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All Contents © 2020The Kiplinger Washington Editors
By Charles Lewis Sizemore, CFA, Contributing Writer
| March 26, 2020
The stock market is a mess of bearishness and volatility right now. But despite the carnage, a sizable number of stock picks are starting to look better in the eyes of Wall Street's pros, and they're starting to compile some analyst upgrades as a result.
The Federal Reserve has introduced aggressive measures and Congress is finalizing a $2 trillion rescue package. That's at least providing a sense that there might be a backstop in place to prevent a total implosion of GDP over the next two quarters. But the hit to corporate profits still is hard to quantify at this point. We know it will be bad once the first-quarter earnings reports start trickling in next month. We just don't know how bad.
"We have zero visibility on the earnings front," says Sonia Joao, a financial advisor based in Houston, Texas. "We're hoping for the best but bracing for the worst and trying to keep our portfolios weighted toward higher-quality names."
Nonetheless, Wall Street's pros are starting to see a brighter picture for a few stock picks. Part of this is simply a function of price: No matter how bad the economic picture looks, at some price, most stocks are worth owning. And in some cases, stock prices have fallen far more than even a worst-case scenario would suggest.
"We don't necessarily need things to look good," says Doug Robinson, principal of San Francisco-based Robinson Capital Management. "We simply need for the outlook to go from awful to less bad. That's enough to see meaningful improvement in the sentiment toward most stocks."
Here are seven stock picks that have earned analyst upgrades amid the market chaos. An analyst upgrade is not holy writ – it's an educated guess. But it's an educated guess by the professionals that study the companies and know their financial situation inside and out. Thus, this list is a great start-off point for investors looking to put some cash to work.
Data is as of March 26. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $178.6 billion
Dividend yield: 3.9%
Analyst ratings: 12 Strong Buy, 4 Buy, 4 Hold, 0 Sell, 0 Strong Sell
We'll start with an American icon, Coca-Cola (KO, $41.61).
Soft drink sales have been in an inexorable decline for years. Between 2010 and 2018, American per capita soft drink consumption dropped by 15%. As people have become more health-conscious, they've downed less soda.
With restaurants essentially shut at this point, people are eating and drinking at home. But they've also been resorting to sugary "comfort foods" to help them deal with the stress of being sequestered. That's a little help in offsetting sales lost to restaurants. Also important: Coca-Cola sells a lot more than its namesake Coke. It also has thriving bottled water, juice, tea and coffee businesses.
KO has received a couple analyst upgrades of late. JPMorgan recently promoted Coca-Cola to Overweight (equivalent of Buy), writing that "We acknowledge that we may be early in this call given the uncertainty around when or if the pandemic is contained, limited visibility on the potential uptick in at-home consumption, and the strengthening of the dollar; all of which could drive further negative earnings revisions. However, we believe this represents a unique long term opportunity to own a high quality asset which seems to be pricing in the scenario that volumes will not rebound post the peak of the COVID-19 pandemic."
JPMorgan went on to say it saw no risk to Coca-Cola's dividend, which now yields more than 4%. That payout has also been increasing for more than a half-century, putting it among the ranks of the "Dividend Kings."
HSBC recently upgraded the stock, too, from Hold to Buy. Most of the analysts covering KO now have it among their bullish stock picks, with 16 recommendations of Buy or better versus just four Holds.
Market value: $309.9 billion
Dividend yield: 2.0%
Analyst ratings: 10 Strong Buy, 4 Buy, 7 Hold, 0 Sell, 0 Strong Sell
Walmart (WMT, $109.40) is almost uniquely positioned to ride out the coronavirus scare. Much of the economic activity that has been lost because of city or state-wide lockdowns will never be recovered. If you go a month without eating in a restaurant, getting your clothes dry cleaned or getting a haircut, you don't immediately go out once the lockdown is lifted and "catch up" on restaurant meals, dry-cleaned shirts or haircuts. Those transactions are lost forever.
But in Walmart's case, the company is primarily selling things that get used up fairly quickly and need to be replaced, such as food, medicines and cleaning supplies.
There are some purchases being made today that will pull forward future purchases. Think toilet paper. All of the people out there hoarding toilet paper – and yes, you know who you are, and I'm judging you harshly – are not going to buy more toilet paper immediately after this crisis passes. They likely have a year's supply at this point. But most of the rest of what Walmart sells needs to be replaced within a week or two. So, while the company might get a major earnings bump this quarter that might not be sustainable once life returns to normal, it also likely won't see sales dip too far below pre-crisis levels.
Credit Suisse recently upgraded Walmart from Neutral (equivalent of Hold) to Outperform (equivalent of Buy), writing, "In our view, Walmart is no longer just an early cycle, defensive, low-price player, as in prior cycles. Its market share growth story and this period should validate the changes it's made."
Market value: $150.3 billion
Dividend yield: 0.3%
Analyst ratings: 26 Strong Buy, 4 Buy, 5 Hold, 1 Sell, 2 Strong Sell
Chipmaker Nvidia (NVDA, $245.62) has been among the most rewarding, albeit sometimes frustrating, stock picks out there. NVDA stock is up more than 1,000% over the past five years, but it occasionally takes nauseating dives. For instance, a couple years ago, its processors were the favorites of Bitcoin miners. When the cryptocurrency bubble burst, it cut Nvidia's stock price by more than half. But earlier this year (before the bear market set in, of course), the stock hit new all-time highs.
Nvidia's GPU chips are designed for high-performance video games and other heavy-duty graphics users. While video games still are its bread and butter, the company is expanding into data centers, machine learning and self-driving cars, among other things, and that's what is increasingly driving its gains.
Nvidia is very much a play on the future. But the present doesn't look so bad either. A little more than half of its revenues come from gaming. If we're looking at a prolonged period of spending more time indoors, home entertainment options such as gaming consoles look solid.
The analysts would seem to agree. Over the past 10 days, seven analysts reaffirmed their bullish ratings and an eighth upgraded the company to a Buy. The banks reiterating include Oppenheimer, Goldman Sachs, Wedbush, Merrill Lynch, Wells Fargo, Morgan Stanley and SunTrust Robinson. Needham's Rajvindra Gill believes that GPUs will be increasingly used in medical applications in the wake of the COVID-19 outbreak, and he also believes the company's "superior balance sheets remain supreme."
Market value: $26.5 billion
Dividend yield: 2.5%
Analyst ratings: 3 Strong Buy, 0 Buy, 16 Hold, 0 Sell, 0 Strong Sell
It's not all that difficult to understand the appeal of a chocolate company right about now. With pretty much all of life's little pleasures off limits for the duration of the virus quarantines, buying a chocolate bar at the grocery store is one of the few many of us have left.
Furthermore, people are stressed out at the moment, and chocolate is a comfort food.
With all of this in mind, Credit Suisse recently upgraded Hershey (HSY, $126.14) to Outperform with a price target of $160. This move would erase the losses seen since the beginning of March. About a week later, Piper Sandler and Edward Jones analysts also added HSY to their stock picks, doling out analyst upgrades to Buy-equivalent levels.
Sometimes an investment thesis really is as simple as it appears on the surface. As the owner of the Hershey's, Reese's, Jolly Rancher, Almond Joy, Cadbury, Kit Kat, Rolo, Twizzlers, Pirate's Booty and a host of other brands, Hershey is well positioned to rake in better-than-usual sales as long as the world is effectively on lockdown. And once this passes, HSY is unlikely to see a major reduction in sales. People aren't hoarding a lot of chocolate. It's not toilet paper, after all.
Market value: $951.6 million
Dividend yield: 0.4%
Analyst ratings: 9 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell
An interesting addition to this list of recently upgraded stock picks is Callaway Golf (ELY, $10.10).
With the world on lockdown, sports more or less outlawed until further notice, and the prospect of a nasty recession on the horizon, it might seem odd to see enthusiasm for a company that makes golf equipment and accessories. After all, buying an expensive set of clubs might seem a bit extravagant at a time when millions of Americans may soon be in the unemployment lines.
Yet Cowen & Company recently upgraded the stock to Outperform, and Roth Capital recently initiated coverage with a Buy rating.
It's worth noting that Cowen's price target was modest at $10 per share, which the stock surpassed the next day. It will be interesting to see whether Cowen revises its target higher given the recent move. However, the average price from analysts who have sounded off over the past three months, at $21.38 per share, implies ELY will more than double from here. Roth Capital's price target is close to that, at $21 per share.
Market value: $22.6 billion
Dividend yield: 9.2%
Analyst ratings: 11 Strong Buy, 1 Buy, 10 Hold, 0 Sell, 0 Strong Sell
Chemical stocks tend to be cyclical. So, with the world looking at the very real likelihood of a nasty recession on the horizon, it's easy to see why Dow Inc. (DOW, $30.38) got pulverized along with the rest of the market. Its shares were priced at more than $50 as recently as January. They sank all the way to the low $20s and still only trade around $30.
Here's the thing. We might get a recession. It fact, it's all but guaranteed at this point. But life goes on, not all heavy industry grinds to a halt. And if we're looking at a long period of government stimulus and relief, including funding for infrastructure, then demand for Dow's products should remain strong, or at least strong enough to justify a much higher stock price from here.
DOW has received several analyst upgrades of late. Citigroup, Jefferies and SunTrust Robinson all recently promoted the stock to Buy. Specifically, Citi's P.J. Juvekar says chemical stocks in general look cheap, and that Dow is priced at just 23% of "replacement value."
We'll see what happens. But in the meantime, you can collect a dividend of more than 9% that CEO Jim Fitterling recently defended as "artificially high," stressing a much-improved financial position that makes them "ready to go into a down cycle."
Market value: $31.1 billion
Dividend yield: 7.3%
Analyst ratings: 14 Strong Buy, 2 Buy, 10 Hold, 0 Sell, 0 Strong Sell
First, it was the coronavirus outbreak and response. That alone was enough to rattle the market. But then, Saudi Arabia and Russia decided to go to the mattresses, Godfather-style, launching an all-out oil price war the likes of which we haven't seen in decades.
This was enough to rattle all energy-related stocks, even those primarily in the midstream transportation business. Even if a company's revenue stream is based on volume of oil and gas moved rather than price, widespread bankruptcies in the oil patch could end up really disrupting business.
And it doesn't help that pipeline companies tend to carry a lot of debt.
All the same, some blue-chip energy stock picks like Kinder Morgan (KMI, $13.73) were hit far harder than they should have been. Shares fell from around $22 per share to under $10 before eventually bouncing a little.
But a few analyst upgrades started rolling in after that move. Barclays upgraded the stock to Buy with a price target of $16, and SunTrust Robinson reiterated its Buy recommendation with an $18 target. Several other banks have upgraded to or reiterated Buy or Hold recommendations, with price targets ranging from $14 to $20 per share. All of that means the pros see some measure of relief in this stock pick's future.