Stocks For The New Surge
Stay at home stocks can be a conundrum for stock investors. While they offer upside because of abrupt changes in the economy, these same dislocations might at the same time imperil their own business.
Therefore, it’s not just companies that cater to consumers being at home, but those with the financial strengths to weather the vicissitudes of a pandemic-laden economy. Here’s three with A++ ratings for financial strength. Come what may, they will either capitalize on the opportunities or weather the storm.
In the U.S. McDonald’s has a drive through option at about 95% of its locations. The company has been investing them since the mid seventies, but little could they imagine one day drive-through would be McDonald’s savior. Even with its dining rooms now largely closed, for the third quarter, U.S. same store sales were up 4.4% and overall earnings per share were $2.22 versus a comparable $2.11, for a remarkable 5% gain.
It’s not all roses of course as U.S. revenue represent just under 40% of total sales and drive throughs are generally less prevalent internationally. And further, overseas locations are implementing stricter measures to contain the pandemic than in the United States. Not surprisingly, system-wide same store sales were off 2.2%
MORE FOR YOU
But with light at the end of the tunnel, McDonald’s has not only survived, but thrived in some respects. Should the impacts of the pandemic largely lift by the second quarter of 2021, McDonald’s is well positioned to continue its growth trajectory. If it doesn’t, McDonald’s A++ rating for financial strength according to Value Line VALU means it among the elite companies that can triage its’ way to better days ahead.
And the 2.4% dividend will make the wait a little more palatable.
The sight line for enthusiasm over Fedex is unobstructed. Consumers and many workers are at home and almost all of them need stuff delivered there. And pandemic or no, online sales continue to eat into brick and mortar sales, an inexorable trend that will drive organic growth across almost anyone’s investment horizon. What’s not to like?
Of course once you make this argument, it’s tempting to take a look at UPS too. After all the same drivers are in place, and UPS has the chops and the infrastructure to take advantage of them. It could be a toss up, but in a two person race, Fedex might have the advantage. “When comparing them directly, we think FDX has a slight edge, which is based on its significantly lower debt to equity percentage (54% compared to 84% at 9/30/20). This is particularly important now, since so many companies have taken on huge amounts of debt due to COVID-related disruptions to their businesses,” said Value Line’s Ian Gendler.
Fedex has a much smaller dividend than UPS, 0.90% versus 2.41%. However Fedex has grown its dividend much faster, 19.44% average annually over the last 10 years versus UPS at 8.35% average annually over the past decade. At this rate the cash on cash return from Fedex will overtake UPS in just over five years and ceteris paribus, every year thereafter.
The ultimate stay at home stock is Amazon. One reason for is that even when it was not an imperative, consumers could go to the hardware store, the grocery store and the shoe store without getting up from the couch.
Now that consumers must is good for Amazon, and this figure is evident in the second and third quarter reports where sales were up 37% and 20% respectively. But the bigger, long term benefit is the change to consumer behavior. When they can walk the aisles of Target TGT without a care, how many consumers will nonetheless pare back their visits for the convenience of staying at home?
Apparently a lot of analysts think that’s exactly what they will do. A tally by The Wall Street Journal shows among analysts covering the company, there are 42 buy/overweight ratings, three hold ratings and no sell recommendations. Of course, that level of exuberance is, in an of itself, cause for concern. More so when the company is trading at a hefty 92 times trailing 12-month earnings and 70 times forecasted EPS.
But for longer term investors, Amazon is likely to grow into this valuation while lofty new expectations are set that will make today’s prices seem inexpensive. Of course, there will be ups and downs along the way, but Amazon’s financial strength, rated A++, will help tamp down the volatility.
Following the first wave of the pandemic, Value Line reviewed the balance sheets of all of the companies in its 1,700 stock universe. According to Value Line’s Gendler, “Hundreds of stocks experienced reductions in their ratings for financial strength. Some, however, were raised, Amazon among them, since they were able to successfully weather this difficult situation.”