The novel coronavirus has fundamentally altered the investing landscape. Many sectors that were already struggling, like energy and brick-and-mortar retail, have seen their slow declines turn into abject free fall. Other businesses, such as video gaming and work-from-home software companies, are booming. Many companies that initially plunged are now turning into huge rebound stocks.
For example, you might not think of Indonesian copper miners or Brazilian payment processors as natural beneficiaries of the present economic situation. Yet those are some of the off-the-radar rebound stocks that are thriving today.
Here are three surprising rebound stocks that are making huge comebacks this summer:
Rebound Stocks: Freeport-McMoRan (FCX)
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Back in March, the coronavirus pandemic was in full force. Freeport-McMoRan tumbled below $5, and traders were scared. But shortly after the stock hit that low, I pointed out that the company’s CEO had been spending millions to buy the stock, and I also offered an optimistic forecast. Sure, the coronavirus has depressed short-term economic activity, and thus the demand for base metals. The market, however, only priced in that downside and lost sight of the potential recovery. Fortunately, astute traders were able to take advantage of that mis-pricing.
While the U.S. is still struggling to fully control the pandemic, in China and many other countries around the world, economic activity is approaching “normal” levels. As a result, industrial buyers are quickly returning to the copper market.
Thanks to this resurgent demand, global copper inventories are falling, and are now far below the five-year average levels for this time of year. And now, the price of copper is up 3% year-to-date. FCX stock has followed this amazing trajectory. It is now up 14% overall in 2020.
In addition to copper’s run, Freeport-McMoRan is also drawing fuel from a rallying gold price and the surprising announcement that the company has been producing more copper and gold than it had previously forecast. This is notable as many mining operations face production shortfalls due to the virus.
In fact, part of copper’s strength is due to mine closures in Chile and Peru. Yet Freeport-McMoRan has boosted production despite the headwinds.
The unexpectedly strong guidance sent analysts scurrying to revise their earnings estimates. Although a slim annual loss is probably still in the cards for this year, earnings per share should easily top $1 next year, assuming copper and gold prices remain around current levels. The company has invested heavily in new projects that will bring even more production online. This could lift EPS to $2 in coming years.
Risks remain, of course. The recovering global economy could sputter once again, and the virus could make a second — or third — wave. But powerful long-term demand trends are likely to push the copper price and Freeport’s shares much higher than they are today.
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In July, Baidu announced plans to boost investment in cloud computing, artificial intelligence, data centers and other new infrastructure over the next 10 years to prepare for “the smart economy of the future.”
“New infrastructure — which encompasses emerging technologies like AI, cloud computing, 5G, [internet of things], and blockchain — will be the driver for China’s economic development in the coming decades,” CTO Haifeng Wang explained.
To establish a leadership position in the techno-future it anticipates, the company has laid out a plan to have 5 million intelligent cloud servers operational by 2030, and to train 5 million AI professionals within five years.
There is no guarantee Baidu’s grand AI ambitions will translate into robust profit growth, but the company is pointed in the right direction. We also know that Baidu is profitable and possesses a rock-solid balance sheet with more than $20 billion in cash and equivalents. And thanks to resurgent economic activity in China, the company should earn about $6.50 a share this year, rising to about $8.50 next year. At that level of profit, the stock would be selling for just 15x earnings.
Baidu stock also trades for less than 3x revenues. That is incredibly cheap for internet companies in general, and compared to other information providers in particular. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) goes for more than 6x sales by contrast. With compelling profitability and valuation ratios, and a credible cloud strategy for the next decade, Baidu’s investors will be richly rewarded.
Rebound Stocks: PagSeguro Digital (PAGS)
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Trying to buy a good stock in a bad market is usually a recipe for failure. And in early March, that’s exactly what an investment in the Brazilian payment processor PagSeguro appeared to be: a failure. The stock had crumbled 70% from its high above $50 last September to less than $15. But since that low, the stock has more than doubled. That makes it one of the best stocks in one of the world’s hardest-hit stock markets.
Year-to-date, PagSeguro is now up 30%, even though the overall Brazilian stock market is still down. Brazil’s struggling stock market is no mystery, as the country is facing one of the world’s worst coronavirus outbreaks. Political uncertainty is also rising.
That’s a grim backdrop for any Brazilian company, including PagSeguro. And yet, the company still managed to produce impressive year-over-year growth during the first quarter. A few pertinent highlights would include:
24% increase in active merchants on its payment platform
27% jump in revenue
13% gain in net income
10% boost in cash on the balance sheet
Meanwhile, PagSeguro continues to take market share from its competitors. This steady market-share growth results directly from the company’s strategy to attract millions of small and micro-merchants to its platform. In a way, this is similar to Square’s (NYSE:SQ) model in the United States. Get a strong position with active small businesses, and then use that to build out a broader financial platform. Like Square, PagSeguro is launching an online bank to broaden its business. Brazil is an underbanked country, and thus there’s plenty of room for a disruptive financial services company to reach previously untapped channels.
Additionally, the company seems to be benefiting from the coronavirus in two ways. First, PagSeguro’s core customer base of micro-merchants are the kind of entrepreneurs who cannot afford to shelter in place. They must work to eat, and so they are continuing to operate throughout the coronavirus crisis in Brazil. Second, PagSeguro’s platform offers touchless payments. Because of virus fears, touchless payments are gaining steam against cash.
Looking longer term, PagSeguro’s strategy closely resembles the uber-successful model Tencent (OTCMKTS:TCEHY) pioneered in China with its WeChat platform. Many Chinese use WeChat Pay like a kind of digital concierge to conduct dozens of everyday tasks. They can book a shared car ride, conduct touchless transactions in person or online, buy train and airline tickets, invest in stocks, pay utility bills, and even buy and manage their health insurance.
PagSeguro’s bank is building a similar suite of apps and services that customers can utilize through its platform. Bottom line: PagSeguro is performing extremely well in the midst of challenging macroeconomic conditions. Despite short-term obstacles, shares can reach new highs in 2021.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.
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