Wednesday, March 18, 2020 / by Ken Couture
The S&P 500 was climbing Tuesday morning but still deep into a bear market and priced about 13.5 times one-year forward earnings. That is much lower than the five-year average of 17 times, not to mention the recent high marks that exceeded 19 times.
Amid the broader market turbulence, analysts at Jefferies Research find one group of stocks compelling—the high-quality names with strong fundamentals and attractive valuations, or priced at what Jefferies called “practically stealing.”
It offered a list of stocks spanning all sectors that investors would want to own across a business cycle, despite potential near-term drawbacks. Some held up well in the last downturn, some enjoy a business model well-differentiated from peers, and some have strong cash flow to support appealing dividends in a low-rate environment.
Here are a few highlights from the list in each sector:
Videogame stocks are less-exposed to the Covid-19 disruption and possibly even stand to benefit as people spend more time on home entertainment. Within the group, Activision Blizzard (ticker: ATVI) is a favorite of analyst Alexander Giaimo. The company enjoys a solid product pipeline, aggressive mobile approach, plus 100% self-owned intellectual property. Giaimo expects Activision to see two straight years of double-digit earnings growth.
While casinos were among the hardest hit during the coronavirus selloff, Las Vegas Sands (LVS) is a stable long-term bet once the pandemic impact fades, according to analyst David Katz. The gambling giant offers a strong balance sheet, stable management team, and continuously growing share in key markets such as Macau and Singapore, with a few capital projects under way. While both areas have experienced sharp drawdowns in visitor volume because of the pandemic, things likely won’t get any worse from here, Katz said.
While global economic growth remains a concern, chocolate and other indulgence foods typically sell well in recessionary environments, noted analyst Rob Dickerson. Mondelez (MDLZ), known for its various snacking products such as the Cadbury chocolates and Oreo cookies, is well-positioned relative to peers, with higher exposure to faster-growth markets such as China. During the coming periods of extensive self-quarantine, pantry-loading among U.S. consumers could offer further tailwinds to the company.
Oil’s fallout might be shippers’ boon. The recent price war between Saudi Arabia and Russia has flooded the market with millions of barrels of additional crude and led to a price collapse of the commodity. But Euronav (EURN), the largest crude tanker company in the world, is likely to benefit as tanker demand increases, both for inventory building and floating storage, according to analyst Randy Giveans. After strong results from the fourth quarter, the company has stated that the first quarter of 2020 will be even better. Another positive for investors: Euronav has a policy to return 80% of its net income to shareholders through dividends and share repurchases.
The recent Fed rate cuts have been negative for bank stocks that make part of their profits from interest rates on loans. But the price downturn has also offered an attractive entry point for bank stocks with long-term value. SVB Financial (SIVB), for example, is trading at only 1.3 times tangible book, compared with its 2.3 times historical average. The commercial bank, focusing on funding early-stage high-tech companies, is well-positioned to capitalize on the rebound in innovation markets once the economic damage from the coronavirus pandemic subsides, analyst Casey Haire wrote.
While Gilead (GILD) stock has been rising lately in hope for the potential coronavirus treatment remdesivir, its valuation remains cheap, noted analyst Michael Yee, currently trading at just 10 times earnings. If remdesivir can show “even a marginal benefit” in clinical trials, the stock’s multiples could further expand. Gilead is a relatively safer stock among biopharma peers, Yee said, because of the company’s minimal exposure to China and lower share of sales in Europe. The firm also has a strong balance sheet, offers an attractive yield of 3% to 4%, and will continue to deploy capital toward pipeline-building acquisitions.
Cintas Corp. (CTAS) generates about 80% of its revenue from uniform rentals to corporate clients, largely sold as a program for the entire length of contracts, analyst Hamzah Mazari said. As a result, employees’ absence at work shouldn’t harm Cintas’ revenue stream. The company’s exposure to the hardest hit end markets—such as hospitality and energy companies—is limited, Mazari wrote. An economic downturn could also make Cintas’ competitor Aramark (ARMK) sell its business sooner than expected, giving Cintas an opportunity to swoop in at an attractive valuation.
Over the past 20 years, Cisco Systems (CSCO) has proven its resilience during periods of uncertainty, meltdown, contagion or crisis, noted analyst George Notter. This includes the global financial crisis in 2008 and 2009, fears over an emerging-markets slowdown in 2011, concerns about Huawei competition in 2012, and continuous worries about workload migration to the cloud from 2015 to 2018. Investors that bought the stock on the back of each crisis, however, were rewarded later on. Looking forward, Notter thinks the company is likely to ride higher again, along with the digital transformation of businesses around the globe.
Rio Tinto (RIO) is one of the largest iron ore miners in the world, with a strong balance sheet. According to analyst Chris LaFemina, the company generates significant free cash flow through the cycle, has relatively low geopolitical and operating risk, and pays a large dividend—currently yielding more than 8%. Because of its financial strength, Rio Tinto is also well-positioned to take advantage of an economic downturn to add value through merger-and-acquisition deals, LaFemina said.
With schools moving classes online and companies asking employees to work from home, the self-quarantine expected in the next few weeks will create a surge in demand for internet infrastructure. Equinix (EQIX) owns a large number of internet-exchange facilities across dozens of global markets, which allow internet service providers, digital content providers, cloud services, enterprises, financial services, and others to connect their networks. More than half of the Fortune 500 companies are customers of Equinix, according to analyst Jonathan Petersen. The dividend yield of 1.8% is below the average of REIT peers, but the company has been increasing its dividend at a nearly 10% annual rate since it converted to a REIT in 2015.
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