Michael Farr names his Top Ten stock picks for 2022

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A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Dec. 13, 2021.

Michael Nagle | Bloomberg | Getty Images

Farr, Miller & Washington is a “buy-to-hold” investment manager, which means we make each investment with the intent to hold the position for a period of 3 to 5 years.

Nevertheless, in each of the past 14 Decembers I have selected and invested personally in ten of the stocks we follow with the intention of holding for just one year. These are companies that I find especially attractive in light of their valuations or their potential to benefit from economic developments. I hold an equal dollar amount in each of the positions for the following year, and then I reinvest in the new list.

The following is my Top Ten for 2022, listed in random order. This year’s Top Ten represent a nice combination of growth and defensiveness.

Results have been good in some years and not as good in others. I will sell my 2021 names Dec. 31 and buy the following names that afternoon. The reader should not assume that an investment in the securities identified was or will be profitable. These are not recommendations to buy or sell securities. There is risk of losing principal. Past performance is no indication of future results. If you are interested in any of these names, please call your financial advisor to discuss.

1. FedEx (FDX)

2. Truist Financial (TFC)

3. Apple (AAPL)

4. Donaldson (DCI)

5. Disney (DIS)

The Walt Disney Company is one of the most prestigious brands in the world. Over the past 98 years, the company has evolved from a small animation studio to a vertically integrated media and entertainment conglomerate. Disney+, the company’s streaming platform, amassed nearly 120 million subscribers in the first two years since it was launched, putting it in direct competition with Netflix’s roughly 215 million subscriber base. However, Disney’s stock has been pressured as the momentum in subscriber growth has slowed in recent months. Management is guiding for 240 to 260 million subscribers by the end of its 2024 fiscal year, but the company won’t achieve this target in a linear fashion. We expect subscriber growth to improve over the next few quarters as the service is launched into new markets and as original content that was delayed due to the pandemic is added to the service. As for the legacy businesses, the theme parks have seen an uptick in recent months and that should continue given the pent-up demand for travel and experiences. The movie theaters have been slower to recover, but we expect demand to be the strongest for tentpole films, as seen by the release of “Spider-Man: No Way Home.” Disney shares trade at 33x CY22E EPS, which is above historical levels. However, if we exclude the losses from the streaming segment, the multiple for the legacy business is trading below historical averages. The company suspended its dividend to pursue growth opportunities. 

6. Mondelez (MDLZ)

7. Ross Stores (ROST)

8. Medtronic (MDT)

9. Raytheon Technologies (RTX)

Raytheon Technologies was formed through the combination of Raytheon Company and the legacy United Technologies aerospace and defense businesses. The merger created a powerhouse in the A&D industry, but management’s near-term sales and profit targets for the combined entities have been pushed out because of the Covid-19 crisis. The crisis took an enormous toll on the commercial aerospace industry as steep production cuts at Boeing and Airbus combined with a massive drop in airline passenger miles. Fortunately, the defense side of the new company, which contributed 65% of total company pro forma sales in 2020, is doing just fine. The defense side should provide downside protection and steady cash flow, allowing the company to continue investing in R&D during this crisis and any future downturns. As conditions improve on the commercial side, the company should start to benefit from aircraft production increases as well as greater aircraft utilization. Furthermore, the growing installed base of the company’s groundbreaking geared-turbofan (GTF) engine, combined with a rebound in aircraft utilization, will contribute to a growing stream of high-margin and high-visibility aftermarket revenue. Finally, we also expect the company will ultimately reap huge cost and revenue synergies from the ongoing integration of both Rockwell Collins and the Raytheon Company. The synergies will help the company return an expected $20 billion in capital to shareholders in the four years following the merger. The stock offers strong value at about 17x CY22E EPS – a significant discount to the overall market. The dividend yield is also highly attractive at 2.5%. 

10. Visa (V)