Back when Saturday Night Live was in its heyday, and arguably much funnier, the late Gilda Radner played a character called Rosanne Rosannadanna, who would lament and comment on current situations, both locally and nationally. Her go-to phrase was “It’s always something.” Long-time investors are well aware of that, and were reminded last week after the news of the latest coronavirus outbreak in China started to hit the tape.
Coronaviruses are a group of viruses that cause diseases in mammals, including humans, and birds. In humans, the virus causes respiratory infections that are typically mild, but in rare cases they can be lethal. In cows and pigs, they may cause diarrhea, while in chickens it can cause an upper respiratory disease.
Due to the spread of the virus, China is all but locked down now, and the government has halted stock trading and extended the lunar new year celebration from January 30 to February 2. Reports have indicated that a lockdown now affects 56 million people, and it may have come too late, which could make the situation worse.
One thing is for sure, investors concerned over the potential fallout may want to move to shares of companies with very little or no exposure to China. We found five that make sense now, and all are rated Buy at Merrill Lynch.
Allegiant Travel
This low-cost carrier flies to many cities, but none of those destinations are in China. Allegiant Travel Co. (NASDAQ: ALGT) has a unique business strategy: flying where other airlines do not. The company connects 136 city-pairs and typically flies each leisure route only a few times a week, using older planes with low capital costs. An early unbundler, the company generates more fees per passenger than any U.S. airline. Allegiant’s largest market is Las Vegas, followed by Orlando and Phoenix.
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The company recently announced the largest service expansion in its history, which includes 44 new nonstop routes, including 14 routes to three new cities: Chicago, Boston and Houston. This major addition to service is driven by Allegiant’s goal of connecting leisure travelers in underserved cities to popular destinations around the country. Most of the 44 new routes are non-competitive, with no other airline providing service between those airports.
The Merrill Lynch price target is $197 for the shares, while the Wall Street consensus target is slightly higher at $198.78. The stock was last seen trading at $166.69 per share.
American Electric Power
Merrill Lynch recently add this to its US 1 list of top stocks. American Electric Power Co. Inc. (NYSE: AEP | AEP Price Prediction) is one of the largest electric utilities in the United States, delivering electricity to more than 5.4 million customers in 11 states. It ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
The addition to the US 1 list was somewhat of a contrarian call as the utility sector as a whole has had a huge run over the past few years, as interest rates have plummeted again. The Federal Reserve went back to cutting rates and using “short-term” quantitative easing.
American Electric Power offers shareholders a solid 2.75% dividend. The $106 Merrill Lynch price target compares with the $99.80 consensus price target, as well as the most recent closing share price of $101.78.
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AT&T
This is a top telecom and entertainment play. AT&T Inc. (NYSE: T) is the largest U.S. telecom company and provides wireless and wireline service to retail, enterprise and wholesale customers. The company’s wireless network serves approximately 124 million mobile connections, with 77 million postpaid subscribers.
While AT&T’s traditional wireline voice business has undergone a period of secular decline due to wireless substitution and cable competition, the company through WarnerMedia has become a diversified media and entertainment business.
Merrill Lynch noted this when discussing the 2020 potential for the communications giant:
Our price objective is based on a P/E multiple of 12 times our fiscal year 2020 EPS estimate, which is in the middle of AT&T’s historical relative multiple range vs the S&P 500. We think this is warranted based on challenging operating trends within AT&T’s television business, higher leverage, and integration risk, but offset by higher earnings estimates and faster growth after baking in the impact of the company’s stock buyback and cost savings initiative.
Investors receive a significant 5.44% dividend. Merrill Lynch has a $43 price target, which compares to the consensus target of $39.31. AT&T stock closed Monday’s trading at $38.25 a share.
Jack in the Box
This is a top fast-food offering for investors to consider. Jack in the Box Inc. (NASDAQ: JACK) is a San Diego-based quick-service restaurant chain that has transformed in recent years from a mostly company-operated to predominantly franchised business model. There are Jack in the Box restaurants in more than 20 states, but with heavy concentration in California (41% of the total) and Texas (27%).
The company has been very solid, and the Merrill Lynch analysts noted this when it reported fiscal fourth-quarter results last year:
JACK has performed well, taking comps from two years of no growth to up 2%-3% for two quarters, an important reversal after new product misses, some executive changes, a lack of resonating value, and franchisee unrest increased pressure on CEO Lenny Comma. JACK’s improvement has been helped by a better promotional success, franchisee buy-in with a bit of momentum, and high check growth at competitors that give JACK some room with a premium positioning.
Shareholders receive a 1.95% dividend. Merrill Lynch has set its price objective at $100. The consensus target price is $92.69, and the shares closed at $81.97 on Monday.
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Kroger
This top grocer does virtually all its business in the United States. Kroger Co. (NYSE: KR) is the second-largest U.S. food supermarket retailer and generates $120 billion in annual sales. Kroger operates roughly 2,800 supermarkets throughout 35 states and under two dozen banners. Kroger also sells fuel at 1,450 supermarket fuel centers and operates 2,268 pharmacies and 274 jewelry stores.
The analysts note that the company’s price leadership, strong management team, store execution, and impressive leveraging of technology partnerships and investments (including a recently announced partnership with Ocado) should support Kroger’s revenue outlook and help drive efficiency in 2020 and beyond.
Kroger shareholders are paid a 2.26% dividend. The Merrill Lynch price target is $31. The consensus figure was last seen at $27.95, and the shares closed most recently at $28.33 apiece.
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While the coronavirus is certainly a concern, this is hardly the first time this kind of contagion has worried the markets and investors. Severe acute respiratory syndrome (SARS), which was also caused by a coronavirus, appeared in 2002 in China. It spread worldwide within a few months, though it was quickly contained. No known transmission has occurred since 2004.
The bottom line for worried investors is to avoid stocks for a while that have heavy China exposure and focus on companies like these five that do most or all their business right here at home.
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