Background

The market is volatile as ever, and predicting the market is nonsense.

Instead, it is better to research which companies to invest in.

In this post, I’m sharing my list of top companies to invest.

The market nowadays is still so unpredictable, and it is as volatile as ever. I think we all got used to seeing market indices with more than 3% increase or drop in one day. Since March 1 until today (April 5), we’ve seen 16 days of Nasdaq composite index either dropping or increasing more than 3% out of 25 trading days. That is more than half! Max drop was -12.32% (March 16), while the max increase was 9.35% (March 13). My previous blog post explains a negative correlation between market volatility and market performance. Hence I suggested that it is probably better to invest when market volatility gets back to normal (for more info: When is the right time to invest during a stock market crash?).

It’s silly but also funny that we all kind of know that we shouldn’t be timing the market, or we shouldn’t try to predict the market bottom because it’s just impossible. Instead, it’s better to think about what companies to invest.

Finding the Top Companies to Invest

What are the criteria of finding top companies amidst the COVID-19 crisis (along with other crises triggered by COVID-19, such as unemployment, economic slowdown due to shelter-in-place order)? Once Warren Buffett said, “Only when the tide goes out, do you discover who’s been swimming naked.”

Figure 1. Warren Buffett quote.

I think this quote is very relevant and applies perfectly when finding companies to invest in such a crisis situation. The tide is going out, and we are already seeing companies with weak fundamentals at risk of bankruptcy. The U.S. government will spend an astronomical amount of money to support these companies, but we should avoid these companies as it is too risky.

The first criterion that I’d look for when selecting companies to invest is market capitalization. Some would argue why is market cap important? Market cap refers to the total “value” of a company by multiplying the price of a stock by its total number of outstanding shares [1]. The market cap represents a company’s worth as well as investors’ perception of its prospects. Simply, mega market cap companies are assessed by the market as companies that are currently performing well and will also continue its solid growth and performance in the near future. These factors are all baked into their stock prices, which means that if we are unsure of which companies to invest in, perhaps it is a safe bet to invest in a company that has the largest market capitalization- the #1 company.

So which companies have the largest market cap? Below is the list of top 10 companies by market cap.

Table 1. Top 10 Companies by Market Cap.

Company Sector Market Cap (as of 4/6/2020) Microsoft (MSFT) Technology 1.26T Apple (AAPL) Technology 1.15T Amazon (AMZN) Consumer Cyclical 994 Alphabet (GOOG) Communication Services 815 Alibaba Group (BABA) Consumer Cyclical 501 Facebook (FB) Communication Services 472 Tencent (TCEHY) Communication Services 472 Berkshire Hathaway (BRK-A) Insurance-Diversified 449 Visa (V) Financial Services 375 Johson & Johnson (JNJ) Healthcare 368

Not surprisingly, Microsoft is currently at the top of the list, which means that it is the #1 company in terms of market cap, and the most valuable company in the world. So if we want to invest in companies that are known to be the most valued companies in the world, it should be the above companies.

There is an interesting research paper by Dr. Bessembinder from Arizona State University. In this report, which is titled “Wealth Creation in the U.S. Public Stock Markets 1926 to 2019” he points out that the net wealth created in the stock market between 2016 to 2019 is $12.56 trillion, and 22.1% of this $12.56 trillion increase was due to the top five companies, which are Apple, Microsoft, Amazon, Google, and Facebook. Dr. Bessembinder also explains that during the three years, you’d need only 48 out of 4,896 companies to account for 50% of the total wealth created by the market. That is less than 1%. This topic was also covered in MarketWatch.com-Coronavirus isn’t stopping the rich from getting even richer on Wall Street on March 26, 2020. This research implies that diversification is more important than ever, which I thought was an odd conclusion. If you know that a few companies will create a significant portion of wealth, wouldn’t it make more sense to invest in those companies instead of trying to find a good company in the remaining almost 5,000 pool?

The second criterion is to examine how much cash a company has-”cash reserves”. We’d want to look for companies with lots of cash, especially at these harrowing times. As alluded in the quote (Figure 1), companies with strong fundamentals, healthy cash flow, and ample cash reserves are far better positioned to survive and even solidify their foundation during this crisis period. So which company has the most cash on hand? As illustrated in Figure 2, Microsoft, Berkshire Hathaway, Alphabet (Google), Apple, Facebook, and Amazon are the top six companies with cash, and which also happens to be in our list of top 10 companies by market cap (Table 1).

Figure 2. Companies with most cash reserves (source).

The third criterion is to look for a company’s credit rating. In just a couple of weeks, the majority of people in the US have been asked to stay home to prevent the virus from spreading. This means a dramatical economic slow-down, as people won’t spend money as they used to, which will hurt companies [8, 9]. Companies won’t have sufficient funds to run their business and to maintain their operations. Depending on the severity, even large corporations may be at risk. In such cases, companies need to borrow money, and they need to have good credit ratings (just like individual credit score). For example, although Ford has lots of cash reserves (as illustrated in Figure 2), it’s credit rating recently received ‘junk’ status from S&P Global [5]. These junk bonds are bonds that have a higher risk of default and a higher return than most other bonds issued by corporations and governments [6]. Now let’s look at credit ratings of the six companies that were both in our two lists, (1) companies by market cap, and (2) companies with most cash reserves. All six companies, except for Facebook, are rated very high, signifying that these companies present a low risk of default.

Table 2. The six companies’ credit ratings.

Company Credit Rating Microsoft AAA (S&P) / Aaa (Moody’s) → Highest Quality Berkshire Hathaway Aa2 (Moody’s) → High Quality Alphabet AA+ (S&P) → High Quality Apple Aa1 (Moody’s) → High Quality Facebook N/A Amazon A2 (Moody’s) → Upper Medium

The fourth criterion, which I think of as the most important is examining a company’s vision. I’ve been interested in how industries rise and fall and how megatrends change the way we live. Well, we’ve learned that it’s not only megatrends that drastically change our lives. We are all adjusting ourselves to a new lifestyle that we’ve never experienced before due to COVID-19, and people say that this could be the new normal [10]. Because the majority of people living in the US are asked to stay at home, a couple of things have changed. People are heavily relying on remote collaboration/communication tools, learning for students is all happening online, people are getting groceries and other necessary items through online shopping, and people go online for entertainment. It’s not surprising that online traffic increased dramatically. Reports showed that Internet use increased by about 50% to 70%, and streaming has also increased by at least 12% [11], which is even causing a slow down on the Internet speed in some regions [12].

As things get back to normal, yes of course people will return to their offices, students will go to school, we will go to grocery stores, and will enjoy outdoor leisure. But I think the online traffic and usage will continue to grow because whether it was our choice or not, we became more familiar with using technology to do things that we would normally do in person. Companies are adapting and enhancing their services and products to cope with the changing needs of their customers. So I personally think one of the biggest changes before and after COVID-19 would be an increase in online usage and digital consumption. If that is the case, do the six companies that we’ve identified above have a competitive edge?

My short answer is yes, and here’s why.

Company Rationale – why it would be successful post COVID-19 Microsoft #2 cloud computing platform-AzureRemote working – TeamGaming Berkshire Hathaway Warren Buffett Alphabet Cloud computingData center businessYouTube consumption – advertisement Apple 5G enabled iPhonesWearables business profit growthServices business profit growth Facebook ??? Amazon #1 cloud computing platform-AWSOnline shopping

Companies need to expand their infrastructures as online usage increases, and a major part of this infrastructure is cloud computing and data centers. The top 3 cloud platform providers are Amazon AWS, Microsoft Azure, and Google Cloud. According to Statista, Amazon AWS accounts for 39% of the global cloud computing platform market share, followed by Microsoft Azure (19%), and Google Cloud (9%) [13, 14]. Cloud computing services, data centers, and related technologies (e.g., chip makers) will become even more important and will continue to thrive at least in the next couple of years. On top of the cloud business, Microsoft is seeing a massive user growth in Teams, which is a communication and collaboration platform [15]. Amazon, which has the most cloud computing market share, still has about half of its revenue being generated by its online shopping business, and we expect the online shopping business to grow continuously. Google is consistently seeing revenue growth from its video streaming YouTube business, and Google will benefit even more because more people will consume their video content. Apple, on the other hand, has a different competitive edge, which is related to the 5G revolution. Even with a well-established cloud computing infrastructure, consumers’ digital experience won’t be good if they don’t use a device that is equipped with high network speed. Although various news outlets are reporting that Apple will delay its first 5G enabled phones, it will eventually launch it. In addition, Apple’s wearable and service businesses are the fastest growing businesses in the company, which recently reported record revenue growth [16, 17]. These are the reasons why I think investing in Amazon, Microsoft, Google, and Apple is a safe and a good bet.

The remaining two companies, Berkshire Hathaway and Facebook are extremely well established companies with great leadership. Berkshire Hathaway is an investment-worthy company, just because I can trust Warren Buffett, his experience and wisdom. However, I don’t think I will invest in Berkshire Hathaway because I don’t really know much about the company. I know it’s a great company with a bulletproof income statement and balance sheet, but I’m personally not that interested in the company. On the other hand, Facebook is a company that I’d personally like to invest in, but I cannot think of a good reason to invest. Unlike other companies that I explained above, Facebook’s vision is opaque to me. I know Facebook will revolutionize something, it’s just I don’t know what that is.

Conclusion

I think it will be hard to lose by Investing in the top six companies: Microsoft, Berkshire Hathaway, Alphabet, Apple, Facebook, and Amazon. These companies are already approved by the market, as the most valuable companies in the world. They have more than enough cash to survive the global pandemic crisis and are assessed as top investment-grade companies by the big three credit rating companies (Standard & Poor’s, Moody’s, and Fitch Group). Moreover, these companies have visions and business models that are on track to lead the world. So my pick of the top companies that I will invest in are (1) Microsoft, (2) Amazon, (3) Alphabet, (4) Apple, and (5) Facebook. I strongly believe that these companies will give a higher than average yield. Thanks for reading, and please stay safe!

Reference

[1] Fidelity: Understanding market capitalization

[2] Wealth Creation in the U.S. Public Stock Markets 1926 to 2019

[3] Coronavirus isn’t stopping the rich from getting even richer

[4] The 10 American companies with the most cash

[5] Ouch! Ford’s credit rating cut to junk status by S&P Global

[6] Investopedia: Junk bond

[7] Boeing credit rating nears junk status as airlines make historic cuts

[8] Corporate Debt Loads a Rising Risk as Virus Hits Economy

[9] Junk bond default rate to triple within 12 months, S&P says

[10] The week in payments: What the new normal will look like when it comes

[11] COVID-19 pushes up internet use 70% and streaming more than 12%, first figures reveal

[12] Surging traffic is slowing down our internet

[13] Top 6cloud service providers who’ll dominate the cloud war

[14] Top cloud providers in 2020: AWS, Microsoft Azure, and Google Cloud, hybrid, SaaS players

[15] Microsoft says Teams communication app has reached 44 million daily users

[16] Apple reports record first quarter results

[17] Apple’s fastest-growing business segment, which includes AirPods and Watch, is now bigger than Mac