Top 10 ISA stocks in May on Freetrade
What have stocks and shares ISA investors been buying over the past month?
Published
September 4, 2024
US tech stocks and index ETFs battled it out over May to top the charts as the most popular buys for Freetrade stocks and shares ISA investors.
There’s still a noticeable lack of UK stocks among investors’ top ISA picks. That’s probably not surprising, given how unfashionable the UK’s key sectors have been over the past few years.
But, higher commodity prices lifting some of those unloved stocks might be behind a few UK ETFs creeping into the top 10 ISA buys in the past month.
More broadly though, stocks have had a bumpy ride recently, to say the least.
Recession fears have only added to the worry pile, with markets already down due to the war in Ukraine, renewed Covid fears in China and an upward-looking interest rate trajectory.
That said, it looks like Freetrade ISA investors are content with using the downturn as a chance to double down on their tech holdings.
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.
May wasn’t pretty for Tesla shares but the EV poster child got a boost at the end of the month thanks to some bullish comments from Credit Suisse analyst Dan Levy.
Levy put pen to paper after visiting Tesla’s Fremont facility, first voicing concerns over short-term niggles but giving a much more positive outlook after that.
The big hurdle for Levy is the ability of Tesla’s Shanghai factory to get back to full capacity.
He said, “Management noted that Shanghai saw a full month of shutdowns, the majority coming in April. Since the Q1 call, Shanghai has operated with one shift, and management notes that for Tesla to produce at two shifts with meaningful volume, Tesla’s China suppliers will also need to resume production.”
The country’s tentative reopening after recent Covid fears is clearly a key focus for June.
And, despite Levy’s prediction that second quarter vehicle deliveries will total 240,000-250,000 units, lower than the previous estimate of 295,000, it’s his longer-term view that has lifted the share price.
Even with the challenges to production, Levy slapped a $1,125 target on the stock. A key reason behind the bullish stance was the evidence of continuous production improvements the firm is making.
Levy said, “The visit reminded us that Fremont has shown ongoing manufacturing Kaizen,” referencing the theory of constant 1% improvements made popular by management consultants in the 2010s.
So, while the stock has been punished over fears of what rising interest rates could mean for its valuation, the analyst clearly sees the current weakness as a long-term buying opportunity.
The US S&P 500 rallied strongly towards the end, but May was still a tough month for the index.
The main weight on the market was the looming threat of recession, something Wall Street analysts really started to flag during the month.
A low growth and high inflation backdrop isn’t enthusing investors but some corners of the market are banking on that slowdown in growth taking the Fed’s rate rise plan down a notch too.
Analysts seem to agree interest rate rises are baked into the next two Fed meetings but if the trajectory stalls, or even falls, after that beleaguered stocks could get a bit of a break.
That’s the top-down view. On the ground, individual companies are still being frustrated by sluggish supply chains, a hit to production brought on by more lockdowns in China and effects from the war in Ukraine, not least in the cost of oil.
And while some investors have used depressed prices to snap up stocks on their watchlists, there are those still asking whether the short relief rally at the end of the month will give way to yet another leg down soon.
UK consumer stocks may have got a bounce thanks to the Chancellor’s cost of living payouts but that relief hasn’t made it across the Atlantic.
Walmart and Target both saw their share prices plunge in May as they laid bare just how badly rising costs are affecting consumers.
Walmart chief exec Doug McMillon said shoppers were having to forego purchases elsewhere just to keep up with higher food prices.
Target boss Brian Cornell chimed with McMillon on the rising pressure saying, "Growth was challenged by unusually high costs, resulting in profitability well below what we expected it to be and where we expect to operate over time.”
Add into the mix a rising rate environment, which has pulled tech shares down this year, and there’s one company sitting in the middle of that nasty venn diagram, Amazon.
Shares in the firm tumbled to basically where they were two years ago at the start of the pandemic, as investors began to wonder if the Covid effect really is over.
Amazon’s latest earnings report, released in April, shows first quarter total sales growth slowed to just 7%, down from 44% a year before.
Operating income went from $8.7bn a year ago to $3.7bn. That might already be cause for a grimace but when you strip out the operating profit from Amazon Web Services (AWS), Amazon's North American and international retail operations actually chalked up a $3.8bn operating loss.
And that still includes higher-margin parts of the business like advertising and Prime subscriptions, so the purely retail segment must really be giving up those lockdown gains.
The thing is, Amazon has clearly diversified its revenue streams for eventualities like this.
Granted, it’s an extreme example of why we diversify in general but AWS was the jewel in the crown long before Covid. And on that front, Amazon investors might actually draw some comfort.
AWS recorded a 37% growth rate in April. That might be the slowest growth of the major public cloud businesses, but it is the largest by some distance and shows at least that side of things is ticking along nicely.
Apple hasn’t been spared from the tech rout but there’s at least one investor filling their boots on the dips, Warren Buffett.
At the beginning of May, Buffett revealed he’d scooped up a cool $600m in Apple shares after the price went south mostly on interest rate worries.
“Unfortunately the stock went back up, so I stopped,” Buffett said. “Otherwise who knows how much we would have bought?”
It’s a lot to be investing, especially in light of CEO Tim Cook pouring cold water on some resurgent enthusiasm from the market. Quantifying the impact of ongoing supply chain challenges in China, he said factory closures will take $4-8bn off next quarter’s sales.
But, then again, Warren’s always had a time horizon considerably longer than the next 12 weeks.
Strip out all the headwinds, like exiting Russia and China’s lockdowns, and Apple would have grown at a double-digit clip in its latest quarterly update.
In the first quarter of 2022, the firm reported a net income of $34.6bn. Apple’s net income figures have grown massively in the past decade, with the yearly total rising from just over $6bn in 2008 to around $95bn in 2021, according to Statista.
And it’s this trajectory, rather than the short-term narrative, that Buffett is eyeing up.
The challenge now is figuring out whether supply interruptions from lockdowns and other global issues will be temporary, a series of temporaries, or something more endemic.
If it's the former, Apple sales and profits should continue to grow nicely. If not, the iPhone maker faces permanently higher costs and lower profits.
Popcorn at the ready.
Shares in AMC shot up last week as Tom Cruise was back in action in Top Gun Maverick.
The world’s favourite volleyball sequel (with a bit of fighter jetting thrown in) gave the actor his first $100m opening weekend at the box office and clearly piqued investors’ interest too.
Cinemark, AMC and IMAX Corp all jumped, as the movie racked up an estimated $248m worldwide in its first three days.
One swallow doesn’t make a summer but it’s maybe a signal we’re finally ready to get back in front of the silver screen in our droves.
Streaming services aren’t ready to pass that baton back though, with Netflix releasing the newest season of Stranger Things and Disney debuting the Obi-Wan Kenobi Star Wars spinoff on Disney+.
Maybe we’re happy enough with the best of both worlds though. In that case cinema stocks probably have a lot more to gain than the pandemic-favourite streamers. But that depends entirely on showing movies we actually want to see.
Anything less than a real blockbuster is likely to get a shrug and a “Let’s get a takeaway and binge The Office” instead. Especially if cinemas have to pump up the prices of tickets and pick’n’mix to deal with inflationary pressures.
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.
And this looks to be a sentiment shared by Freetrade ISA investors who stuck with the US theme in May.
For broad US exposure, stocks and shares ISA subscribers favoured Vanguard’s income-accumulating ETF last month. That’s because dividends are incredibly important to the value of total returns.
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.
But, with the dividend taps getting steadily loosened after a dry 2020 and somewhat kinder 2021, investors have also been looking to payouts to supplement incomes.
It can be nice to see those payments land in your account, just make sure you’re putting them to good use. The last thing you want is to miss out on that glorious compound effect just because you chose the wrong version of an ETF.
Past performance is not a reliable indicator of future returns.
Source: FE, as at 30 May 2022. Basis: bid-bid in local currency terms with income reinvested.
GameStop got a bump in May thanks to one decidedly market force and another bottom-up product rollout.
On the former, investors noticed the number of GME shares being shorted rose to about 26% of the free float. As the face of meme stock mania, GameStop investors are all too familiar with high short interest and likely looked for a big squeeze by buying up enough stock to force the shorters out.
On the ground though, investors might have also been attracted to the firm’s plans to enhance its NFT credentials. With an NFT marketplace already planned for later in 2022, the retailer revealed its digital wallet, which can be used to send and receive crypto assets.
It plans to let users send each other in-game assets without being forced to leave their web browsers.
It’s a small step but an important one that signals the company’s plans to serve its gaming community rather than just being a one-stop shop for trade-ins.
Ads. They’re Alphabet’s bread and butter. And when you’ve got a search giant like Google plus a platform like YouTube in the back pocket, it’s easy to see how lucrative a business that can be.
The worry for Alphabet is all that ad money could be finding a few more homes.
Amazon has just entered the ad game and Netflix is reportedly launching an ad-supported version of its service later this year. Disney is lining up to do the same.
That’s bad news for Alphabet for a few reasons. First, there’s the clear competition it presents. And if the UK’s supermarkets are evidence of one thing, it’s that it doesn’t take too much of a marketplace before there’s a race to see who can slash prices the quickest.
That means a looming hit to margins, just to keep consumers onside.
Then there’s the fact that ad-supported streaming services could mean a cheaper offering for viewers. If third-party advertisers can foot the bill, or at least make it reasonable for the end user, viewer numbers could rise and steal attention away from the seemingly free options like YouTube.
YouTube has shown signs of slowing growth for a while now with TikTok already pulling us away from the platform and marketing budgets across the world returning to normal after dizzying spends over the pandemic.
Whether it can reaccelerate or not will be crucial in the upcoming quarters for Alphabet’s stock price.
We can all be guilty of chucking all the UK indices in with each other, thinking market forces will influence companies up and down the size scale in the same way.
2022 is a great example of how that train of thought can end up hurting our portfolios.
While the country’s top bourse managed to end May with its year-to-date head above water, it was an altogether different story for the 250 mid caps below it.
That’s because the biggest 100 names on the UK market include world leaders in industries like oil and mining, which have benefited from higher commodity prices linked to the war in Ukraine.
On the other hand, the country’s mid tier companies are much more exposed to companies that exist in and serve the UK domestic market. With inflation biting, supply chain disruption still a thorn in the side of UK plc, and interest rates rising, it has problems of its own to deal with.
According to the index providers themselves, around 76% of the revenue made by large cap companies comes from abroad. That figure shrinks to 51% among medium-sized firms.
That’s often because smaller firms have fewer divisions outside the UK and serve far fewer customers abroad. They also normally have a simpler business model than the mega caps which might operate a number of underlying businesses across the world.
For investors, it’s extremely useful to remember, as mid caps can often reflect the state of the domestic economy much better than the sprawling companies further up the list.
Those names in the middle arguably also foster more opportunity for growth than bigger firms whose high-growth days are behind them. That’s not guaranteed of course, just a reflection of elephants being able to run less quickly than… well… smaller elephants.
The point here is to make sure you know what you’re getting when you buy a UK index ETF, both in terms of company size and exposure to the actual UK economy.
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