The three best factor-based investments to buy now include a member of the “big three” telecommunication companies, a multinational technology giant and the fastest-growing fitness chain in the United States.
Factor investing involves selecting investments based on characteristics that have proven to outperform market returns. We have chosen three different stocks based on three separate investment factors.
Growth investing is a strategy that involves selecting securities expected to grow at a faster rate than the overall market. Investors often seek companies with favorable revenue and earnings projections in new and exciting industries such as artificial intelligence or biosciences. Growth investing can be a riskier strategy than other approaches, as it is based on a company’s future potential rather than current value or income.
Value investing involves identifying companies undervalued by the market. Individuals focus on identifying and buying assets trading below their current intrinsic value, looking at factors such as earnings, dividends, share price multiples and the overall financial health of a company. Value investing is often a long-term strategy and commonly involves buying shares in mature companies with solid track records and stable growth prospects.
Momentum investors buy stocks that have recently exhibited strong price performances, believing they will continue to do well in the near future. Momentum investing is backed by historical evidence that prices tend to persist in one direction for some time, and assets that have recently appreciated are more likely to continue to rise in price than those that have recently declined.
3 Best Factor-Based Investments to Buy Now: Growth Investing
Planet Fitness Inc (NYSE: PLNT)
Planet Fitness Inc. (NYSE: PLNT), founded in 1992, is a North American gym franchisor and operator headquartered in Hampton, New Hampshire. The company is the fastest-growing fitness chain in the United States, with a market capitalization (market cap) of $6.5 billion.
The gym industry experienced significant challenges in 2020 and 2021 due to the COVID-19 pandemic, with many facilities temporarily closing t heir doors or operating at reduced capacity to comply with social distancing guidelines. However, the COVID-19 pandemic pushed many consumers to pursue healthier lifestyles.
Fitness tracking app MyFitnessPal reported a 67% jump in revenue from 2020 to 2021. As a result, gym and fitness club memberships in the United States have rebounded to approximately 90% of pre-pandemic levels, with many businesses surpassing original figures. Planet Fitness is one of those businesses.
The fitness chain has seen its member count rise from 14.4 million at the end of 2019 to 16.6 million in Q3 2022. Planet Fitness has also increased its locations from 2,001 to 2,353 over the same period.
The company’s success lies in its low-cost, no-frills business model and focus on customer service. At just $10 a month, Planet Fitness’s low price discourages absentee members from canceling. As a result, a majority of a location’s members do not show up. The average Planet Fitness gym has 6,500 paying members despite only being able to accommodate 300 individuals at once.d
The company’s ability to generate robust and consistent subscription revenue at little relative cost has allowed it to rapidly gain market share and create strong brand awareness in the fitness industry. The company’s “Judgment Free Zone” philosophy and non-intimidating atmosphere have helped to attract a diverse range of customers, including those who may not have previously felt comfortable in traditional gyms. PLNT’s strong brand recognition allows it to attract more customers at a lower cost, which is essential for the long-term success of any company.
Planet Fitness has consistently reported strong financial results in recent years. The company has produced an average sales growth rate of 14.3% over the last five years. PLNT has seen its share price rise by 140.1% over the same period. The fitness chain has had an exceptionally strong last four quarters, with sales skyrocketing by 42.9% and earnings per share (EPS) by 64.7% over the past 12 months.
PLNT has fallen by 17.5% over the past year. However, the stock has rebounded by 25.7% over the last three months. The company’s share price over the previous year is graphed below alongside a 50-day moving average.
Chart provided by Stock Rover.
Planet Fitness has shown few signs of slowing down. The company is projected to report a revenue increase of 57.8% in 2022 and 15.5% in 2023.
While Planet Fitness primarily focuses on the U.S. market, the company has expanded internationally in recent years. As of September 2020, the company had 21 gyms in operation outside of the United States, focusing on markets in Canada, Latin America, and the Caribbean. There is potential for further international expansion, which could provide a significant growth opportunity for the company. CEO Chris Rondeau is confident the fitness chain can reach over 4,000 locations in the near future.
Planet Fitness’s strong financial performance, growing market share, strong brand recognition and potential for international expansion make it a must-buy growth stock.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $92.64, 18.7% higher than its latest closing price of $78.06, earning PLNT a “STRONG BUY” recommendation from Stock Rover and a place among our three best factor-based investments to buy now.
3 Best Factor-Based Investments to Buy Now: Value Investing
Apple Inc (NASDAQ: AAPL)
Apple Inc. (NASDAQ: AAPL) is a multinational technology company founded by Steve Jobs, Steve Wozniak and Ronald Wayne in 1976. Headquartered in Cupertino, California, Apple is consistently ranked as one of the largest corporations in the world, with a market cap of $2.0 trillion.
It is often convenient to link Apple with the other Silicon Valley technology giants. The company is frequently mentioned as part of the “FAANG” group of companies: Facebook (now Meta) (NASDAQ: META), Amazon (NASDAQ: AMZN), Apple, Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOGL). However, Apple is unique compared to the other companies listed.
While the other FAANG companies primarily generate revenue from software-based services, Apple is a hardware company. The company attributes 80.2% of its 2022 sales to its product business segment (iPhones, MacBooks, Apple Watches, etc.) and only 20.8% to services such as its App Store or Apple Wallet.
Apple’s reliance on tangible, instead of software-based, products presents challenges the other FAANG companies (outside of Amazon) are mainly able to avoid, such as supply chain problems or issues with scaling. However, it does benefit investors. Compared to its technology counterparts, AAPL is priced at a discount. In other words, it does not have to rely on future sky-high growth rates to justify its current share price multiples.
Despite recording a 9.1% annual sales growth and 672.4% return over the last 10 years, compared to just 4.7% and 213.0%, respectively, for the S&P 500, AAPL is priced similarly to other S&P 500 stocks. Apple possesses a (share) price-to-earnings (P/E) ratio of 20.5 and an enterprise value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of 15.5, similar to the S&P 500 averages of 20.4 and 14.5. P/E and EV/EBITDA ratios are the most popular metrics Wall Street analysts use to discover undervalued stocks. As a result, the company has all the markings of a great value investment.
Unlike other tech companies, Apple does not focus on top-line growth. Instead, it prioritizes strong profit margins and return on investment. The company’s EPS has grown by 20.2% annually over the last five years and is projected to increase by a further 8.9% in 2023. Apple also posts a ridiculous 197.0% return on equity compared to the S&P 500 average of 19.6%.
The company also has a highly loyal customer base, which results in repeat purchases. According to Forbes, Apple’s brand was ranked as the highest in the world in 2020, at $241.2 billion. Strong brand loyalty is invaluable as repeat customers account for an average of 65% of a business’s annual revenue. Strong brand awareness also greatly reduces the cost of acquiring new customers.
Apple’s $23.6 billion cash war chest has allowed it to develop its high-growth software and Asia business sectors. Its services segment, which includes the App Store, Apple Music and iCloud, accounted for just 14.3% of its total sales just five years ago, compared to 20.8% now. The company has also made significant investments in Asian markets, including investing $1.0 billion in Chinese ride-hailing service Didi and shifting iPhone production partially to India.
Even legendary value investor Warren Buffett, who avoided nearly all tech stocks until recently, is bullish on Apple stock. In fact, 36.3% of Berkshire Hathaway’s (BRK.A) portfolio is AAPL shares. His next largest holding is Bank of America (NYSE: BAC), at 11.1% of his total portfolio.
Apple has recently seen its share price fall significantly like other tech stocks. AAPL is down 30.4% over the past 12 months, shown below, with a 50-day moving average.
Chart provided by Stock Rover.
However, with one of Fortune 500’s strongest management teams, led by veteran CEO Tim Cook, Apple investors have little cause for concern. If anything, AAPL’s share price drop has caused it to become significantly undervalued.
Apple is stronger than ever, with a loyal customer base, opportunities for expansion, a strong management team and favorable multiples. These factors make AAPL an attractive option for value investors.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $178.13, 42.5% higher than its latest closing price of $125.02, earning AAPL a “STRONG BUY” recommendation from Stock Rover and a place among our three best factor-based investments to buy now.
3 Best Factor-Based Investments to Buy Now: Momentum Investing
T-Mobile U.S. Inc. (NASDAQ:TMUS)
T-Mobile U.S. Inc. (NASDAQ: TMUS), headquartered in Bellevue, Washington, was created from a 2013 merger of T-Mobile USA with MetroPCS. Deutsche Telekom, the majority stakeholder in T-Mobile, orchestrated the deal. The telecommunication company is currently the third-largest mobile carrier in North America, with a $178.6 billion market capitalization (market cap).
In 2020, T-Mobile acquired Sprint Corporation for a hefty $26 billion price tag. The acquisition, one of the largest of the year, was an “all-in” gamble on the 5G industry by the telecom giant. T-Mobile directly cited the emerging technology as the driving force behind the deal.
By combining the two company’s resources, T-Mobile management expects its new network’s 5G capacity to expand by 14-fold over the next five years. Acquisition synergies are projected to generate at least $43 billion in TMUS shareholder value.
T-Mobile executives have good reason to bet on 5G. The new technology is expected to increase our internet and cellular speeds and transform how hospitals treat patients, influence global trade and enhance artificial intelligence. Smart cities, fully autonomous vehicles and even the metaverse can all be brought to reality through 5G advancements.
There are already signs that T-Mobile’s gamble is paying dividends. Although T-Mobile is the smallest of the big U.S. three telecom companies (AT&T (NYSE: T), Verizon (NYSE: VZ) and T-Mobile) by revenue and market cap, it is currently the dominant force in the United States 5G market.
The first wireless provider to launch nationwide 5G coverage in 2019, T-Mobile leads in 5G availability, reach and speed. According to RootMetrics, out of 125 U.S. markets, T-Mobile ranks first in 55 for availability and 75 for download speeds. The company’s aggressive expansion has catapulted it into the 5G driver’s seat covering 260 million individuals and earning it the title of the largest 5G network in the country.
As the world’s largest economy and third-largest mobile communications market, the United States is a crucial battleground for telecom companies. In 2021, the big three generated approximately $382.33 billion in revenue in the United States alone. Furthermore, as the world’s innovation capital, many of 5G’s most significant leaps are expected to be introduced in the United States first.
In the approximately three years since telecom companies began their 5G rollout across the United States, TMUS has experienced an average annual sales growth of 21.2% and a return rate of 83.8%. The industry average over the same period stands at 13.1% and 22.6%, respectively.
Although T-Mobile sales are projected to remain relatively flat over the next year, its EPS are forecasted to rise by an outstanding 240.5% as the company is expected to pursue share buybacks in 2023. Share buyback programs often indicate that management believes its shares are undervalued.
As a result of its positive financials and growth, T-Mobile has avoided the downturn that has plagued most of the stock market. TMUS has seen its share price jump by 26.7% over the trailing 12 months. The S&P 500 has produced a negative 20.6% return over the same period. T-Mobile’s share price movement over the last year is displayed below alongside a 50-day moving average.
Chart provided by Stock Rover.
T-Mobile’s strong financial performance, growing market share and potential for future growth make it an alluring stock. The company’s strong and consistent performance in recent months makes it an equally attractive momentum investment.
A discounted cash flow (DCF) analysis, using Stock Rover, values the stock at $177.10, 22.6% higher than its latest closing price of $144.48, earning TMUS a “STRONG BUY” recommendation from Stock Rover and a place among our three best factor-based investments to buy now.