After a rough near term, these stocks should eventually recover.
The longer-term outlook for the U.S. economy has improved significantly following a shockingly good May jobs report. At this point, the economy is clearly on the right path to a recovery. Unfortunately, the magnitude and speed of economic recovery are uncertain. Some companies struggling with subpar liquidity could have a rocky road ahead in the near term, but many illiquid stocks should come out of the downturn just fine. Here are seven cash-strapped stocks with relatively low quick ratios -- calculated by dividing a company's liquid assets by its current liabilities -- that investors should be buying on the dip, according to Morningstar.
Gap (ticker: GPS)
Shares of mall retailer Gap are down more than 30% in 2020, and the stock's quick ratio of 0.74 at the end of the fiscal year suggests that its near-term liquidity is far from ideal. Social distancing measures temporarily shut down shopping malls and affected mall retailers across the board. Despite Gap's operating loss of $1.2 billion in the first quarter, analyst David Swartz says it will survive the downturn. And the company's Old Navy brand will perform relatively well as malls reopen. Morningstar has a "buy" rating and $22.50 fair value estimate for GPS stock.
Hanesbrands is a global leader in innerwear and activewear. The company announced former Walmart (WMT) chief merchandising officer Steve Bratspies as its new CEO on June 9. Swartz says Bratspies' selection suggests that the company intends to focus on improving direct-to-consumer offerings. Because Hanes owns its major supply chains, the company has production and cost management flexibility, Swartz says. Hanesbrands finished 2019 with only $329 million in cash and more than $3 billion in debt, but Swartz says the company should make it through the crisis just fine. Morningstar has a "buy" rating and $23 fair value estimate for HBI stock.
The oil market has suffered from an unprecedented one-two punch of a global travel shutdown and a pricing war between Russia and Saudi Arabia in 2020. In fact, the extreme environment even briefly pushed West Texas Intermediate crude oil prices below $0 per barrel. Analyst Preston Caldwell says oil services giant Schlumberger took aggressive action to shore up its liquidity position by cutting its dividend by 75%. Caldwell says the dividend cut will free up $1.5 billion in cash that will help Schlumberger weather the storm. Morningstar has a "buy" rating and $48 fair value estimate for SLB stock.
The Mosaic Co. (MOS)
Mosaic says it is the world's largest combined producer of phosphate and potash, chemicals used in the fertilizer industry. Mosaic recently repaid $400 million it drew down from its credit revolver in March, suggesting that it has sufficient cash for now. The company still has more than $4.5 billion in debt, but analyst Seth Goldstein says Mosaic should successfully navigate the downturn. Goldstein recently cut his 2020 phosphate price projection from $325 to $280 per metric ton, but his long-term forecast of $370 is unchanged. Morningstar has a "buy" rating and $30 fair value estimate for MOS stock.
At one point, traders were speculating that insolvency could force the U.S. government to nationalize Boeing. But Boeing raised $25 billion via a bond sale in late April, and analyst Burkett Huey says liquidity concerns have been mitigated for now. Huey says the bond sale should allow Boeing to survive for roughly another year with virtually no cash flow. In the meantime, he says Boeing is more carefully managing its cash flow, and the stock is significantly undervalued. Morningstar has a "buy" rating and $281 fair value estimate for BA stock.
Philip Morris International (PM)
Philip Morris is one of the largest international cigarette producers. The company's quick ratio of around 0.5 suggests that near-term liabilities could be an issue, and the company's cash-to-debt ratio is just 0.13. Still, analyst Philip Gorham says the health crisis shouldn't affect the company's long-term business. He says Philip Morris has one of the strongest portfolios of both cigarette and heated tobacco products in the world, including its Marlboro and Parliament brands. Long-term investors should consider buying the 12% year-to-date dip. Morningstar has a "buy" rating and $98 fair value estimate for PM stock.
ViacomCBS has been one of the hardest-hit stocks in the market, dropping more than 40% year to date. Investors are particularly concerned with the company's $18.7 billion in debt following Viacom's merger with CBS in late 2019. In the first quarterly report after the merger, the combined company generated a net loss from continued operations of $273 million. ViacomCBS' cash-to-debt ratio is only 0.03, but analyst Neil Macker says the company's valuable sports rights, high-quality cable network brands and successful TV production studios are a winning recipe for long-term investors. Morningstar has a "buy" rating and a $65 fair value estimate for VIAC stock.
Companies that should rebound from being cash-strapped:
-- Gap (GPS)
-- Hanesbrands (HBI)
-- Schlumberger (SLB)
-- The Mosaic Co. (MOS)
-- Boeing (BA)
-- Philip Morris International (PM)
-- ViacomCBS (VIAC)
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