufficient for your needs, hyper-growth stocks like PayPal can be a welcome addition to a diversified and prudently risk-managed portfolio.

PayPal Business Summary

PayPal was spun off from eBay in 2015 and provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company had over 300 million active accounts at the end of 2019, including 20 million merchant accounts. The company also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform."

- Morningstar

PayPal is a great investment in the future cashless society, which this pandemic has accelerated significantly.

• 5/5 balance sheet safety
• 3/3 wide and stable moat
• 2/3 above-average quality management
• 10/11 SWAN quality hyper-growth company

(Source: GuruFocus)

PayPal has 46% more cash than debt, and its advanced accounting metrics indicate low short-term bankruptcy risk, low long-term bankruptcy risk, and low accounting fraud risk.

PayPal's 13-year median debt/EBITDA is 0.62, a level consistent with AAA-rated companies.

Factoring in the entire business model and risk profile, here are the actual credit ratings on PayPal.

• S&P: BBB+ positive outlook, 5% 30-year bankruptcy risk
• Fitch: BBB+ stable outlook, 5% 30-year bankruptcy risk
• Moody's: A3 (A- equivalent), 2.5% 30-year bankruptcy risk

The business model is also wide moat and stable, as seen by the company's profitability trends relative to its peers over time.

PayPal's historical profitability, outside of this pandemic, of course, is in the top 20% of credit services companies.

(Source: GuruFocus)

Currently, PayPal's profitability averages in the top 26% of its peers, but analysts expect that to improve, as has already started to occur.

(Source: GuruFocus)

Joel Greenblatt considered return on capital, which he defined as pre-tax profits/operating capital (the money it takes to run the business), the gold standard proxy for overall company quality and moatiness.

(Source: Imgflip)

• PayPal's ROC in Q2 2020 was a staggering 441%
• TTM ROC 210% (top 9% of peers)
• 13-year median ROC 143%
• Rule of thumb for a good company: 8% ROC
• Average ROC of blue-chip quality companies: 80%
• Average ROC for 11/11 Super SWAN quality companies: 123%

PayPal's returns on capital have been slowly rising over time, indicating its competitive advantages give it a relatively wide moat.

Its management quality is also above average, based on the fact that the company has managed to maintain and, in some cases, improve its profitability to levels that Joel Greenblatt would call among the best on earth.

While we hold a favorable view of PayPal’s management, we think a standard stewardship rating is appropriate. The company has a limited history as an independent company, but we think management’s strategic choices and its acquisitions have generally been sound. CEO Dan Schulman joined eBay in 2014 and has led PayPal since its spin-off in 2015. Previously, he served as a group president at American Express, which provides some background in the electronic payments space.

We think PayPal’s management has successfully navigated the ongoing evolution of the electronic payments space to date, and its choices have helped to maintain the narrow moat that surrounds the business. While PayPal has arguably simply been better placed for growth given its online focus, we think management has done a good job exploiting the opportunities in front of the company and working to minimize competitive threats.

We would point to a couple of factors to justify our favorable view. First, we think the switch to consumer choice a couple of years was a savvy move and suggests management understands both the basis of the company’s moat and its limitations. This move positioned PayPal as more of a partner to other players in the ecosystem and headed off competition that might have otherwise arisen. We also think PayPal has done well to build merchant relationships outside of its core PayPal offering. Its ability to offer in-app payment functionality has positioned it to serve clients such as Uber. We think this kind of relationship has been key in extending PayPal’s growth."

- Morningstar (emphasis added)

Basically, PayPal is a 10/11 SWAN quality company, and just like Lowe's, has benefited from the pandemic.

PayPal Business Update

The second quarter provided further confirmation that the coronavirus has led to a material shift toward online payments, a trend that PayPal is well-placed to benefit from. We believe this trend will have lasting benefits for the company and will allow PayPal to bolster its competitive position. We intend to increase our fair value estimate to $110 from $94 and will maintain our narrow-moat rating. However, we continue to see the shares as materially overvalued.

In its first-quarter call, PayPal noted that while volumes suffered a setback in March, they gained momentum in April, and second-quarter results suggest the company maintained that momentum through the quarter. In our view, the shift toward online payments in the wake of quarantine efforts has accelerated the existing trend in this direction, and we believe these gains are sustainable.

In the quarter, PayPal saw its net revenue increase 22% year over year, driven by a 29% increase in payment volume. Payment volume in turn was driven by strong growth in active accounts, which were up 21% year over year. The absolute increase in net active accounts set a record for the company, suggesting the coronavirus has meaningfully expanded its customer base."

- Morningstar (emphasis added)

Just how fast is the company expected to grow during the worst recession in 75 years?

PayPal Consensus Growth Estimates

(Source: F.A.S.T. Graphs, FactSet Research)

In a year when the S&P 500 is expected to report -18% EPS growth, PayPal is expected to report the mirror image of that, +20% growth. Growth in cash flow metrics is even more impressive, close to 100% on EBITDA and owner earnings, and 108% on pre-tax profit.

In 2021 and beyond, the company's growth engine is expected to keep humming right along, with the analyst growth consensus unanimous that its growth profile has been improved by the pandemic.

Its growth consensus estimates have been trending higher over time and are now at their highest levels in nearly five years.

• YCharts long-term growth consensus: 21.7% CAGR
• FactSet long-term growth consensus (median of 8 analyst forecasts): 23.2% CAGR
• Reuters' 5-year growth consensus: 23.1% CAGR (36/44 analysts who cover the company)

Most impressively of all, the company has a great, if short, track record of beating expectations every single year.

PayPal Analyst Scorecard

Since its spin-off, PayPal has never missed two-year EPS growth forecasts, and in fact, has beaten them by 7-17%. Of course, three data points are not statistically significant, but the company's track record of growing faster than expected is impressive.

• 21-23% CAGR analyst growth consensus
• 22-28% CAGR margin of error adjusted consensus growth range

(Source: F.A.S.T. Graphs, FactSet Research)

PayPal's 22-28% CAGR analyst growth consensus range is well within its historical (if short) 24-28% CAGR historical growth range.

So why not recommend the company today, given this 10/11 quality SWAN's expected hyper-growth?

PayPal Historical Market-Determined Fair Value

(Source: F.A.S.T. Graphs, FactSet Research)

PayPal is currently pricing in all the growth analysts expect through 2022. If the company were to grow as expected (its track record is exceptional on that front) and trade at market-determined historical fair value by the end of 2022, investors paying a 30% premium to 2021's average historical fair value can expect basically zero returns.

PayPal 2025 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

If PayPal grows as analysts expect and trades at historical mid-range fair value in 2025, then investors paying 46.5X 2021 consensus earnings are still expected to see about 11% CAGR total returns.

(Source: Dividend Kings Investment Decision Tool)

However, since there is no guarantee that analysts are right about PayPal's growth rate, or that it will trade at fair value in 2025, the risk-adjusted expected return is actually 7.7%, still 2.44X that of the S&P 500.

Dividend Kings Ratings On PayPal

The good news for patient investors is that PayPal, like many hyper-growth tech stocks, is a rather volatile company at times.

PayPal Future Volatility Risk

Its short history means that its historical volatility is much lower than the average company's 27% 15-year historical norm. But as we saw in the recession, when volatility soared to over 50%, PayPal, just like any stock, can crash hard during market panics.

(Source: JPMorgan Asset Management)

JPMorgan estimates that in the 20-25% probability of a double-dip recession due to the pandemic, PayPal might fall about 23%, not quite returning to 2021 fair value though coming close.

Since a recession is a low-probability scenario, I'm not even bothering to set limits on PayPal, though I have returned it to the Dividend Kings Phoenix Watchlist, since it's no longer a potential trim/sell.

Dividend Kings Phoenix Watchlist Sorted By Fastest Long-Term Analyst Growth Consensus

(Source: Dividend Kings Research Terminal)

The Dividend Kings Phoenix Watchlist is the only list from which Dividend Kings or I am buying blue-chips during this recession.

• The highest-quality 9+/11 blue-chip companies most likely to rise from the ashes of this recession and soar to new heights
• Average quality 9.9/11 SWAN vs. 9.7 average Dividend Aristocrat
• Average dividend/balance sheet safety score: 4.8/5 very safe vs. 4.5 average Dividend Aristocrat
• Average dividend growth streak 22.6 years vs. 20 Ben Graham standard of excellence
• Average valuation: Fair value vs. 33% overvalued S&P 500 and 18% overvalued Dividend Aristocrats
• Average dividend yield: 3.0% vs. 1.7% S&P 500 and 2.2% average Dividend Aristocrat
• Average long-term analyst growth consensus: 9.2% CAGR vs. 6.4% S&P 500 and 7.5% CAGR Dividend Aristocrats
• Average credit rating: A- stable outlook vs. A- stable outlook average Dividend Aristocrat
• Average 3-year bankruptcy risk: 2.9%
• Average M-score: -2.63 vs -2.22 or less safe = low accounting fraud risk
• Average return on capital: 110% (top 15% of industry peers, very wide moat/extremely high-quality according to Joel Greenblatt)
• Average 5-year analyst total return forecast: 3.0% yield + 9.2% growth -0.2% valuation boost = 12.0% CAGR vs. 4.2% CAGR S&P 500
• Average 5-year risk-adjusted expected return: 8.8% CAGR vs. 3.2% S&P 500 (2.8X better)

Of course, the purpose of the Phoenix list is to keep track of the highest-quality blue-chips that I'm willing to buy myself, since I buy $200-500 worth of everything the Dividend Kings Phoenix portfolio buys in our Daily Blue-Chip Deal Videos.

We only buy potentially good buys or better, always getting a 5-20% discount to average historical fair value for any given year, depending on a company's quality and risk profile.

PayPal is absolutely worthy of being back on the list, though it would have to fall a long way before we'd buy it at a 10% discount to fair value.

PayPal Investment Decision Score

(Source: Dividend Kings Automated Investment Decision Tool)

Compared to the much-slower-growing and basically as overvalued S&P 500, PayPal is a potentially OK long-term investment right now.

However, as Chuck Carnevale reminds us, knowingly overpaying for any company, regardless of its quality or forecast growth rate, is an unforced error that reasonable and prudent investors always avoid.

Bottom Line: Lowe's and PayPal Are Wonderful Hyper-Growth SWANs, But Only At A Reasonable Price

The right watchlist is worth its weight in gold when the market inevitably freaks out in the future.

Today, Lowe's and PayPal are not good buys, but they are excellent watchlist companies that can, within a properly constructed and risk-managed portfolio, help you achieve your financial goals.

Do I think that either of these companies is likely to fall anytime soon? That would be speculative market timing, and I don't play that game.

What I can tell you is that all companies eventually become reasonably or attractively priced.

With enough patience, the ultimate virtue of the prudent long-term investor, you never have to overpay for hyper-growth blue-chips or pray for luck.

(Source: AZ quotes)

If you understand the three languages of Wall Street (probability, margin of safety, risk management) and practice the five core fundamentals of successful investing, then you can and will make your own luck and maximize the chances of achieving your financial goals.

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