Warren Buffett famously said one should be fearful when others are greedy and be greedy when others are fearful. Right now, there is a lot of fear around stocks, with an 18% year-to-date loss on the S&P 500 index – and that’s after gaining 3% in recent trading sessions.
Does that mean it’s time to get greedy? Perhaps a hint is coming in from Oppenheimer. The firm is less pessimistic than most, and in recent note, chief investment strategist John Stoltzfus lays out a bull case for gains on a mid-term time scale.
Stoltzfus doesn’t back down from the current headwinds. He acknowledges inflation, the lingering difficulties of COVID lockdowns and supply disruptions, and the recessionary pressures brought on by the Federal Reserve’s switch to an anti-inflationary regime of increasing interest rates. But in Stoltzfus’ view, “Even in the face of uncertainty and palpable risks of recession, our longer-term outlook for the US economy and the stock market remains decidedly bullish. We believe US economic fundamentals remain on solid footing. US growth should remain well supported by consumer demand, business investment, and government spending.”
Stoltzfus sees a 23% upside to the S&P 500 by year’s end, from its current level near 3,900. A gain of that magnitude would put the index at 4,800.
Against this backdrop, we’ve used the TipRanks database to pull up the details on two stocks that Oppenheimer analysts have tapped as Top Picks for 2022 and beyond. Are these the right stocks for your portfolio? Let’s take a closer look.
American Express (AXP)
First up is one of the most recognizable names in finance, American Express. This New York City-based company has a world-wide reach and a reputation for offering financial services to a higher-end clientele. The company’s products include credit access and financing, which customers can use via credit cards and charge cards, business and corporate checking accounts and credit programs, and business lines of credit.
Even though the corona pandemic put a damper on consumer spending in 2020, Amex still saw more than $8 billion in revenues at the height of the crisis in 2Q20. Since then, the company’s top line has generally increased, topping out at $12.44 billion in 4Q21.
The most recent quarterly report, for 1Q22, showed $11.7 billion in revenues, which despite a 6% sequential drop was still up 29% year-over-year. The company’s earnings were in-line with the previous year’s 1Q, at $2.73, but 12% above the analyst forecasts.
This stock gets ‘top pick’ status from Oppenheimer, where analyst Dominick Gabriele explains why: “We see tailwinds still mounting at AXP vs. peers given the return of T&E spend and pent-up demand among the affluent consumer. Loan growth is likely to stay elevated vs. the industry and AXP isn’t seeing any inflationary impacts to discretionary spend among their customer base. We think the average ticket size could continue to increase at AXP and be a boon to volumes in coming quarter vs. peers. We expect continued OP of AXP vs. peers. Structural changes materializing pushing LT revenue growth expectations higher.”
To this end, Gabriele quantifies his position with an Outperform (i.e. Buy) along with a $212 price target. Investors stand to pocket a 50% gain, should all go according to plan over the next 12 months. (To watch Gabriele’s track record, click here)
Overall, the stock has 14 recent analyst reviews, split down the middle on Buys versus Holds for a Moderate Buy consensus rating. The shares are priced at $141.03 and their $185.15 average price target suggests a 31% upside in the next 12 months. (See AXP stock forecast on TipRanks)
Chipotle Mexican Grill (CMG)
The next Top Pick we’re looking at is Chipotle Mexican Grill, a recognizable brand in the fast food industry. Chipotle has been expanding its network over the past few years, and in 12 months between March 31, 2021 and March 31, 2022 the chain grew from 2,803 locations to 3,014. New location openings per quarter have ranged from 40 to 78; the 51 new openings in 1Q22 was well within that range.
In other positive metrics, Chipotle’s $2 billion in 1Q revenue was up 16% year-over-year. Drilling down, we find several positive data points supporting that gain, including a 9% increase in comp store sales and a 33% increase in in-restaurant sales. The company’s digital sales came to nearly 42% of food and beverages. Getting to the bottom line, adjusted earnings came to $5.70 per share, up nearly 6% from the year-ago quarter.
Chipotle’s management was particularly pleased with the 51 new locations opened during the first quarter. Of these, 42 include a drive-thru Chipotlane, a feature which, according to the company, has shown solid performance since the onset of the pandemic crisis.
Covering this restaurant chain for Oppenheimer, 5-star analyst Brian Bittner writes: “CMG remains a top pick owing to its unique pricing power, robust traffic drivers, and ongoing margin/EPS upside path. We also believe its accelerating unit growth (to the 10% range) with higher-return Chipotlanes is underappreciated.”
Bittner has also taken a broader look at the fast food sector in general, and continues to place Chipotle at the top relative to peers. Of that broader view, Bittner looked at the last cyclical recession, and said of Chipotle, “With investors focused on a potential recession, we carefully analyzed industry-wide and company-specific data points during the ’08/’09 economic downturn. In a nutshell, restaurant industry sales were surprisingly resilient (despite 8.6M jobs lost) and significantly outperformed overall retail sales trends. On a bottom-up basis, CMG and MCD were the only brands in our coverage where quarterly same-store-sales never turned negative.”
In-line with his upbeat view of CMG, Bittner rates the stock an Outperform (i.e. Buy), and sets a $1,925 price target that shows his confidence in 42% growth going forward. (To watch Bittner’s track record, click here)
All in all, this restaurant chain has picked up 20 analyst reviews in recent months, and these include 16 Buys against 4 Holds, for a Moderate Buy consensus rating. The average price target of $1,777 and change implies a 12-month upside potential of ~32% from the current trading price. (See CMG stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.
Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.
China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.
(ticker: BABA) and
(0700.H.K.) were among the companies fined as a result.
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