So much is uncertain these days. The coronavirus has came back, but the ‘second wave’ already shows signs of fizzling out. China was in the headlines again recently, as President Trump promised to ban Tik Tok from US access unless it was purchased by a US company. With the November election less than three months away, no one can truly say what the political landscape will look like come year’s end. And to top it off, we don’t even really know how our kids will be going back to school. By remote? In person? It all comes back to the coronavirus.
Looking at the clouded landscape from Wells Fargo, head of equity strategy Chris Harvey isn’t worried about the virus or China – he believes those factors are baked into the economic picture by now. He does see risk, however, from the elections and the coming school year: “What we worry about more is the narrative of negative interest rates coming back, the fact that we think that political risk is underpriced, and back to school is going to have a ton of fits and starts, which could play into the economy and the job picture.”
On a more immediate note, Harvey sees the markets peaking near their current levels, and then pulling back in the run-up to the elections.
Yet, even though Wells Fargo sees markets nearing their upper resistance levels, the firm is still suggesting value stocks to buy. The firm's analysts have been pointing out opportunities in the market, and we’ve pulled the info on them from the TipRanks database. Some of the recent picks are an eclectic bunch from a range of sectors. Let’s find out why they’re so compelling to Wells Fargo.
Up first is Exelon, a US electrical utility producer. Exelon is a parent company, with subsidiary utilities providing electrical services in five states plus DC. The company is active in all parts of the electric industry, from power generation to distribution to sales and delivery. Exelon serves some 10 million customers from its 31,000 megawatts of power, generated by a combination of gas, hydroelectric, nuclear, solar, and wind facilities.
Entering 2020, Exelon saw earnings rise slightly in Q1, bucking the usual trend of the first ‘corona quarter.’ The second quarter results showed a sequential drop in earnings and revenue, but projections for Q3 show a return to normal levels. The essential nature of Exelon’s business – we need electricity, even during times of virus and lockdowns – shielded the company from the brunt of the recessionary pressures.
The fundamental strength of Exelon’s business shows in the dividend. At a time when many companies were cutting or suspending dividends, EXC raised its payment in Q1 and has kept it at the higher level ever since. This is in-line with the company’s pattern of raising dividends in the first quarter of the year. The current payment, at 38.2 cents per share, annualizes to $1.53 and gives a yield of 4%.
Neil Kalton, in his coverage of EXC for Wells Fargo, sees the company’s nuclear power developments in Illinois as a net positive, writing, “We continue to believe that the combination of IL’s ambitious clean energy goals combined with the economic importance of the IL nuclear fleet (jobs, property taxes) will prompt legislative action…”
Kalton rates the stock Overweight (i.e. Buy) and his $50 price target implies a 32% upside for the coming year. (To watch Kalton’s track record, click here)
"Our Overweight rating reflects our belief that shares do not adequately reflect the value of the nuclear fleet given potential policy support," Kalton noted.
The analyst consensus rating on EXC is a Moderate Buy, based on 7 Buys, 2 Holds, and a single Sell set in recent weeks. The shares are selling for $37.85; the average price target of $45.44 suggests it has room for 20% growth in the year ahead. (See Exelon stock analysis on TipRanks)
With our next stock, Five9, we enter the cloud computing tech sector. Five9 uses intelligent cloud services to power a scalable contact center platform. It’s an important niche that has grown more important during the corona crisis when so much routine business has moved online. Five9’s stock barely noticed the market collapse and has risen steadily during the economic downturn and subsequent recovery. Shares have more than doubled since the market hit bottom in mid-March.
Earnings, while turning negative in 1H20, generally conformed to the company’s historical pattern. Q4 is typically the firm’s strongest of the year, by a wide margin, with EPS falling off sharply in the other three quarter. Recent performance has been consistent with that – and has also beaten expectations. In Q2, the EPS loss was less than forecast.
Wells Fargo analyst Michael Turrin is impressed with Five9, both the company’s performance and its path for future prospects. He writes of the latter, “We think the $30Bn contact center software market is being transformed … with Five9 one of the best positioned pure-play cloud vendors standing to benefit. We estimate this market is ~20% cloud today, but our recent industry conversations suggest this number could reach >50% within the next 3-5 years, representing a long runway of new cloud revenue which we think can continue to drive FIVN shares higher over time.”
Turrin maintains his Overweight/Buy rating on the stock, and raises his price target to $155. The new target indicates a 30% upside potential.
With 10 Buys and 4 Holds on record, Five9 shares get a Moderate Buy from the analyst consensus. The stock’s average price target of $140.69 suggests a 18.5% upside from the current trading price of $118.87. (See Five9 stock analysis on TipRanks)
L Brands (LB)
Last on our list is a retail company, the owner of Bath and Body Works and Victoria’s Secret. Earlier this year, the company tried to sell of the majority share of VS, planning to keep a 45% stake. The deal fell through in May, after the retail sector had been slammed by three months of the ‘coronavirus recession.’ Earnings were grim in Q1, when net sales fell 37%, but the company’s stock has been rising since the end of May and is now trading above its late February/early March levels.
L Brands has managed to outperform the broader markets even as its business fell due to the social lockdown policies. Online sales were bright point, with Bath and Body Work’s Q1 online numbers increasing 85%. The company expects Q2 numbers to return to more normal levels, reflecting the reopening of economy and the (at least partial) lifting of restrictions in most markets. It’s important to note that LB’s earnings show a high degree of seasonal cyclicity, with Q4 – including the holidays – generally outperforming the rest of the year put together.
Despite the collapse of the Victoria’s Secret sale, L Brands recently reiterated that it remains committed to separating the lingerie retailer from Bath and Body Works. BBW has long been the more profitable of the company’s two brands.
Earlier this year, LB took steps to shore up liquidity for the crisis period, closing an offering of secured senior notes. The offering was in two tranches, the first for $750 million at 6.875% and the second for $500 million at 9.375%. Both are due in 2025; proceeds were used to redeem a previous note issue and to fund general operations.
Ike Boruchow reviews this stock for Wells Fargo, and believes that LB is conducting a successful turnaround. He says of the company, “…over the past few years, LB has generated meaningful comp deceleration and margin erosion. However, we believe that the company may be poised for improvements in the upcoming year as they take a more critical eye to their business, and we believe they could see meaningful multiple expansion and numbers moving higher as the company makes progress towards resuming profitability.”
Boruchow reiterates his Overweight/Buy rating on LB, and his newly raised price target, $35, implies a robust 33% upside potential for the year. (To watch Boruchow’s track record, click here)
L Brands’ Moderate Buy consensus rating is based on 18 reviews, including 9 Buys, 7 Holds, and 2 Sells. The split reflects the headwinds the stock has seen in the past year, and investor caution as a result. Share are selling for $26.40, and recent appreciation has pushed the share value above the average price target of $24.65. (See L Brands stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.