Alphabet (GOOGL) ended 2024 on a high note with AI innovation boosting its offerings, further cloud expansion, and strong YouTube performance.
Both the top and bottom lines have been growing in the double-digit range recently, and the balance sheet is as cash-rich and strong as any company, save for maybe Berkshire Hathaway. In short, Alphabet has fundamental strength in spades – dominant market share, steady growth, and hefty cash flows.
Technical analysts will see lots to like too given the share price has been in a steady uptrend, outperforming for months. Chartists point to a breakout of a lengthy consolidation in late 2023 and has been setting higher highs, and that suggests renewed investor confidence.
Stable consumer and business spending is translating to digital ad demand and AI investments are starting to pay off in productivity and new features.
With interest rate hikes likely paused, large-cap growth stocks like Alphabet become even more attractive. This backdrop, plus Alphabet’s ongoing AI initiatives which keep it competitive against peers, should propel further gains.
All in all, Alphabet’s combination of reliable fundamental growth and positive chart momentum, supported by the secular shift to AI and digital advertising recovery, make it a top pick with a favorable risk-reward profile that has the potential to produce strong upside potential with relatively low volatility.
Amazon
After a tough 2022, Amazon has dramatically improved its profitability, largely through cost cuts. Those efforts paid off with a record-breaking holiday quarter in 2023 when full-year 2023 net sales jumped 12%, and net income swung from a loss in 2022 to $30.4 billion in profit
Amazon’s core businesses of e-commerce, cloud, and now a booming ads division are back on a growth trajectory and margins are expanding.
The company is capitalizing on its scale to reignite earnings growth, and the fundamentals are expected to strengthen further as AWS (cloud) growth reaccelerates and retail sales remain solid.
From a technical standpoint, Amazon’s stock has shown strong upward momentum since mid-2023. It built a base for much of 2022–23 and then broke out on earnings results that confirmed its turnaround. There is still upside before reaching prior highs, and recent higher lows indicate buyers stepping in on dips.
Several macro factors support Amazon in the coming months too with consumer spending remaining been solid and so benefiting the retail and advertising arms. Any moderation in inflation or interest rates will boost consumer discretionary companies like Amazon.
At the same time, businesses are increasing cloud spending again, which helps AWS. Amazon also benefits from secular e-commerce growth and the expansion of online ads. With the Fed likely at peak rates, high-growth names have a clearer runway.
Putting it all into the mix, Amazon offers an appetizing low-risk, high-reward setup. The downside is cushioned by its improved profitability and dominant market position, while the upside may very well be significant as both consumers and cloud clients loosen their purse strings in a more favorable economic climate.
Palo Alto Networks
Palo Alto Networks is a leading cybersecurity provider that grew revenues by about 16% year-over-year to roughly $8 billion and the company has markedly increased its profitability with recent quarterly net income jumping by ~80% YoY as it scales its platform.
Technically, the stock has been in a steady uptrend and outperformed the broader market over the past year. The stock broke out of a multi-month sideways range after management posted better-than-expected earnings and has largely held those gains.
Evidence of institutional accumulation seems to be on the rise. Any decisive push above its recent highs is likely to trigger another leg up, and at the same time downside seems to be limited by strong support around the breakout levels.
Current trends make cybersecurity even more attractive: as companies digitize and adopt cloud/AI solutions, security spending is non-discretionary. In a world of high-profile cyber threats, Palo Alto’s services are in steady demand even in slower economies.
Plus, with IT budgets stabilizing and likely to increase for security, and emerging areas like AI security and cloud security on the horizon, Palo Alto is in a good spot to benefit.
The 2025 environment where enterprises seek to protect ever-growing digital infrastructure provides a tailwind so Palo Alto Networks fits Druckenmiller’s criteria well in that it’s a fundamentally strong growth company, riding a durable cybersecurity macro trend.
The stock that has already shown it can move higher and offers considerable reward potential as it captures more market share, while its entrenched role in customers’ security frameworks limits the downside risk.
Northrop Grumman
Northrop is one of the premier U.S. defense contractors, with a diversified portfolio spanning aerospace, defense electronics, and missiles and now sits on a record order backlog of $85–90 billion thanks to heightened defense budgets globally, which virtually locks in revenue growth for years
Northrop has been growing sales at a mid-single-digit pace, and importantly, it has been raising its earnings forecasts as it improves margins. In fact, against a backdrop of increased global defense spending, Northrop lifted its profit outlook for 2024 and is seeing strong demand for its programs. Steady revenue, rising profit, and a huge backlog gives high confidence in its forward earnings.
NOC’s stock has been consolidating but appears to have found a floor. It’s showing signs of an emerging uptrend, with the share price recovering off its lows as investors recognized the value in its backlog and reliable earnings.
Historically, defense stocks can trade in ranges and then rerate higher when budgets or conflict-driven demand jumps; Northrop may be at such an inflection.
The relative strength versus the market has been improving over the past couple of years. With strong support in the $420–$440 area and the stock still below its prior peak, the technical risk/reward looks favorable thanks to limited downside and room to run on the upside especially if it breaks above resistance around the $500 level.
The macro narrative for Northrop is straightforward and positive. Rising geopolitical tensions have prompted many nations to boost defense spending. Ongoing conflicts in Ukraine and Middle East and heightened-power competition translate to heightened demand for Northrop’s products like stealth bombers, missiles, and defense systems.
In the next 3–6 months, this environment is unlikely to change dramatically – if anything, supplemental defense budgets and international arms deals could add to its backlog. Additionally, in a potentially softer economy, defense is a relatively insulated sector with government-backed revenues.
Northrop Grumman offers a lower-risk profile because it’s a stable government business and a clear catalyst path of budget increases and contract wins that could unlock high reward.
It may not skyrocket like a tech stock, but its odds of delivering solid, market-beating returns – even if the broader market wavers – are quite high, which is exactly the kind of asymmetrical bet Druckenmiller would appreciate.
Discover Financial Services
Discover is a leading credit card issuer and digital bank that has the hallmarks of being undervalued while the business remains fundamentally strong.
Consumer credit volumes have been good as evidenced by the fact that Discover’s total loans grew about 6% last year with credit card loans ending the year slightly up year-over-year.
Management has posted consistent profits even after accounting for one-time charges, highlighted by a stronger-than-expected recent quarter.
Discover’s return on equity and profit margins are historically high for the industry, and credit losses are not unduly high.
It’s also interesting that they have resumed share buybacks and so it seems in-house they believe the company is likely on sale too. With a forward P/E in just the single digits and a well-covered dividend, the valuation is starting to look really attractive relative to peers.
Turning our attention to the charts, DFS stock appears to be in the early stages of a recovery after suffering a sharp drop a couple of years ago on bad news, but since then has stabilized and carved out a base in the $90–$100 range. After selling pressures were exhausted it started a relentless climb higher towards $200 per share.
Make no mistake about it though that Discover’s fortunes are tied to the U.S. consumer. The near-term outlook of solid employment, decent wage growth, and healthy consumer spending bodes well for credit card usage. With interest rates leveling off, Discover can also maintain high loan yields without the challenges of higher funding costs.
In the next few quarters many forecasts expect a soft landing, and so credit card delinquencies should remain in check.
The bottom line is Discover offers a contrarian but classic Druckenmiller-like setup in that it’s fundamentally solid but was beaten down on fixable issues, it’s technically turning the corner, and macro conditions (decent consumer health and plateauing rates) support a rebound. The downside risk, barring a sudden recession, is limited by its low valuation, while the upside could be substantial as normalcy returns, making it a compelling low-risk, high-reward pick.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.