These 3 Stocks Avoid the Hidden Price of Nostalgia

“The thing about the old days… they the old days.” ~ Slim Charles, The Wire

Nostalgia can often be an enemy of investing success.

As humans, we anchor ourselves to the past and internalize it as being normal. Then, deviations from this normalcy are treated like aberrations. 

This type of thinking can hinder investors. Instead, they should understand that change is the only constant in this world.

What’s Changed?

One of the biggest changes over the last decade is that we are in a period of structurally higher inflation. Contrast this to the last few decades when inflation had been contained due to a combination of globalization, demographics, and technology.

While the pandemic-driven stimulus was the catalyst, there are deeper fundamental factors behind the global surge in inflation. We are entering a period, reminiscent of the 1960s and 70s. There is a considerable amount of political uncertainty, geopolitical instability, and a stagnant economy. Populism is ascendant on both sides of the aisle, while the centrist, neoliberal dogma is receding. 

This is the major reason for inflation’s durability and the steady climb in longer-term interest rates. Countries in the developed world are facing an intractable fiscal situation. 

Notably, this period saw stocks struggle to advance, while commodities ripped higher. 

As it is, deficits are too high and exacerbated by higher rates, adding to interest rate expenses. On top of this, demographics mean that programs like Social Security and Medicare outlays will continue to increase, while revenues lag behind. 

The rise of populism diminishes the chances of a bipartisan, grand bargain that would lead to a more sustainable path. Instead, it increases the chances that the Fed and/or Treasury will step in to artificially suppress rates which will also add to inflationary pressures. 

Your Market-Beating Edge: Zen Ratings

Despite this backdrop, there are going to be plenty of opportunities for investors. 

In fact, this era of higher inflation means that many companies’ moats just got wider and deeper.

The Zen Ratings can be an invaluable tool to identify these companies. Picking stocks with an A or B overall rating ensures that downside risk is minimized. Then, investors can prioritize components like Growth and Financials. Growth reflects measures like sales acceleration, profit margin improvements, and free cash flow momentum, while the Financials score evaluates the sustainability of these trends.

What Now?

Think about a company like Uber (NYSE: UBER). Uber was started in an era where venture capital was cheap and abundant due to the Fed’s ZIRP policy. Additionally, this was a period where there was considerable slack in the labor market. Thus, the company had no shortage of drivers, and VC investors were able to subsidize the business for years before it became profitable.

Starting such a business in this era would be considerably more expensive and challenging. For one, the cost of capital is much higher at 4.5% vs 0%. This means that Uber’s strategy of operating at a loss to gain market share is not viable. And, labor is more scarce and expensive as well, which means driver recruitment would be a struggle.

In addition to Uber, I want to talk about 2 more stocks whose businesses have gotten stronger and more valuable in this new era: Doordash (Nasdaq: DASH) and Ericsson Telephone (Nasdaq: ERIC).

1. Uber (NYSE: UBER)

Uber is a pioneer in the modern economy with its ride-hailing and food-delivery services. It also helped establish the on-demand gig economy which offers flexible work opportunities through its platform. 

As noted above, Uber’s moat is now deeper and wider given changes in the economy. It also has a dominant market share in terms of ride-hailing which unleashes its own set of network effects, making its platform even more powerful.

It’s also well-posited for autonomous vehicles (AV) as they are already being integrated into its network as evidenced by Waymo in several states. Uber has another opportunity as autonomous vehicles will also need to be serviced and maintained, and Uber already has the infrastructure and network to accomplish this.  

The Zen Ratings are also bullish on Uber as it’s rated a Buy (B). B-rated stocks have produced an average annual return of 19.5% which easily beats the S&P 500’s average annual return of 10.8%.

Out of the Zen Ratings’ universe of more than 4,600 stocks, Uber is ranked in the top 2% for Financials. This can be attributed to Uber’s improving margins, increase in operational efficiency, and a strong return of equity ratio. 

2. Doordash (Nasdaq: DASH)

DASH is similar to Uber in many ways and also benefited from the unique conditions of the previous decade. It’s a leader in food delivery as its platform connects users with restaurants and other stores to provide on-demand delivery services. 

The same dynamics that expanded Uber’s moat also apply to Doordash especially given that many younger consumers are increasingly reliant on these services. Recent growth has been driven by expansion into other areas like groceries, retail, and pharmacies as well as foreign acquisitions. 

DASH is in the midst of an earnings surge. This year, earnings are expected to climb by more than 600% for the full-year, and analysts are looking for another 66% increase in EPS in 2026. Given this strong earnings momentum, it’s not surprising to see that DASH has an A grade for Growth. 

Part of DASH’s success is that it’s seeing rising earnings, sales, and margins, an appetizing combination for investors. Additionally, just like Uber is positioned as an intermediary for the coming AV boom, DASH is also well-positioned to be an integral intermediary for the advent of delivery drones which are expected to become a reality in the coming decade and will have similar transformative effects on business and life. 

3. Ericsson Telephone (Nasdaq: ERIC)

ERIC is a Swedish company which is a leading provider of infrastructure, software, and services to mobile network operators. While UBER and DASH are more exciting companies, ERIC is an old-school, telecommunications stock that has underperformed. 

Yet, the AI boom and requisite infrastructure investments could be a catalyst for these types of companies as this type of physical infrastructure becomes increasingly important. In an inflationary environment, the value of these assets should also commensurately increase.

Over the last decade, mobile operators upgraded their networks to 5G which is necessary in a world where people are constantly accessing huge troves of data such as streaming videos on their phones. Now, the challenge will be to make intelligence abundantly available. Of course, the computational needs of AI are significantly higher than consuming content.

Despite this potent catalyst, ERIC has an attractive valuation with a forward P/E of 14.4 which is more than 50% less than the S&P 500’s forward P/E of 22. It also pays a 3.1% dividend yield. Given this, it’s not surprising to see that ERIC is rated a B for Financials, Value, and Safety.

Overall, ERIC is rated highly by the Zen Ratings with a Strong Buy (A) rating and is in the top 1% of all stocks. A-rated stocks have an average annual performance of 32.5% which beats the S&P 500’s average annual gain of 10.8%. 

Conclusion

Many investors are applying yesterday’s playbook to today’s market. 

This behavior is hard-wired into our brains, but successful investing is about embracing the change and finding the new opportunities that emerge as a result of this change.

The inflation dynamic is a headwind for consumers and most businesses. Yet for a select few companies, it will help bolster their competitive advantages.

What to Do Next?

• 9 Special Stock Lists You Need Now >
• See All “A” Rated Stocks with +32.52% Average Annual Return >
• 2 New Stocks to Buy from Steve Reitmeister >

Want to get in touch? Email us at news@wallstreetzen.com.