Top 10 ISA stocks in January on Freetrade

Top 10 ISA stocks in January on Freetrade
What have ISA investors been snapping up over the past month?
Dan Lane
February 1, 2022

A heady mix of UK and US rate rise chat and post-pandemic life getting closer wasn’t enough to pull the plug on the tech party altogether in January, although it did prompt a reassessment of how diversified our portfolios were. 

Freetrade stocks and shares ISA investors turned to ETFs in droves, as a way to gain a less stock-specific exposure to the US market.

The reality is the S&P 500 is still dominated by the US tech giants and opting for a US tracker fund still comes with a big dollop of the FAANGs. But these US ETFs climbing ISA investors’ buy lists is a clear sign of market-watchers wanting a much broader exposure to American life after lockdown.

There’s still a dearth of UK stocks among investors’ top picks - likely a sign that the London market has a lot of work to do in attracting listings fit for new generations’ view of the future.

That said, a rising rate environment could be good for some of the UK’s legacy banks and insurers, whose reliance on chunky interest margins and rising bond yields have held them back over the past decade, but could soon be a boon.

Top stocks and shares ISA buys on Freetrade in January 2022

Before we get stuck in, it’s important to highlight that this is a wrap-up, not a suggestion or recommendation that you buy or sell any of the securities mentioned. 

Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio. 

Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for first-time investors. And if you are still unsure of how to pick investments, speak to a qualified financial advisor. 

  1. Tesla (TSLA)
  2. Vanguard S&P 500 UCITS ETF Dist. (VUSA)
  3. Vanguard S&P 500 UCITS ETF Acc. (VUAG)
  4. Microsoft (MSFT)
  5. Apple (AAPL)
  6. AMC Entertainment (AMC)
  7. Amazon (AMZN)
  8. Vanguard FTSE All World UCITS ETF (Dist.) (VWRL)
  9. Alphabet (GOOG)
  10. GameStop (GME)

1. Tesla (TSLA)

With Tesla heading up the top buys again and interest in the likes of Lucid stalling, there seems to be the feeling that, if anyone can make it through a difficult time for EVs, it’s the sector’s poster child. 

A big hit to Lucid’s progression could be the same supply chain constraints Musk mentioned in Tesla’s full-year results. But given its scale, Tesla is likely to be at the front of the queue when it comes to scarce critical materials - Lucid, not so much.

Tesla’s Q4 and full-year 2021 results were strong, with fourth quarter revenue up 65% to $17.7bn. Operating profit hit $2.6bn (2020: $575m) even taking into account Elon’s $245m share-based payday. 

The hike comes on the back of a record-breaking year for the firm, in which it delivered 936,000 vehicles. That’s almost double the previous year’s haul.

Importantly, Tesla looks to be much further down the road than any of its peers, Rivian and Lucid included. 

Alarm bells have started to ring in some corners of the Tesla fandom though, sending shares lower over January.

Granted, part of that might be nerves at Musk’s pragmatism over continuing production hurdles. In the Q4 results he told investors, “Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through 2022.”

But it’s also likely to be a result of rising rates taking the shine off highly-valued stocks in the US. 

That’s not necessarily a bad thing though - bringing valuations down to a level more in line with fundamentals can be healthy. For Tesla that would mean coming down further still but clearly investors think current levels offer enough value to snap up shares now.

2. Vanguard S&P 500 UCITS ETF Dist. (VUSA)

If 2020 and 2021 were all about US tech stocks shooting the lights out, 2022 might be more about how much of that market confidence they can hang onto.

The S&P 500 is down 6% year to date, largely driven by investors getting a bit nervy at the prospects for the tech titans from here, especially in a rising rate environment.

What began as expectations of three US interest rate rises this year quickly became four. That increases the discount rate investors use to divide future corporate profits, producing a lower estimate of what those shares should be worth now.

That’s particularly important when we’re dealing with companies whose profits are expected to come down the line, after the big expansion phase i.e. tech. 

As we said above, reducing those valuations isn’t necessarily a bad thing though. Share prices need to (and tend to) reflect companies’ earnings eventually or we risk going full tilt into bubble territory.

It can still be unsettling to see that all happening in the short term. What it does mean is the forward valuation of the US market is slowly coming down. It’s still the highest among its global peers but baby steps.

The US is still sitting way above all other global regions on a forward valuation basis. Price divided by 12-month forward consensus expected operating earnings per share. Source: I/B/E/S data by Refinitiv, As at 25 Jan 2022.

For now, the market has digested Fed chair J-Pow’s 2022 rate trajectory to combat inflation. We’ll have to see if that materialises and how calm investors stay about it all this year.

3. Vanguard S&P 500 UCITS ETF Acc. (VUAG)

While further US interest rate rises are on the horizon, that doesn’t mean the market-leading firms on the biggest stock market in the world have suddenly lost all value.

Investors clearly aren’t willing to throw in the towel just yet and stuck with the US theme in January.

For broad US exposure, ISA investors favoured the Vanguard ETF’s income-distributing share class last month. That can be useful to supplement an income or if you have regular expenses you need help with.

For those eager to rack up dividends over time and reinvest them to take advantage of the power of compounding, an accumulation share class (Acc.) could help.

According to Hartford Funds, an initial £10,000 invested in the S&P 500 over the 60 years from 1960 to 2020 would have grown to $627,161 in price terms, or $3,845,730 with dividends reinvested.

Dividends are incredibly important to the value of total returns.

Past performance is not a reliable indicator of future returns. 

Source: FE, as at 31 Jan 2022. Basis: bid-bid in local currency terms with income reinvested.


4. Microsoft (MSFT)

Microsoft occupies a confusing place in investors’ minds.

It was once the face of all things tech, then it was forced to play second fiddle to burgeoning tech like Apple. Windows 95 memes and images of yellowing desktop monitors pointed to its stagnation.

But that was far from a sign of its demise. A current $2tn+ market cap and stalwart status as one of the biggest names on the index tells us that much.

That it has not only kept up with the new growth names, but often topped them, is a clear sign of the firm’s overall resilience.

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The software giant raked in revenues of $51.7bn in Q4 2021 - a 20% hike on 2020. Profits hit $18.8bn but it still fell victim to broader fears about tech valuations.

The real driver was the company’s cloud computing business but, despite a transition back to normal life, chief exec Satya Nadella is confident in the firm’s ability to stay relevant post-pandemic.

He said, “Digital technology is the most malleable resource at the world’s disposal to overcome constraints and reimagine everyday work and life. 

“As tech as a percentage of global GDP continues to increase, we are innovating and investing across diverse and growing markets, with a common underlying technology stack and an operating model that reinforces a common strategy, culture and sense of purpose.”

5. Apple (AAPL)

High demand for iPhones in China helped Apple top earnings estimates and report record sales over Christmas, even with supply chain problems and the ongoing Omicron spread.

Despite warning investors that chip shortages could lead to $6bn in lost sales, first quarter revenues came in at $123.9bn. That’s 11% higher than the same time last year and above  analysts’ estimates of $118.7bn.

New models of existing products like the Apple Watch and iPad helped propel figures higher but the main tailwind still seems to be the iPhone. The flagship product saw record sales in the run up to Christmas despite naysayers the world over calling time on the range for years.

CFO Luca Maestri said, “The very strong customer response to our recent launch of new products and services drove double-digit growth in revenue and earnings, and helped set an all-time high for our installed base of active devices.”

And Maestri was just as bullish for near-term 2022 figures too, saying “We expect to achieve solid year over year revenue growth and set a March quarter revenue record despite significant supply constraints.”

The pandemic has undoubtedly accelerated appetite for anything we, and our employers, need to be able to WFH. But beyond that rush to get everyone in your team a laptop and monitor comes the sticky nature of what you’ll likely replace that with in a few years.

Yes, we’re creatures of habit but contracts are even stickier and firms are often reluctant to change hardware providers at the best of times. It’s expensive, takes time to change and can just be inefficient all-round, even if the current supplier is a tad more expensive. 

This could mean the pandemic will be viewed as a real inflection point for firms finally equipping employees for home working, and the providers shipping tech their way.

6. AMC Entertainment (AMC)

Profit-taking before Christmas and souring sentiment on the back of CEO Adam Aron selling $9.7m worth of stock snuffed out any pre-Christmas AMC share price growth hopes quickly.

2022 hasn’t been any kinder to the stock and despite some volatility in and around the anniversary of the short squeeze Reddit mania, the overall trend seems to want to head back to the AMC levels of old.

More broadly, cinemas across the board have been hit hard by Omicron fears - the sector has become a bit of a punchbag investors like to wallop when restrictions pop up. Cineworld is languishing in the UK and boutique offering Everyman is only faring slightly better.

But beyond the virus, there’s still a lot for AMC and the rest of the silver screen gang to contend with, not least the rise of stay-at-home streaming services. That trend might have boomed during lockdown but it was already in full force before the pandemic and its success hit cinemas hard.

AMC's movie theatre business was barely getting by even before 2020. Since coronavirus struck, the chain has burned through over $100m every quarter as the broader landscape punishes anything reliant on footfall.

7. Amazon (AMZN)

Amazon reports its fourth-quarter earnings this week and investors will be hoping they’re enough to liven the stock up a bit.

It’s been one of the pandemic’s big winners but even the Bezos behemoth hasn’t been immune to a looming period of rising interest rates across the pond.

Shares took a dive in January, which might have triggered a wave of buying ahead of numbers coming out on Thursday.

In its Q3 results last year, the firm said revenue growth was likely to calm down in Q4. 

But, the market is still upbeat, with analysts expecting a year-on-year revenue increase of 9.6% on average. 

That’s still within management’s 4-12% guidance range but probably more important is how Amazon sees the much longer-term picture developing. 

Rates are one thing and online shopping looks set to stay, but how quickly the company expects buying to come down as prices rise and economies open will be an incredibly important aspect this year.

8. Vanguard FTSE All World UCITS ETF (Dist.) (VWRL)

Broad market index ETFs can be useful building blocks for our ISA portfolios. But we need to make sure we know what’s under the bonnet.

Rushing into a global ETF might seem like it gives instant diversification (and it does compared to just holding a few stocks) but it pays to see exactly what you’re getting.

This All World ETF gives access to a range of global markets but the fund is organised by market weight. That means over 60% of its holdings are in the US (as at 31 December 2021) with just over 6% in Japan and 4% in the UK.

It reflects the size of these markets and might be a useful learning point for anyone thinking it was simply a case of splitting exposure evenly around the world.

Tech made up a quarter of the fund at the end of 2021 with the top names looking like a roll call of the usual suspects: Apple, Microsoft, Amazon, Tesla, Alphabet, Meta (Facebook), NVIDIA, then followed by semiconductor firm TSMC & insurance provider UnitedHealth Group.

That might come as a surprise for anyone hoping to avoid the tech names by casting their net a bit wider.

9. Alphabet (GOOG)

Another high flyer to get taken down in the January slump, Alphabet stock actually started to meet a bit of resistance in November.

Investors might not have given up on the firm just yet though - figures out this week will give long-term holders a much better view of what 2022 and beyond looks like for the Google-owner.

After marketing teams pulled ad budgets to tighten belts at the start of the pandemic, they let the purse strings loose last year and Google knew all about it.

In the nine months to the end of September, Alphabet reported revenues of $182bn, a 44% hike from the $126bn it raked in, in 2020.

And that’s a trend the firm’s investors are hoping sticks around.

Global advertising spending was estimated to increase by 22.5% in 2021 to $763bn. If that’s a sign of things to come, Alphabet could benefit. 

Already, the shift online has helped boost revenues by a compounded annual rate of 20% over the past 10 years. 

The stock might still be above what many investors are willing to pay, on valuation terms, but a P/E of 28 will look fairly reasonable compared to other tech firms.

Quality rarely comes cheap, the question is whether that performance can be maintained for the next decade or if last year’s ad habits are a flash in the pan.

10. GameStop (GME)

For every investor excited about GameStop’s move into NFTs there’s one nervous that it’s just desperately trying to stay relevant. 

Reports last month suggested the firm is partnering with a couple of crypto firms, with a view to developing games on blockchain and NFT technology.

GameStop hasn’t actually confirmed the strategy but the rumour was enough to give the stock a bit of energy before it shifted onto the back foot.

The retailer is building an online hub for trading NFTs of virtual videogame collectibles and launched its NFT website last year, so inviting creators to join the platform might seem a logical step.

A note of caution though, jumping from headline to headline isn’t necessarily the best strategy out there. Capitalising on a tenuous link to the newest hot trend can make fans cringe. Late last year games maker Ubisoft received backlash over its in-game NFT marketplace for exactly that reason.

More broadly, it’s the latest in a line of efforts designed to jolt life into the GME brand. Away from the short-selling mania there is actually a business to be run and Chairman Ryan Cohen has been tapping executives from companies like Amazon to do just that.

Just coincidentally, he wants GME to become the Amazon of gaming, whether it has the firepower to get that done will be a big focus for investors this year.

Make your money work a little bit harder with a tax-efficient investing account. First, learn the basics of how stocks and shares ISA works with our guide. Then, if you know that ISAs are right for you, go ahead and open an ISA account or transfer from another provider to start contributing regularly. Download our iOS trading app or if you’re an Android user, download our Android trading app to get started investing.

Important Information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.

When you invest, your capital is at risk. The value of your portfolio, and any income you receive, can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change.

Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

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