Investing
Raymond James Has 5 Stocks to Buy Now If We Have a Snapback V Recovery
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It’s been 100 years since the United States and the world has encountered a pandemic like COVID-19. The Spanish flu, responsible for the 1918 flu pandemic, was unusually deadly. Lasting almost 36 months from January 1918 to December 1920, it infected 500 million people, about a third of the world’s population at the time.
While the medical community doesn’t seem to feel that the current pandemic will produce anything close to the death count of the Spanish flu, the staggering damage done to the world economy will resonate for quite some time. Across Wall Street, there has been much debate over whether we have a V-, U- or W-shaped recovery coming.
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Given the extraordinary circumstances, and the velocity of the selling and corporate balance sheet damage, it is almost impossible to predict the outcome with any certainty. The analysts at Raymond James have come up with lists of stocks to buy under all three recovery scenarios. They noted this in the report:
Eventually, economic activity is going to drive a recovery in profits, but because the world has never been through a disruption like this, no one knows with any certainty how fast economic activity will return. For this reason, we believe thinking in terms of scenarios makes the most sense at this point, and note that, historically, “U” shaped recoveries tend to occur where earnings bottom, and stabilize for a while, before returning to pre-recession levels over the course of 3-4 years. The “V” shaped recovery is less and less likely, in our view, given the lack of a proven therapeutic near term, but certainly a potential if a medical cure or virus mutation is found in the coming months. Finally, a “W” shaped recovery would be one in which economies are open and closed periodically over the next 1-2 years as effective therapeutics and vaccines are not discovered, forcing not just a deeper recession, but a longer recession than typical with corporate earnings likely not reaching 2019 levels again until after 2023, and likely locking in what seems like short term consumer behavior today, into a “new normal” for several years.
The Raymond James analysts created three lists of 30 to 35 companies. All stocks on the lists are currently Strong Buy or Outperform rated by the analysts, and they have been curated by each analyst for each economic scenario. Then they arranged the lists based on market cap, leverage and sector preferences that would be likely under each scenario.
We screened each of these lists looking for companies that also have had strong insider buying during the recent downturn and comeback rally. Here we look at five companies that could excel in a V-shaped recovery.
Avnet
The analysts see this as a sleeper in the huge technology supply arena that could be poised for a big move. Avnet Inc. (NYSE: AVT) is a global distributor of electronic components (such as semiconductors, passives and connectors). The company ships over 117 billion electronic components annually (from more than 1,400 suppliers) to upward of 2 million customers. Customers include original equipment manufacturers, electronics manufacturing services companies and original design manufacturers.
Avnet has two operating segments: Electronics Marketing and Premier Farnell. The catalog business (Farnell) can see lower margins as component lead times compress, but if a V-shaped recovery renews product purchasing, the company could fire right back up. Trading at very reasonable multiples, this is an excellent pick now.
Shareholders receive a 2.85% dividend. The Raymond James price objective for the shares is $47, and the Wall Street consensus target price is $31.25. Shares closed Monday’s trading session at $29.52, up almost 5% on the day.
Delek
This small-cap refiner could do well if we can get back into our cars and go to work and travel the country this summer. Delek U.S. Holdings Inc. (NYSE: DK) is an independent U.S. refiner headquartered in Brentwood, Tennessee, with core operating assets located in Tyler, Texas, and El Dorado, Arkansas.
Delek operates three business units (refining, retail, logistics) but derives more than 70% of its operating income from its refining segment, which has approximately 140 million barrels per day of crude throughput capacity. Delek’s product slate is skewed toward the light end, including motor fuels.
Holders of Delek stock receive a 6.32% dividend, which may or may not remain in place. Raymond James has a $20 price target, while the consensus target is $21.60. Shares closed up almost 5% on Monday at $19.42.
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Delta Air Lines
This company consistently has ranked high with Wall Street, and with the summer vacation season not far away, this could be a solid pick now. Delta Air Lines Inc. (NYSE: DAL) and the regional Delta Connection carriers offer service to 334 destinations in 64 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft.
The company has eliminated its dividends to help preserve cash. In addition, Delta is cutting second-quarter 2020 operating expenses by 50% on an 85% decline in capacity and basically halting capital spending in response to the ongoing crisis. With Delta on track to end the second quarter with $10 billion in liquidity, it should have a runway into 2021, even in a zero revenue environment.
The $36 Raymond James price target compares with the $37.07 consensus target. Delta stock was last seen trading at $22.16 a share.
Halliburton
This company is down almost 75% over the past year, but it remains a top large-cap oil services pick across Wall Street. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry.
The company serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. The company’s business always has been dependent on commodity prices. The low price environment triggered by the battle between Saudi Arabia and Russia on oil production has hammered benchmark pricing, and Halliburton has felt the brunt of it. Contrarians that see a path to higher oil prices could make some huge money here.
Shareholders receive an 8.55% dividend, though it could be on the chopping block. Raymond James has set its price target at $12. The consensus target is $11.68, and Halliburton stock closed most recently at $8.91.
Mohawk Industries
This company has benefited over the past couple of years from the strong housing market. Mohawk Industries Inc. (NYSE: MHK) is a leading building products company, manufacturing and selling flooring products such as carpets, rugs, ceramic tile, wood, stone, luxury vinyl tile and vinyl flooring. The company believes it is the world’s largest flooring company, with operations in 10 countries.
The company sells flooring products under the Aladdin, Columbia Flooring, Durkan, Horizon, IVC, Karastan, Mohawk, Pergo, Portico, QuickStep and SmartStrand brands. The Flooring ROW segment provides laminate and hardwood flooring, as well as roofing elements, insulation boards, medium-density fiberboards, chipboards and vinyl flooring products under the IVC, Moduleo, Pergo, Quick-Step and Unilin brands, and it licenses patents related to flooring manufacturers.
The Raymond James price target is $105. The consensus target is $95.57, and Mohawk Industries stock traded up over 6% on Monday to close at $83.74.
These five companies could be big winners if the recovery is V-shaped and sooner rather than later. It is important to remember that all their stocks have seen substantial insider buying recently, which is one of the best indicators for stock investors.
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