Apple, Diamondback And 3 Other Nasdaq Stocks To Buy

The Nasdaq Stock Market has a reputation as a home for up-and-comers. In the past year, it’s been more like down-and-outers.

The Nasdaq Composite Index fell more than 3% in the 12 months through March 15, while the Standard & Poor’s 500 Total Return Index, widely viewed as a proxy for the stock market as a whole, rose almost 9%.

The Nasdaq Composite contains about 3,000 stocks, but close to a third of its value lies in seven highly popular stocks, which I call the Sacred Seven. In the year from March 15, 2021 to March 15, 2022, three of the seven were down. Here’s the rundown:

• Alphabet (GOOGL), up 26%.
• Amazon.com (AMZN), down 4%.
• Apple (AAPL), up 26%.
• Meta Platforms, former Facebook (FB), down 30%.
• Microsoft (MSFT), up 23%.
• Netflix (NFLX), down 34%.
• Tesla (TSLA), up 13%.

In my last column about the Nasdaq, a year ago, I recommended Alphabet and Apple, which happily were the two best performers. I suggested avoiding Amazon and Facebook, which both fizzled. But I also suggested avoiding Microsoft and Tesla, and those two did well.

I didn’t comment on Netflix at the time, and it fell the worst. I think Netflix is the perfect example of the truism that there’s a difference between a good company and a good stock. As a company I think Netflix deserves immense credit for practically inventing streaming, and executing its strategy well. As a stock, I think it’s still a wee bit overpriced at more than 33 times earnings and 10 times book value (corporate net worth).

What I Like

I continue to like Alphabet and Apple. I regard Alphabet as the most innovative company in the U.S. Its subsidiaries include Google, You Tube, Waymo and Deep Mind.

Apple has $37 billion in cash or near-cash, and $26 billion in securities, plus a loyal following for its flagship iPhone.

Outside the Sacred Seven, here are a few stocks I think might offer good gains in the coming year.

Diamondback Energy (FANG), based in Midland, Texas, stayed profitable intermittently during the six-year energy bear market of 2014-2020, when most of its rivals were losing money steadily. Notable for its strong presence in Texas, Diamondback achieved a 19% return on total capital in its latest quarter.

One thing that slightly troubles me about Diamondback is that it’s almost universally liked by Wall Street analysts. Of 30 analysts publishing opinions, 28 recently rated it a “buy.” Stocks advance by exceeding expectations, and high expectations are harder to exceed.

Despite this drawback, I expect high oil prices to persist in 2022-2023, and Diamondback to do well.

Encore Wire (WIRE), out of McKinney, Texas, makes wire and cable for residential, commercial and industrial buildings. I’ve owned the stock on and off for years. Because it’s in an unglamorous business, Encore sells for a less than six times the company’s per-share earnings—a cheap stock.

Yet if you looked at a graph of Encore’s revenue and earnings, you might think it was a high-tech hot stock. In the past five years, sales have averaged better than a 16% annual increase, and earnings have grown at a 49% pace. The company is debt-free.

Dirt-cheap at three times earnings is Olympic Steel (ZEUS) of Highland Hills, Ohio. Steel companies have been piling up good earnings lately, but investors distrust their future for a few reasons. The industry has been enjoying tariff protection, which may be eliminated someday.

Also, steel earnings are notoriously cyclical. Olympic, for example, lost money in 2009, 2015, 2015, 2016 and 2020. So if the good times are rolling now, investors fear they won’t last. Nonetheless, I like the industry because we’re in an inflationary period, and steelmakers usually are able to hike their prices in such times.

Past Record

This is the 16^th column I’ve written about Nasdaq stocks. The average one-year gain on my recommendations in this series has been 19.8%%, compared to 17.8%% for the Nasdaq Composite Index and 13.7% for the S&P 500 over the same periods.

My recommendations from a year ago went nowhere. Apple, Alphabet and StoneX Group (SNEX) did fine, but LGI Homes (LGIH) fell and America’s Car-Mart (CRMT) plunged. The net result was a gain of 0.5%, beating the Nasdaq Composite but way behind the S&P 500.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: I own Alphabet and Apple personally and for most of my clients. I own Encore Wire personally and in a hedge fund I run. One of my clients owns Diamondback.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].