Since the virus scare began, and during the economy’s swing from bull to bear, investment bank Goldman Sachs has kept its finger on the pulse of the stock market. Fortunately for investors, the bank predicts that the S&P 500 won’t register new lows, and has been advising clients to ‘buy the dip.’
Silvia Ardagna, of the GS Private Wealth Management investment strategy group, noted, “Our own advice to clients is that right now is a good time to get back into markets and take advantage of the decline in equity markets to position for the rebound.”
Ardagna and her team see a recession developing for 1H20, caused by the economic impact of coronavirus and the measures taken to combat the epidemic, but remain “positively impressed” by the response from policymakers. Predicting a V-shaped recovery, she believes that a strong recovery is likely in the second half of the year.
We’ve looked into Goldman's recent calls, and using the TipRanks database, we’ve chosen two of the firm's recent stock picks, and one that demands more caution from investors. Let’s take a closer look.
CSX Corporation (CSX)
We’ll start in the transportation industry, where CSX, a holding company, operates through its subsidiaries. The company’s rail transport subsidiaries are located primarily in the eastern US (the company’s name is derived from the old Chesapeake and Ohio Railroad), while other services, including container shipping, barge transport, and contract logistics are provided worldwide.
Heading into the coronavirus disruptions, CSX started out with a strong position. The company reported 99 cents EPS in the fourth quarter, beating the estimate by 2%, the $2.9 billion in quarterly revenue was also over the forecast. But what about the current coronavirus quarter?
Covering this stock for Goldman Sachs, analyst Jordan Alliger writes, “While the upcoming quarters certainly bring elevated EPS risk … we believe CSX on a 12-month basis offers solid risk/reward… The combination of valuation support, operational strength, and liquidity, plus cyclical positioning for eventual recovery makes overweight exposure to rails desirable upon virus containment.”
Alliger backs up his long-term optimism with a rating upgrade, bumping CSX shares from Neutral to Buy. His $75 price target suggests an upside potential of 25% for the coming year. (To watch Alliger’s track record, click here)
Overall, CSX holds a Moderate Buy rating from the analyst consensus. This is a based on a 9-8 split among the recent reviews of Buys versus Holds. Shares are selling for $60 now, and the average price target of $69 implies 14.5% upside from current levels. (See CSX stock analysis on TipRanks.)
Henry Schein, Inc. (HSIC)
Next up, we move to the healthcare industry, a segment that is, in time, sure to see a positive bounce due to the coronavirus. As efforts expand to contain and control the spread of the COVID-19 disease, healthcare and its various support services will be in high demand.
Henry Schein distributes healthcare products and services in over 30 countries. The company offers services for business, clinical, technology, and supply chain solutions, especially tailored to the medical and dental industries.
Like CSX above, HSIC started 2020 – and faced the coronavirus epidemic – following strong Q4 results. Revenues came in at $2.67 billion, matching the forecast and up 8.1% year-over-year, and the EPS of 97 cents was up 8.9% yoy and beat the forecast by 6.6%. The company’s Medial and Technology/Value-added services led the revenue gains, growing 15% and 20% respectively. Even better, for the current climate, HSIC finished 2019 with $106.1 million in cash on hand, up nearly $50 million from year before.
Goldman Sachs analyst Nathan Rich lays out the case for optimism here: “We think HSIC faces lower earnings risk than peers from the COVID n outbreak and its business may be quicker to recover... HSIC’s Medical segment should beneﬁt from the distribution of COVID tests, which could help to mitigate the impact of lower dental/physician ofﬁce trafﬁc.” In other words, Henry Schein’s leading position in the healthcare industry during a time of pandemic crisis, place it in a strong position for future growth.
Rich’s Buy rating on the stock represents an upgrade from Neutral, and his $59 price target implies room for 13% growth in the coming 12 months. (To watch Rich’s track record, click here)
Wall Street tends to agree with the analyst's confidence on the healthcare player, considering TipRanks analytics reveal HSIC as a Strong Buy. Out of 4 analysts tracked in the last 3 months, 3 are bullish on Henry Schein stock while 1 remains sidelined. With a return potential of nearly 25%, the stock's consensus target price stands at $65. (See Henry Schein stock analysis onTipRanks.)
Xylem, Inc. (XYL)
Not all stocks are so well positioned for gains, even if they inhabit essential industries. Xylem is a player in the water and wastewater niche, providing services that address the full water cycle, from collection to distribution to its return to the environment. Xylem’s products include pumps, valves, heat exchangers, dispensing equipment, and treatment and testing equipment.
Water is essential to life, and reputable performers in the water industry can usually build a solid niche. Xylem finished 2019 with $5.25 billion in revenues, net income of $401 million, and a strong balance sheet including $1.7 billion on hand in liquid assets and available credit.
But in a flashing warning sign for investors, Xylem on March 31 withdrew its 2020 guidance, citing the impact of COVID-19. The company has previously indicated a 1% to 2% revenue loss in Q1 when the virus first began to spread – but as it became an epidemic, and then spread worldwide, Xylem saw the impact on business and supply chains as more disruptive. Revising guidance would make sense in that environment – but Xylem simply withdrew its forecast without replacing it, leaving investors up in the air.
Brian Lee, in his coverage of the stock for Goldman Sachs, sees a possible reason for the company’s guidance move – a reason that also prompts him to downgrade this stock from Neutral to Sell. He writes, “Based on our sensitivity analysis framework across our water coverage, we see greater downside risk to XYL’s fundamentals in light of the COVID-19 headwinds, largely given the company’s limited recurring revenue exposure… [this] leaves the company more exposed to the potential downturn in new demand…”
Lee’s Sell rating is accompanied by a lower price target of $56, indicating his view that the stock will slip by 16% this year. (To watch Lee’s track record, click here)
All in all, Xylem’s Hold rating from the analyst consensus is based on 11 recent reviews, including a single Buy, 8 Holds, and 2 Sells. Wall Street is not sanguine about this stock. Shares are trading at $66.68, while the $68.22 average price target suggests an upside potential of merely 2%. (See Xylem stock analysis on TipRanks)
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