Confirmed cases of coronavirus disease in the US have expanded dramatically, from only 100 just two weeks ago to more than 3,300 now. As the disease spreads, the Federal government has declared a national emergency and released $50 billion in aid for States and territories to fight the viral outbreak. At the same time, the Federal Reserve cut its key interest rate back to near-zero, and announced that it will initiate a $700 billion program of quantitative easing.
The governmental moves, welcomed by the business community, have at best only partially stemmed the feeling of panic in the general public. Grocery stores are reporting long times – sometimes around the corner – and depleted stocks of household cleaners, hand sanitizers, and food staples. And we’ve all heard the stories (and seen the jokes) about toilet paper hoarding.
The consensus outlook is that COVID-19 will get worse before it gets better. Quarantines, social distancing, and remote work options will only go so far to slowing the spread, and essential services (those grocery stores, of course, but also trash collection, fire & rescue, police, hospitals, gas stations, utility works) must continue.
But for stock investors, there may be a silver lining. While markets are clearly taking a hit, and have definitely entered a bear cycle, some individual stocks may be primed for gains. Grocery chains, for example. Long lines and short stock may inconvenience the customers, but behind them are high sales – and that can only be good for the bottom line.
We’ve use the TipRanks Stock Screener tool to look at three such stocks. All are Buy-rated and offer investors a reliable dividend. In short, they are strong defensive stock plays, just the type to counter a market panic. Let's take a closer look.
Dollar General (DG)
We’ll start at the discount end, with Dollar General. This low-cost retailer offers customers a wide range of products, from basic groceries to the over-the-counter medicine and household cleaners in high demand today. The discount prices help ensure that customers can afford the merchandise, even in a downturn.
All of this puts Dollar General in a strong position for today’s markets. The chain will certainly have not shortage of customers – so as long as management can maintain the supply chain, it should do well.
DG also offers a reliable dividend which it just announced will be raised to 36 cents quarterly starting in April. That will mark the third increase in the past three years. The yield is modest, at just 1%, but the company has maintained the payments for the past five years, and low payout ratio of 17% indicates that there is plenty of slack should management choose to raise the payment further.
Karen Short, 4-star analyst with Barclays, is upbeat on this stock, describing it as ‘a port in the storm.’ She rates DG a Buy, with a $180 price target that implies an upside of 42%. (To watch Short’s track record, click here)
To support her thesis, Short writes, “While others are likely bracing for the macro/supply chain impact of COVID-19, DG likely benefits from staples stock-piling and potential trade down. In times of market turmoil, we believe best-in-class companies with strong balance sheets and ample protection from macro uncertainty should be owned – DG fits the bill [...] DG is a best-in-class retailer offering long-term growth and rare defensive characteristics. We believe current investments are positioning the company for meaningful share gains longer-term.”
Also bullish is UBS analyst Michael Lasser: “The market is likely to focus on the co's intermediate term outlook in light of potential supply chain and consumer disruptions related to Covid-19. Still, we think DG is better positioned than others as it serves as a key fill-in shop for consumers.”
Lasser’s Buy rating is supported by a $175 price target, indicating his confidence in a 38% upside. (To watch Lasser’s track record, click here)
Overall, DG has a Strong Buy rating from the analyst consensus, based on 5 Buys and 2 Holds set in recent days. The stock is trading for $137.27, and the average price target, $174, suggests an upside potential here of 32%. (See Dollar General stock analysis on TipRanks)
Costco Wholesale (COST)
Big-box membership warehouse Costco, like many other large grocery retail chains, has been experiences runs on its stores. Branches in Seattle have reported lines of customers stretching down the block, while branches in New Jersey had reported sold-out merchandise and bare shelves.
The strong sales are a reflection of the coronavirus panic, as well as Costco’s loyal customer base. After all, when people see a need to buy up supplies for hunkering down, they’re going to turn first to their favorite discount source – and Costco’s warehouse -style club-membership model has attracted something of a fan base. That’s clear from the near-90% resubscription rate, and gives the chain a strong foundation.
Costco just reported Q2 fiscal 2020 earnings, with EPS and revenue both above estimates, show the company’s strength to weather a downturn. At $2.10, EPS was up 4.4% year-over-year and beat the forecast by 1.4%. The top line revenues were $39.07 billion, which edged over the forecast and showed 10% yoy growth. The strong earnings support the company’s dividend, which at 65 cents quarterly annualize to $2.60 per share. The 0.86% yield is small, but has been growing in recent years.
Telsey Advisory Group’s Joe Feldman said of Costco, “Costco has seen a surge in demand for coronavirus-related products, such as dry grocery, cleaning supplies, hand sanitizers, and water filtration products. This is partly offset by softer trends in its travel and auto businesses. The US clubs are operating on a regular basis, and working to deal with the recent acceleration in traffic… Costco's strong relationship with vendors is helping to maintain regular deliveries, although it has been challenging to keep up with the demand in certain categories.”
Feldman sees COST shares as a Buy, and reiterates a price target of $330, which implies an upside of 16% from current levels. (To watch Feldman’s track record, click here)
5-star analyst Scott Ciccarelli, of RBC Capital, also takes a Buy-side stand here. His $350 price target suggests a bullish 23% upside. In his comments on the stock, Ciccarelli says, “Sales trends were strong all month/quarter and then accelerated meaningfully as COVID-19 fears spread... Given the rising concerns over an economic slowdown, COST should provide investors with a relative haven.” (To watch Ciccarelli’s track record, click here)
With 11 Buy ratings and 7 Holds, COST shares get a Moderate Buy rating from the analyst consensus. The stock sells for $328.65 and the average price target of $328.65 indicates room for a 15% upside potential. (See Costco stock analysis on TipRanks)
Target Corporation (TGT)
We wrap up with Target, a major name in retail. The company’s CEO Brian Cornell appeared alongside President Trump during Friday’s update on the government response to the coronavirus epidemic. Cornell affirmed that his company would offer space – in store parking lots – for mass virus testing, as part of a general policy of cooperation with Federal authorities. It was another sign good optics for Target.
The chain’s revenue just edged above the forecasts and year-over-year numbers in Q4, coming in at $23.4 billion, but the earnings were stronger. EPS was reported at $1.69, comparing favorably to the $1.53 year-ago number.
In addition to a strong Q4, Target also kept up its dividend. The company has a 20-year history of maintaining the payments, and keeping the yield, currently 2.86%, above the market average. The payout ratio of 39% shows that the 66-cent quarterly payment is easily sustainable. This makes Target an attractive income stock for difficult times.
Telsey’s Joe Feldman, quoted above, likes TGT shares these days. He sees “an uptick in demand of household essentials, disinfectants, and food products, given the outbreak of COVID-19—a trend we expect to continue in the near-future.” He adds, “Overall, Target’s strategies are working and should continue to allow the company to gain profitable market share and drive earnings growth.”
Feldman gives TGT a $137 price target, suggesting room for 43% upside growth in the coming year – fully in-line with his Buy rating. (To watch Feldman’s track record, click here)
And also bullish here is Karen Short from Barclays. She sees the brick & mortar retail sector as declining generally, but Target holding a strong position in it, writing, “We are encouraged by recent sales trends with management citing solid results across categories in February. Additionally, an increase in traffic as consumers start to stock up on essentials in reaction to the coronavirus could be an incremental positive and can further support Q1 results [...] TGT is making substantial improvements to its business, which we believe could position the company well to take market share from other declining retailers.”
Short puts a $135 price target behind her Buy rating, implying 44% growth for the stock this year. (To watch Short’s track record, click here)
Target is another stock with a Moderate Buy consensus rating, this one based on 9 Buys against 6 Holds. The $131.57 average price target suggests a premium of 40% from the current share price of $94.19. (See Target stock analysis on TipRanks)