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Market Weekly Review: Looking Ahead to the Fed

U.S. stocks closed lower on Friday, but the broader market averages ended the week fractionally higher. Consumer Discretionary names led the way higher, while energy stocks lagged this week, along with the underlying price of crude oil.

The action kicked off with a robust Merger Monday. First, Raytheon (RTN) and United Technologies (UTX) merged in a deal worth $120 billion. In addition, Salesforce.com (CRM) bought Tableau Software (DATA) for over $15 billion.

Looking ahead to next week, Adobe (ADBE) and Oracle (ORCL) headline a quiet week for earnings reports.

On what might otherwise be a slow Summer week, all eyes will be on the next interest rate decision from the FOMC Wednesday afternoon. Fed funds futures are pricing in just a 23% probability of an interest rate cut next week, but an 87% chance by the July meeting. Traders will be watching closely for signs that Chairman Jerome Powell is laying the groundwork for future cuts.

Beyond the Fed, investors have also been speculating about whether China and the U.S. will iron out trade issues by the G20 trade conference at the end of the month.

Along those lines, China posted the slowest monthly growth for industrial production in 17 years on Friday. Across the ocean, Broadcom (AVGO) warned that it was seeing lower semiconductor orders, because of geopolitical concerns.

After volatile trading in May where many investors suffered losses, stock prices have rebounded the last couple of weeks, on the belief that the Fed will follow the bond market and lower interest rates.

Knowing what and when to buy can be challenging for any investor. However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such travel/ leisure name that’s worth a closer look is our Stock of the Week below… 

Stock of the Week: Wyndham Destinations (WYND)

The company sells its vacations one piece at a time; operating a vacation ownership (VO) business with over 220 locations across 110-plus countries. The business appears set to reward investors with both growth and income over the next several quarters.

We recently added Wyndham Destinations to our Smart Investor portfolio and are pleased to see that shares were up 3% this week.

As we move into the second half of the year, these gains should keep on coming. Here’s why:

The company recently split into two separate pieces, making Wyndham the biggest pure-play in the VO (or timeshare) business.

That scale is one of the company’s biggest competitive advantages. Across key industry measures, Wyndham is twice as large as competitors like Hilton Grand Vacations (HGV) and Marriott Vacations Worldwide (VAC).

Stable Growth Funds Consistent Dividend

By nature, the VO business offers investors stable and consistent growth. Through annual dues and other fees, Wyndham says that 75% of its annual revenue is both recurring and predictable.

This consistency was apparent back in May, when management posted solid first-quarter results. Excluding one-time items, the company earned $1.03 a share in the first quarter and topped the consensus analyst estimate. Revenue increased 1% from the previous year to $918 million and matched expectations.

Looking forward, Wyndham raised its 2019 profit guidance by 6 to 7 cents a share, to reflect recent stock buybacks. 

Another aspect of the company’s robust recurring revenue is that dividends are an important part of the investment thesis. Management started paying a quarterly dividend of $0.41 a share following the spin-off last year, which was raised to $0.45 (4.2% yield) in March.

Wyndham can comfortably cover the payout 3x with expected 2019 earnings of $5.40 a share. The next dividend will be paid at the end of June.

Analysts See Higher Prices Ahead

Not every firm on Wall Street covers the company, but those that do believe the stock is undervalued. The average price target of $59 by three active analysts suggests 38% upside potential.

In a recent note, Jefferies analyst David Katz said:

“Our investor meetings with WYND’s senior management reinforce our positive thesis, which is the solid execution, consistent financial performance, robust cash flow generation and growth potential should drive a fuller valuation and share outperformance over time. We believe shares at 6.5X '19 EBITDA is punitively too low and should be 2-3X higher.”

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