Key Takeaways

• We dive into some of our Signals from 2021 to check in on how we feel about the prospects of these companies heading into 2022.
  
• Our favorite three areas for 2022 are Healthcare, FAANG and Epicenter. We also still like Energy, particularly in 2H when we think the market will shift from a more defensive 1H to “risk-on.”
  
• We highlight the company Dexcom (DXCM 0.88% ) as a good stock in the healthcare sector. We like this company’s solid community and believe it has a valuable connection with its consumer.
  
• We highlight a few of our favorite Epicenter names that we have covered in the column over the year and check-in on our theses.
  
• We have not covered a member of the almighty FAANG cadre in this column in 2021, but we have covered two large-cap companies, ASML 1.18%  and NVDA 3.34% , that are adjacent plays and key partners with many of the members of the most-esteemed stocks on the market.

Well, it’s that time of the year again. We have survived the first full-year of the pandemic and as it draws to a close, COVID-19 is still a primary driver of markets. The year was much less volatile than 2020, as we predicted in our 2021 outlook, but it didn’t always feel that way. Still, markets have proved amazingly resilient and have now recovered all the losses that occurred as a result of Omicron. Unpredictability seems to be predictable in the first major pandemic since true globalization took hold.

The virulence of the new strain is undoubtable. Within very short order, it has come to comprise the majority of cases in the US. Nonetheless, early data appears to suggest that despite the virulence, the news on the front of severe outcomes like hospitalization and death appears to be favorable.

The nascent rays of light at the end of the Omicron tunnel doesn’t mean there aren’t plenty of major risks for markets in 2022. We see the beginning of the end of the most accommodative Federal Reserve policy in history as a delicate dance and we do think the risk of a policy error by the Fed has grown. They might tighten too early, or too late, and as we all remember markets do not like when the Fed takes the punchbowl away. The below is an excerpt from Tom Lee’s 2022 Outlook presentation that summarizes our current thoughts on the prospects for next year.

As you can see, we believe despite the ice bergs ahead, economic growth will still propel stocks higher. Another thing to take into consideration when folks stress how overvalued stocks are is that they have just perhaps passed the greatest mass-survivability test in history and largely with flying colors at that.

So, remember lean and mean companies meeting pent-up demand is still likely to happen in 2022 and shareholders often like the results when this happens. The first half of the year will likely be rougher and defensive areas will probably do better. However, we still expect stocks to finish 2022 double-digits higher than they are currently.

So, we’ve covered dozens of stocks in the Signal From Noise column this year and we wanted to revisit a few that we think fit well with our 2022 outlook and favored areas. We also wanted to take this opportunity as the holidays approach to thank our loyal readers and subscribers. Aside from having a world-class research team, we all truly believe that we have world-class clients and subscribers. Here’s to you for being a member of the Fundstrat family. From our entire team, we wish you and your loved ones a happy and safe holiday season!

Epicenter

Epicenter stocks was a term coined by our Head of Research, Tom Lee, to describe the stocks that were closest to the economic and social consequences of COVID-19. The cruise lines, the airlines, the casinos and restaurants are good examples. His call in the midst of the early-pandemic to buy these names has been hailed as one of the best “blood-in-the-streets” calls on markets in modern times. We have covered a lot of Epicenter stocks in this column because for much of the year we believed they had by far the best risk-adjusted return and capacity for upside earnings surprise.

Epicenter stocks are by their very nature, high-beta names whose earnings prospects change greatly with the healthcare situation. So, the downside price action can be very nasty when healthcare developments prove adverse as they have been in the wake of Omicron variant. We have picked two airlines, the epitome o f Epicenter, and we picked them specifically because we thought their individual characteristics made them more likely to go the long-haul in a post-COVID world. Relative to larger, legacy airlines like Delta, we still prefer the columns picks of ALK 2.20%  and JBLU 0.26% . Obviously, it’s not smooth sailing for those names at the moment.

Live Nation (LYV 0.60% ) was one of the Epicenter stocks we covered this year. We believed that the largest live events company in the United States was poised to capitalize on a live-music renaissance that would occur as the economy normalized and the healthcare situation improved. We also liked MSGE 0.07%  for the same reason. The company has scale in an industry where that really matters and musicians are more dependent than ever, and eager, to perform for their adoring fans. Omicron has delayed, but not derailed, what will likely be an epic return of live music.

We still think that pent-up demand for these companies’ products will make these stocks attractive. Six Flags (SIX 0.22% ) is another Epicenter name we covered that we think will benefit from pent-up demand, when the healthcare situation is less acute. However, as we indicated in our 2022 outlook, there is a lot of risks and uncertainty in 2022. Live Nation has also been selected on our newest stock list, Brian’s Dunks. Be sure to check out this list if you haven’t!

So, while these names may experience price weakness associated with risks in the earlier part of the year, we do believe they are strong companies that have done a lot of housekeeping and are well prepared to capitalize on a more normal environment, whenever that arrives. We think if you have a long enough time horizon the thesis is still very much intact!

Health Care

Healthcare was only upgraded recently by our team. However, we had done a piece on a company called Dexcom because we really thought they had a great product that converged with accelerating trends in the sector. The company’s Continuous Glucose Monitor simultaneously improves outcomes for patients and reduces costs for insurers and hospitals.

This sweet spot is hard to replicate on purpose and the company was actually helped by several developments specifically related to COVID, like emergency approval of their devices for hospital patients. As we stated in our article, the company is “battle tested and data-driven.” We still think this is the case.  We think this original excerpt from the first article we did on the company still captures the competitive advantage well. The stock is also trading well-off of 52-week highs and we think it will likely be a winner in 2022!

The company has been executing on its three-pronged growth strategy and the next product cycle of their G-7 CGM should be their most successful yet. One advantage of HealthCare as a sector is that it is generally counter-cyclical and defensive. The payment for healthcare services is relatively unaffected by economic cycles compared to more cyclical industries.

So, we think a winning product with a solid growth strategy that checks the necessary boxes for the complicated US Health Care mess (and helps solve some of the problems and complications in the wider sector) will likely be a winner in 2022. COVID-19 was scary for all of us but even more so for those with pre-existing conditions. The unshakeable bond between the company and its “warrior community” is also a nice intangible that gives us confidence.

Our “FAANG Adjacent” All Stars

FAANG is an acronym that has gained a meaning in its own right. Like “the nifty fifty” and “Wintel” before it, the group of stocks have enamored the likes of Wall Street. No one gets fired for owning FAANG on the street and the stocks have put up extraordinary returns over the years. They have become the most powerful commercial force in the history of the human race. Our Head of Research, Tom Lee, also believes their relative outperformance should strengthen in the coming year.

COVID-19 not only accelerated the digital transformation and epically advanced our dependence on, and the competitive moat of the FAANG cadre. Interestingly, these corporate behemoths also demonstrated a haven for capital during the biggest economic challenge of the post-War period. Of course, their revenues weren’t derailed by COVID like many other companies, but they still faced their share of challenges. However, their high multiples are matched by high earnings growth and their credit-worthiness is only a little worse than Uncle Sam. If you own stocks you should definitely have some FAANG for 2022 in our opinion. The top of the Granny Shots list is a great place to start.

Since we didn’t cover any of these names in this column we wanted to stick to the most adjacent stocks we did cover in 2021. These are both semi-conductor names that have a lot less risk than a typical semi name given their incredible competitive moats and the fact that they don’t actually have to build semiconductor fabrication facilities themselves. Of course, this is helpful for any business since a modern cutting edge fab will set you back a cool $20 billion.

When we wrote about ASML 1.18%  we called it “The Jewel of The Empire” in reference to the major competitive advantage that British Colonial domination rested on, India. We believe this is one of the most important companies on Earth with one of the most valuable, and likely insurmountable, technological advantages. The cutting edge of semi-conductor technology is voraciously desired by the FAANG names and other technology companies. Their appetite is ASML’s ace in the hole.

Also, it’s never bad for a company to enjoy the protection of Uncle Sam. Let’s just put it this way, the leadership of ASML definitely is on the US Government’s speed dial and key people are very aware of just how strategically important this company is. One of the reasons their technology was banned from being sold to the Chinese is because their EUV etching technology that is necessary for semis below the 3nm and 5nm level is so small that a surveillance-minded state could design data backdoors without anyone else even being able to detect them.

The next company almost seems like a FAANG in waiting to us. We believe the day will someday come potentially when Nvidia is considered to have far more in common with the likes of Google, Apple and Amazon then Netflix does. The latter is embroiled in the costly trench-warfare-style competition of the digital content wars, where Nvidia seems to be essentially gliding over all. Long gone are the days when this cutting-edge Silicon Valley knight traded in close correlation to cryptocurrency.

So, even though these two names are not technically FAANG stocks, we believe they will benefit from some of the same forces and are key clients and essential parts of the business strategy of the FAANGs. ASML is essentially the gate keeper to Moore’s Law and Nvidia’s technological advantages will likely put it at the center of everything from Artificial Intelligence to cryptocurrency to the metaverse. These are the kind of stocks you like to own and hold, rain or shine, storm or cool breeze.

There you have it. We’ve reviewed some of our picks we think will converge nicely with what we expect for the 2022 outlook. Now all that’s left is a pleasant holiday for everyone to enjoy. It was looking pretty touch and go at certain points since Thanksgiving. Coal seemed like a definite possibility. Perhaps Santa was waiting for Rudolph to volunteer to guide him through the storm, but after today’s record close and third straight day of gains, it looks like old St. Nick decided to show up after all.

The VIX closed below $18, and as we mentioned we expect an “everything rally” into Year-End. Please enjoy your families and do your best to spread Holiday cheer and compassion. We’re lucky to have you as a part of the Fundstrat family and we wish you all a safe and happy holiday with your loved ones!