In this article, we discuss Jeremy Grantham’s warning and his 10 favorite stocks. If you want to see more stocks in this selection, click Jeremy Grantham’s 5 Favorite Stocks.
Jeremy Grantham is a famed British investor who co-founded GMO Asset Management and serves as its chief investment strategist. Grantham is known for predicting market bubbles, and the “super bubble” he called for earlier is yet to burst according to him, even after the turbulent state of the global stock markets. A Bloomberg report dated September 1 cited Jeremy Grantham, who said:
“My bet is that we’re going to have a fairly tough time of it economically and financially before this is washed through the system. What I don’t know is: Does that get out of hand like it did in the ‘30s, is it pretty well contained as it was in 2000 or is it somewhere in the middle?”
Jeremy Grantham believes that stocks surging between mid-June to mid-August indicated a typical bear market rally, that is followed by the economy truly deteriorating. He predicts more trouble ahead, citing overvalued stocks, bonds and housing, the weakness in commodities, and the incessant rate hikes from the Federal Reserve creating a “dangerous mix”.
At the beginning of 2022, Grantham speculated that the S&P 500 stocks would plummet roughly 50% in a historic market crash. In June, the benchmark index once stumbled 25% from its January peak, before gaining in the next two months. However, the US equities have not reached a bottom yet, as cautioned by Morgan Stanley’s Mike Wilson.
Jeremy Grantham said that investors celebrating the bear market rally and terming it a “new bull market” is absolutely ludicrous. “That is nonsense”, he stressed. Grantham believes there are several stages of a super bubble popping. First, the market crashes as it did in the first half of 2022, followed by a slight bear rally. At last, equities break down again and the market reaches a bottom. The short-term constraints to the macro environment include the Russian war on Ukraine and its consequences, the food and energy crisis, China’s Covid policies, rising inflation, and the fiscal tightening. Worsening corporate profits will lead to the upcoming round of losses at the stock market, according to Grantham.
Jeremy Grantham rose to fame for identifying bubbles in Japan in the late 80s, as well as forecasting the US financial crisis of 2008 ahead of time. Therefore, it is wise to understand Grantham’s portfolio composition in this market to gain from his insights. Some of his favorite stocks include Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), and Wells Fargo & Company (NYSE:WFC).
Photo by Jeremy Bezanger on Unsplash
Our Methodology
We used Jeremy Grantham’s Q2 2022 portfolio for this analysis, selecting the 10 biggest holdings of his firm, GMO Asset Management.
Jeremy Grantham’s Favorite Stocks
10. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Holders: 60
Jeremy Grantham’s Stake Value: $374.17 Million
Jeremy Grantham’s GMO Asset Management holds 5.95 million shares of The Coca-Cola Company (NYSE:KO) as per the second quarter 13F filings, worth $374.17 million. The stock accounts for 2% of the total portfolio and The Coca-Cola Company (NYSE:KO) is one of Jeremy Grantham’s top 10 favorite stocks as of Q2 2022.
HSBC analyst Carlos Laboy on September 6 raised the price target on The Coca-Cola Company (NYSE:KO) to $76 from $72 and kept a Buy rating on the shares. Coke has new revenue drivers in Latin America as it extends its once-exclusive sales and delivery system to other brands, the analyst told investors in a bullish thesis.
According to Insider Monkey’s data, 60 hedge funds were long The Coca-Cola Company (NYSE:KO) at the end of June 2022, compared to 64 funds in the last quarter. Warren Buffett’s Berkshire Hathaway is the leading position holder in the company, with 400 million shares worth over $25 billion.
In addition to Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), and Wells Fargo & Company (NYSE:WFC), The Coca-Cola Company (NYSE:KO) is one of Jeremy Grantham’s favorite stocks.
9. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 83
Jeremy Grantham’s Stake Value: $403.61 Million
Johnson & Johnson (NYSE:JNJ), the American multinational healthcare giant, occupies a position in Jeremy Grantham’s top 10 favorite stocks. He owns 2.27 million shares of Johnson & Johnson (NYSE:JNJ) as per the 13F filings for the second quarter of 2022, worth $403.61 million, representing 2.18% of the total holdings. Jeremy Grantham bought Johnson & Johnson (NYSE:JNJ) shares at an average price of $81.82, and the share price has gained about 99% since then, averaging $163 as of September 7.
On August 19, Johnson & Johnson (NYSE:JNJ) declared a $1.13 per share quarterly dividend, in line with previous. The dividend was paid to shareholders on September 6. Johnson & Johnson (NYSE:JNJ) is a reliable dividend king and it has raised its annual dividends consecutively for 60 years.
UBS analyst Kevin Caliendo on July 21 maintained a Neutral rating on Johnson & Johnson (NYSE:JNJ) and lowered the price target on the shares to $180 from $185. The company’s Q2 results were impacted by the macro backdrop, including the notable swing in currency, continuing inflation, and lagging elective procedure recovery, the analyst told investors.
According to Insider Monkey’s data, 83 hedge funds were bullish on Johnson & Johnson (NYSE:JNJ) at the end of June, with combined stakes worth $6.7 billion. Rajiv Jain’s GQG Partners is the biggest stakeholder of the company, with 6.5 million shares worth $1.16 billion.
Here is what Mayar Capital has to say about Johnson & Johnson (NYSE:JNJ) in its Q2 2022 investor letter:
“J&J is currently our largest position and a long-standing holding. The majority of the group’s sales comes from its collection of pharmaceutical franchises, but a large majority (~45%) comes from its collection of medical device businesses and its consumer brands.
Here’s how JNJ makes and spends a dollar of revenues: As of 2021, about 55 cents of that dollar comes from its pharmaceutical sales – sales of drugs to pharmacies and distributors – while 30 cents come from the sale of medical devices, such as surgery equipment and orthopedics. The rest of that dollar in sales comes from sales of JNJ’s consumer brands such as Listerine mouthwash, Nicorette nicotine tablets and Neutrogena cosmetics.
To make that dollar, however, JNJ typically spends about 25 cents to make the products themselves and another 27 cents on marketing and general administrative functions. This leaves JNJ with about 48 cents on the dollar in profit…” (Click here to see the full text)
8. Accenture plc (NYSE:ACN)
Number of Hedge Fund Holders: 61
Jeremy Grantham’s Stake Value: $363.04 Million
Accenture plc (NYSE:ACN) is an Irish-American company that provides strategy and consulting, technology, and operations services worldwide. Accenture plc (NYSE:ACN) is one of Jeremy Grantham’s favorite stocks as of Q2 2022, with his GMO portfolio featuring 1.31 million shares of the company worth $363.04 million. Grantham purchased Accenture plc (NYSE:ACN) shares for an average of $90.54, and over the years, the share price has appreciated by almost 214%.
On August 9, Baird analyst David Koning raised the price target on Accenture plc (NYSE:ACN) to $338 from $310 and maintained a Neutral rating on the shares. The analyst observed that the firm announced an agreement to acquire Romp, an Indonesian brand agency engaged in creative marketing. He believes this could boost Accenture plc (NYSE:ACN)’s annualized revenue and now views the risk/reward as decent due to robust growth, high quality earnings, and a clean balance sheet.
Among the hedge funds tracked by Insider Monkey, 61 funds were bullish on Accenture plc (NYSE:ACN) at the end of the second quarter of 2022, compared to 63 funds in the last quarter. Nicolai Tangen’s Ako Capital is the largest stakeholder of the company, with 2.29 million shares worth over $636 million.
Here is what Polen Global Growth Fund has to say about Accenture plc (NYSE:ACN) in its Q1 2022 investor letter:
“Accenture’s business is firing on all cylinders and continues to enjoy an acceleration in their respective fundamentals because of the increase in digitization around the world. Nearly every company today is searching for ways to become more digital, and Accenture is positioned to provide many of the solutions these companies seek. This inflection in fundamentals was not lost on the market, and each business’s stock performed exceptionally well in 2021. In fact, they represented two of the three top absolute performers for the Global Growth Portfolio last year. As a result, its stock is currently more fully priced. As such, we lowered Accenture to an average weight. We maintain high conviction in the business and plan to own it for many years, but recognize the increase in their prices.”
7. Texas Instruments Incorporated (NASDAQ:TXN)
Number of Hedge Fund Holders: 55
Jeremy Grantham’s Stake Value: $359.48 Million
Texas Instruments Incorporated (NASDAQ:TXN) designs and manufactures semiconductors, selling them to electronics designers and manufacturers worldwide. Jeremy Grantham’s GMO portfolio had 2.34 million shares of Texas Instruments Incorporated (NASDAQ:TXN) at the end of Q2 2022, worth $359.48 million, representing 1.9% of the total 13F securities. Texas Instruments Incorporated (NASDAQ:TXN) is one of Jeremy Grantham’s favorite stocks.
On July 27, Mizuho analyst Vijay Rakesh assigned a Neutral rating to Texas Instruments Incorporated (NASDAQ:TXN) shares and lowered the price target to $168 from $175 after the “solid” Q2 results. The analyst still believes Texas Instruments Incorporated (NASDAQ:TXN) faces potential peak margins and high pricing pressure as supply improves heading into a possible macro slowdown.
According to the second quarter database of Insider Monkey, 55 hedge funds were long Texas Instruments Incorporated (NASDAQ:TXN) with stakes worth $1.6 billion, compared to 46 funds the prior quarter worth $1.9 billion. Jean-Marie Eveillard’s First Eagle Investment Management is the leading stakeholder of the company, with 3.5 million shares valued at $542 million.
Here is what Davis Opportunity Fund has to say about Texas Instruments Incorporated (NASDAQ:TXN) in its Q4 2021 investor letter:
“Within technology and communication services, we own a number of online businesses and semiconductor related companies, including Alphabet, Amazon, Intel, Applied Materials and Texas Instruments. Within the realm of high technology, we believe that leadership positions reflect enduring and widening competitive advantages over smaller competitors, with few exceptions. This is because online businesses, as well as semiconductor companies, benefit from economies of scale. An online search and advertising engine will, in general, be more profitable per unit of cost as it grows larger in terms of users and advertising dollars. It is a hub-and-spoke model, in other words, where it is generally not necessary to grow expenses at the same rate that revenues grow beyond a certain threshold. Therefore, returns on capital tend to be higher, the larger and more dominant the online search company is.”
6. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 153
Jeremy Grantham’s Stake Value: $397.15 Million
Jeremy Grantham has held a stake in Alphabet Inc. (NASDAQ:GOOG) since the last quarter of 2015. Since then, Grantham purchased the stock ten more times and sold shares on sixteen occasions, resulting in a net gain of 155% so far. As of Q2 2022, he owns 3.64 million shares of Alphabet Inc. (NASDAQ:GOOG) worth $397.15 million.
Tigress Financial analyst Ivan Feinseth on August 3 raised the price target on Alphabet Inc. (NASDAQ:GOOG) to $186 from $183 and maintained a Strong Buy rating on the shares, citing his view that the Q2 results showcase the resiliency of its Cloud and Search business segments. Additionally, ongoing investment in Artificial Intelligence continues to support “increasingly focused and helpful experiences for users and businesses”, said the analyst.
Among the hedge funds tracked by Insider Monkey, 153 funds were bullish on Alphabet Inc. (NASDAQ:GOOG) at the end of Q2 2022, compared to 160 funds in the last quarter. Chris Hohn’s TCI Fund Management featured as a prominent stakeholder in the company, with 2.45 million shares worth $5.4 billion.
Like Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), and Wells Fargo & Company (NYSE:WFC), elite hedge funds are piling into Alphabet Inc. (NASDAQ:GOOG).
Here is what GoodHaven Capital Management specifically said about Alphabet Inc. (NASDAQ:GOOG) in its Q2 2022 investor letter:
“Alphabet Inc. (NASDAQ:GOOG) was our top dollar detractor after having been a top gainer in many prior periods. As a top holding in our portfolio, its price movement will often impact overall performance in either direction. Alphabet’s Q1 2022 results were strong, the top line increased by 26% and operating income increased by over 20%. 1 Shares outstanding have begun declining due to stepped-up share repurchases. We’ve owned Alphabet for many years and for almost all of that time have been expecting growth to moderate. We’ve been happily proven wrong so far but that expectation remains. As many companies in the tech/venture capital world retrench and possibly reduce their spending on digital advertising, we would not be surprised to see this negatively impact Alphabet’s growth. At a recent stock price implying a forward P/E of about 14X to 2023 earnings (excluding net cash) we remain optimistic about Alphabet’s long-term upside potential and ability to navigate the regulatory headwinds.”
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Disclosure: None. “Super Bubble” is Yet to Burst: Jeremy Grantham’s Warning and His 10 Favorite Stocks is originally published on Insider Monkey.