3 Cathie Wood Investments That Could Deliver Superior Returns

Three very different stocks that investors should start thinking about picking up in the market sell-off.
Given the technology exposure in Cathie Wood’s ARK ETFs, it would be a minor miracle if they performed well this year. Unfortunately, the technology-heavy NASDAQ index is down more than 25% this year at writing, and all three of the stocks featured here are down significantly. That said, it’s often a good time to consider buying when everyone else is selling, particularly with companies that have excellent long-term growth prospects like Honeywell International (HON 0.98%), Alphabet (GOOG -0.70%), and Trimble (TRMB 1.87%).

Honeywell International, an industrial stock to buy

The industrial giant is a rare beast. In an earnings season characterized by full-year guidance cuts amid ongoing supply chain pressures and raw material cost increases, Honeywell’s management raised adjusted earnings per share (EPS) guidance by $0.10 to a new range of $8.50-$8.80. It’s not much, but it is a good result under the circumstances.

However, the case for buying Honeywell stock isn’t just about 2022. The company has a host of growth drivers across each of its four segments. There’s a multi-year recovery in progress in commercial and business aviation in aerospace. Honeywell Building Technologies’ building solutions, building management systems, and fire and security systems make it a leading player in the growing market of smart connected buildings. It’s a powerful trend to be in as building owners use Honeywell’s digital technology to improve building efficiency and create sustainable buildings in line with their net-zero carbon emission goals.

The performance materials and technologies segment is a leader in renewable fuels. Its safety and productivity solutions segment offers e-commerce warehouse automation, advanced sensors, and productivity solutions used in the industrial internet of things (IIoT). Finally, management believes its investment in a majority stake in the quantum computing company, Quantinuum, will result in a company capable of $2 billion in sales by 2026.

Honeywell has plenty of long-term growth drivers in place, and they will still be there once the economy has got over the supply chain issues prevalent in the first half.

Google is a cash-generation machine

Google owner Alphabet (GOOG -0.70%) (GOOGL -0.67%) continues to dominate its industry and generate prodigious cash. That’s not likely to change anytime soon. Google services (search, Android, Chrome, YouTube, Google Maps, hardware, etc.) continue to generate Alphabet’s profit ($22.9 billion in the first quarter). This profit offset losses at Google Cloud ($0.9 billion ) and “other bets” ($1.1 billion) in the quarter, but it’s only a matter of time before Google Cloud builds the scale to turn profitable.

Meanwhile, Google services continue to drive free cash flow (FCF) generation.

To put these vast figures into context, Wall Street analysts forecast Alphabet will generate $73 billion in FCF in 2022, $89 billion in 2023, and $104 billion in 2024. In other words, Alphabet’s FCF over the next three years ($266 billion) could be used to buy two Honeywells.

Moreover, the $266 billion represents around 17% of the company’s current market cap. So even if Alphabet’s management resists pressure to pay a dividend in the future, the company can still release value for shareholders by breaking up in the future or making earnings-enhancing acquisitions. For sure, Alphabet’s cash won’t stay on its balance sheet forever.

Trimble is a high-tech growth stock worth buying on weakness

The positioning technology company helps its clients work more efficiently. For example, farmers can precisely position their equipment and optimize crop yields, construction companies can reduce waste and cost overruns by delivering projects more precisely, and trucking fleets can operate optimally using positioning systems. In addition, Trimble’s long-term growth drivers speak to the increasing use of digital positioning technology as part of its customer’s workflows.

The future is bright for the company, but the market is worried about the here and now. As a result, Trimble raised its full-year organic revenue growth to 10%-12% during its recent first-quarter earnings presentations. However, CFO David Barnes talked of supply chain problems.He told investors, “Following the second quarter, we expect revenue to increase sequentially through the third and fourth quarters, reflecting gradual normalization in the supply chain, higher prices, and increasing software and recurring growth.”

In other words, Trimble’s earnings are likely to be more back-end loaded than usual this year. Of course, given the uncertainty in the market, that’s not what investors want to hear. That said, long-term prospects still look excellent for Trimble.

A word of caution

There’s a common theme in buying these Cathie Wood ETF holdings. Specifically, it’s long-term value but near-term risk. It’s impossible to pick the bottom of the market or individual stocks, and the supply chain issues impacting the economy won’t be resolved in months. However, they will inevitably be resolved in time. Patience is necessary, and these three stocks can deliver superior returns over the long term.