Stocks to buy

In the last decade, few companies have touched the magic trillion-dollar valuation. Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG, NASDAQ: GOOGL) are the names worth mentioning. While these businesses will continue to create value, I am more interested in finding the next trillion-dollar companies.

An interesting point to note is that most of the trillion-dollar valuation companies in the last decade were from the technology sector. Of course, there are potential opportunities in the sector even in the coming years. However, my focus in this column is largely on companies that are not from the technology sector. Throughout the history of equity markets, there have been surprises. I believe that the companies discussed below can surprise by creating massive value in the next five years. One of the key criteria for screening the next trillion-dollar companies is the cash flow potential. Ultimately, it’s free cash flows that determine the valuation.

Let’s discuss the reasons to be bullish on these potential next trillion-dollar companies.

Chevron (CVX)

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Chevron (NYSE:CVX) would need to deliver returns in excess of 3x to be among the next trillion-dollar companies. I believe this is likely in the next five years. Among oil and gas stocks, CVX is likely to be a major value creator. It’s worth mentioning that companies are valued on the basis of their cash flow potential and visibility. Based on Q1 2023 numbers, Chevron is likely to report $36 billion in operating cash flow.

Another trigger for stock upside is continued investments. Chevron plans to invest $13 to $15 billion annually through 2027. This will translate into revenue and cash flow upside. I also like the fact that Chevron has an investment-grade balance sheet. As of Q1 2023, the company reported a net debt of 4.4%. High financial flexibility positions Chevron for opportunistic acquisitions to boost growth and deepen the asset pool. The company’s investment in renewable energy assets is another potential value creator.

Rio Tinto (RIO)

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In general, the focus is on technology and innovation when it comes to talking about the next trillion-dollar companies. However, I would deviate and look at one of the most undervalued asset classes, industrial commodities. I believe that Rio Tinto (NYSE:RIO) is a high-quality stock that can create value.

The first point to note is that between 2020 and 2022, Rio Tinto reported an operating cash flow of $56.4 billion and a free cash flow of $36.1 billion. Without a doubt, the business is a cash flow machine. Rio expects that the demand for the company’s products will continue to grow at a CAGR of 3.9% through 2035. While the iron ore segment is the main cash flow driver, Rio is investing in copper, aluminum, nickel, lithium, and cobalt assets. These are critical industrial commodities that are driving the global energy transition. Rio Tinto, with an investment-grade balance sheet, is positioned to benefit from positive industry tailwinds.

As an example, the lithium supply gap is likely to be acute by 2035. This will translate into surging lithium prices. Rio is already positioned to be the largest lithium supplier to Europe over the next 15 years. Considering these facts, RIO stock can surprise investors in the coming years.

Tesla (TSLA)

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Tesla (NASDAQ:TSLA)  had the privilege of entering the $1 trillion club in Oct. 2021. However, the latest pullback in TSLA stock has been significant with the company currently commanding a valuation of $527 billion. I however believe that Tesla will make a strong comeback and valuations will surge over a trillion dollars. As a matter of fact, the stock is higher by 60% for year-to-date 2023.

Talking about financials, Tesla reported cash and equivalents of $16 billion for Q1 2023. Further, the company delivered an operating cash flow of $2.5 billion for the quarter. Even with pricing and inflationary pressure, Tesla is positioned for annualized OCF in excess of $10 billion.

An important point to note is that Tesla has set an ambitious target of selling 20 million vehicles annually by 2030. Even if Tesla achieves 75% of this target, there is ample headroom for cash flow upside and value creation. Further, considering the low penetration of EVs globally, the target is not unrealistic. Tesla has ample financial power to set up multiple gigafactory in the coming years. The correction in TSLA stock, therefore, offers an excellent entry opportunity.

AstraZeneca (AZN)

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Among pharmaceutical stocks, AstraZeneca (NASDAQ:AZN) is likely to be among the next trillion-dollar companies. It’s worth noting that in the last five years, AZN stock has trended higher by 104%. I believe that in the next five years, the stock is poised for a bigger rally.

The first reason is valuation. AZN stock trades at a forward price-earnings ratio of 20.2. The stock also offers an attractive dividend yield of 2.6%. With visibility for sustained upside in cash flows, the stock is undervalued.

The second reason to be bullish is the drug pipeline. Currently, AstraZeneca has 178 projects in the pipeline. The late-stage pipeline is attractive with the company expecting to initiate 30 phase three trials. Of these, the company believes that 10 candidates are potential blockbuster drugs. This sets the stage for healthy earnings growth and cash flow acceleration. To put things into perspective, the company has guided for low double-digit revenue growth CAGR through 2025. Even beyond this period, AstraZeneca expects to deliver an industry-leading growth rate.

JPMorgan Chase (JPM)

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In general, banking stocks have been trading at an attractive valuation. JPMorgan Chase (NYSE:JPM) is possibly the best bet in the sector where several smaller banks are facing potential collapse. At a forward price-earnings ratio of 9.6, JPM stock looks massively undervalued. The stock also offers an attractive dividend yield of 2.89%.

In terms of positives, JPMorgan Chase has seen an improvement in net interest income margin. With rising interest rates, the core banking division has benefitted. For Q1 2023, the banking and wealth management division revenue increased by 67% on a year-on-year basis to $10 billion. A higher deposit margin was the key reason for growth.

An important point to note is that it’s unlikely that there will be further rate hikes. A deep slowdown or recession is likely to prompt policymakers to pursue action that boosts credit growth. JPMorgan will be well-positioned to benefit. Also, for Q1 2023, JPMorgan reported a 4% year-on-year decline in market revenue to $8.4 billion. While fixed-income market revenue was flat, equity market revenue declined by 12% on a year-on-year basis. If market conditions improve in 2024, the outlook for this segment will be better.

Exxon Mobil (XOM)

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Exxon Mobil (NYSE:XOM) is another potential name among the next trillion-dollar companies. I expect XOM stock to deliver 100% to 150% total returns in the next five years. This seems realistic since the stock trades at an attractive forward price-earnings ratio of 10.3. Additionally, the dividend yield of 3.47% is attractive.

For Q1 2023, Exxon Mobil reported an operating cash flow of $16.3 billion. This implies an annualized OCF potential of $65 billion. Given the cash flows, dividends are secure and Exxon is positioned to invest aggressively in the coming years. Exxon also reported net-debt-to-capital of 4% as of Q1. With an investment-grade balance sheet, there is ample flexibility for potential acquisitions.

In terms of business specifics, I remain bullish on the company’s upstream segment. Guyana and Permian are likely to be cash flow machines backed by low break-even assets. While oil has declined in the recent past, the recession factor seems to be discounted. Production cuts by OPEC and its allies will ensure that realized oil price remains attractive.

Walmart (WMT)

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Over the last five years, Walmart (NYSE:WMT) has delivered capital gains of 77%. If we add in its dividends, the total returns would be higher. I can say with some conviction that WMT stock returns will be higher in the next five years and Walmart will be among the next trillion-dollar companies.

A big catalyst for Walmart — the company expects 65% of its stores to be serviced by automation by 2026. Further, 55% of the fulfillment center volume will move through automated facilities. This will result in unit cost averages improving by 20%. Therefore, Walmart is positioned for EBITDA margin expansion and cash flow upside in the coming years. I must add that as inflationary pressures wane, the company will be positioned to benefit.

With an omnichannel sales presence and international expansion, Walmart is also positioned for steady revenue growth. The company has guided for 4% sales growth over the next five years. This would add $130 billion in sales. Operating leverage will also contribute to margin expansion. With these ambitious targets, WMT stock is an attractive pick.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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