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“The US500 index did incredibly well in 2021, mainly thanks to companies like Apple, which has reached a market cap of close to $3 trillion and whose share price has skyrocketed by 40%, Microsoft, whose share price rose by 53% on an annual basis, Amazon (7% increase), Alphabet (68% increase) and, of course, Tesla (64% increase). That being said, I won’t be discussing these companies here, but rather the ones that really took the index to the next level in 2021.”
Ivaylo Chaushev, chief financial analyst of DeltaStock
According to the chief analyst, the broad index US500 is increasingly starting to look more like a technological index as its top companies are all tech-related. This, in turn, has started positively impacting the growth of the index itself.
As an example of this, Ivaylo points at Fortinet – a cybersecurity company that has taken the fourth spot in the list of most expensive stocks under the index for the past year, even though it only has the “humble” 142% yearly growth to show for it.
“Fortinet is one of the most stable companies on the list. The foundation behind the company is relatively stable, with quite decent sales growth, growing profits, and a healthy free cash flow. Fortinet’s product portfolio is expanding at an extraordinary pace, with more than 40% of the company’s revenue coming from the products it sells and another 60% from cybersecurity services . . . Fortinet is also following through on its share buyback program, which in turn boosts its price per share. I wouldn’t say that the company’s presence on the list is a surprise to anyone, but I nonetheless expect an upcoming corrective movement as its current share price sits at a level I feel is a little bit overpriced.”
Ivaylo Chaushev
As to why he feels it’s overpriced, the analyst commented that, as the pandemic-related volatility in the sector is quieting down, the flow of capital is starting to shift. And while this doesn’t necessarily mean that the sector will stop growing altogether, he argues that it will do so at a slower rate than expected.
When it comes to Moderna’s performance, which entered the top 3 companies under the index, the company was among the fastest-growing in terms of share price back in 2020 (453% yearly growth), while in 2021 that growth was 143%. This time, however, the chief analyst doesn’t expect the same return on investment in 2022, especially given the fact that the company’s COVID-19 vaccine is its only approved product on the market and that all of its income is derived from it. Moderna’s situation becomes even more dire when we consider that the non-mRNA vaccine variants of other competitors, such as that of Novavax, are stored more easily and provide slightly higher antibody levels.
“One more thing that could affect Moderna’s share price is the Pfizer and Merck pills, which are taken as a follow-up treatment and reduce the risk of patient hospitalisation. While the existence of these drugs will not invalidate the vaccines completely, it will definitely negatively impact sales figures.”
Ivaylo Chaushev
When it comes to the top two spots on the US500 list, the chief analyst doesn’t find it surprising that they are both taken by companies in the energy sector. Both companies (Devon Energy and Marathon Oil) are in the oil and natural gas extraction business, with Devon Energy taking the first place with an annual growth of 179%. This growth is also not surprising, considering the company’s stellar performance since 2020, Ivaylo adds. Profits back then amounted to $394 million, while the latest reports reveal a much bigger figure of $3.466 billion, which is an almost tenfold increase. Devon’s financial health seems to be in order as well, while its cash flow is continuing to increase. When it comes to its outstanding debts, there’s nothing particularly concerning there as well as a recent report mentioned a net debt of slightly over $4 billion.
“The curious thing with Devon Energy is that, besides the gargantuan growth in the price per share, the company is also handing out pretty solid dividends. In the last quarter, for example, the dividends amounted to 84 cents per share, while the total dividends per share for the year were $3.36. They also run a solid share buyback program and that is what makes the performance of this company so outstanding.”
Ivaylo Chaushev
As for Marathon Oil, the situation is about the same, argues the chief analyst. According to him, profits are soaring, while the company’s financial situation is also looking good. The dividends offered here are slightly lower, but the cash flow is also continuously going up. The company also purchased back shares for a total of $500 million. Its debt situation is also shrinking – all in all, a solid company, concludes Ivaylo.
“Although these two companies are looking extremely attractive, they need to be approached very carefully because they are largely proxies to oil. The correlation between share price and oil price is extremely high. At the moment, high price volatility on the oil market will likely stick around at least throughout the first half of 2022, so any investors looking into them should be very cautious.”
Ivaylo Chaushev
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Disclaimer: This article is for information purposes only and aims to share chief analyst Ivaylo Chaushev’s personal opinion on the matter. The information herein provided does not constitute a buy or sell recommendation for any of the financial instruments herein analysed.
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