The selling has returned to the markets. While we got a reprieve on Thursday, the legions of new millennial investors are getting a taste of what happens after a market “melt-up” rolls over and reality sets back in. The stock market by all measurements is expensive, with the S&P 500 trading at a stunning 20.4 times forward earnings, which is a 1.5 standard deviation above the long-term average of 15.4. This level is now three-quarters of the way to the tech bubble high in 1999 and 2000.
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With the market very rich, and the coronavirus pandemic still a long way from being over, we decided to sift through the companies that have been absolutely eviscerated as a result of the demolition of the economy and everything related, like travel, lodging, discretionary purchasing, gaming and so much more.
Five companies with stocks to buy at BofA Securities hit our screens and look like great ideas for long-term growth investors with a somewhat higher degree of risk tolerance. Remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Chevron
This integrated leader is a safer way for investors looking to be positioned in the energy sector. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas.
Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.
The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.
Shareholders receive a hefty 5.73% dividend, which the analysts feel comfortable will remain at current levels. The BofA Securities price target is $97, and the Wall Street consensus target is $90.71. Chevron stock ended Thursday’s trading at $90.05 a share.
Darden Restaurants
With phase one opening procedures in place, the restaurant industry is close to leaving the horror of being totally shut down except for carryout and delivery. Darden Restaurants Inc. (NYSE: DRI) owns and operates full-service restaurants in the United States and Canada.
As of November 24, 2019, the company owned and operated approximately 1,799 restaurants, which included 867 under the Olive Garden, 518 under the LongHorn Steakhouse, 166 under the Cheddar’s Scratch Kitchen, 79 under the Yard House, 59 under The Capital Grille, 45 under the Seasons 52, 42 under the Bahama Breeze and 23 under the Eddie V’s Prime Seafood brands.
The company reinforced the balance sheet last month, and the analyst said this at the time:
Darden completed a $460 million equity raise ($400 million common, $60 million green shoe) to strengthen its balance sheet. The raise highlights Darden’s growing cost of capital advantage to peers given years of a more conservatively run balance sheet. Despite the 6% dilution, we think Darden’s war chest will help it muscle out peers post-Covid-19.
The dividend has been suspended for now, and BofA Securities has a $75 price target. The consensus price objective is $74.44. Darden stock closed most recently at $66.66.
GM
This venerable car company could benefit from an improving economy and the return to work. General Motors Co. (NYSE: GM) is the world’s largest automaker, with annual volume of almost 10 million units. The company reports its operations in four regions, North America, Europe, South America, and International. The company now relies on only four core brands in its key North American segment (Chevrolet, GMC, Buick and Cadillac).
GM sells cars, crossovers and trucks to dealers for consumer retail sales, as well as to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies and governments. In addition, it offers connected safety, security and mobility solutions and information technology services. The company, through its subsidiary, General Motors Financial, provides automotive financing services.
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The company posted solid results last week. The analysts said:
GM reported first quarter adjusted operating EPS of $0.62, well above our estimate of $0.10 and the Bloomberg consensus of $0.30. In light of uncertainty around the macro/market backdrop, GM refrained from updating its previously withdrawn 2020 outlook. GM’s first quarter cash use of $(0.9) billion was impressive considering market pressures and GM has bolstered liquidity with revolver draws.
GM also has suspended its dividend, but the BofA Securities team still has a giant $45 price target. The consensus target is much lower at $34.18, and General Motors stock was last seen trading at $22.31.
Las Vegas Sands
Casinos are starting to open back up, and this is a great long-term play for growth investors. Las Vegas Sands Corp. (NYSE: LVS) develops, owns and operates integrated resorts in Asia and the United States.
The company owns and operates the Venetian Macao Resort Hotel, the Sands Cotai Central, the Parisian Macao, the Plaza Macao and Four Seasons Hotel Macao, Cotai Strip, and the Sands Macao in Macao, the People’s Republic of China, as well as Marina Bay Sands in Singapore.
It also owns and operates the Venetian Resort Hotel Casino on the Las Vegas Strip and the Sands Expo and Convention Center in Las Vegas. Its integrated resorts feature accommodations, gaming, entertainment and retail malls, convention and exhibition facilities, celebrity chef restaurants and other amenities.
The company has eliminated the dividend and said in a statement on Wednesday it has ended its plans to open an integrated resort casino in Japan. The analysts noted this after earnings were reported last month:
Las Vegas Sands reported first quarter adjusted property EBITDA of $437 million, well ahead of our model and the Street but still down 69% year over year. Management gave estimated “zero revenue” cash burn figures that are much better than our previous assumptions. The company’s balance sheet and favorable Asia-centric exposures set them up to be one of the most attractive opportunities in Gaming.
The $61 BofA Securities price target compares with a $62.13 consensus target and the most recent close at $45.69 a share. Las Vegas Sands stock rose almost 3% on Thursday.
Southwest Airlines
This company continues to expand routes, remains a low-cost leader and is also one of the top airline picks across Wall Street. Southwest Airlines Inc. (NYSE: LUV) operates a passenger airline that provides scheduled air transportation services in the United States and near-international markets.
As of December 31, 2019, the company operated a total of 747 Boeing 737 aircraft, and it served 101 destinations in 40 states, the District of Columbia and the Commonwealth of Puerto Rico, as well as 10 near-international countries, including Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos
The company recently had a massive stock sale to raise cash and improve the balance sheet. A recent research report noted this:
Southwest Airlines completed a $3.9 billion capital raise which brings total liquidity to $14.8 billion after all the government payroll support funds. At a cash burn of $34 million per day, the company has enough liquidity to get through the next 435 days (vs 320 days for Delta / 225 days for United). Even with a slow recovery, we expect Southwest to end 2020 with $10 billion in cash and $1.5 billion in net debt.
The company has suspended its dividend until September of 2021. BofA Securities has set a $38 price target, but the consensus target is up at $42.13. Southwest Airlines stock rose 3.25% on Thursday and closed at $24.78.
These five quality American companies have through no fault of their own been absolutely crushed, some to levels not seen in years. Their stocks make good sense for growth investors looking for contrarian value ideas. It is important to remember that it is very possible that those who cut or suspended dividends could reinstate them when things improve.
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