After a breathtaking market drop of around 30% in March, dramatic stimulus packages and debt buying actions from the Fed erased half of those losses. And because of buying volume drying up as the S&P 500 contracts, investors may eye smart stocks as winners and losers emerge.
Investors may run a screener like this one via Stock Rover by downloading and importing the linked spreadsheet. This search is set up to find highly volatile stocks whose trading volume increased above its three-month average. From that search filter, investors will find companies whose earnings are likely to grow despite the current economic shutdown.
For the second quarter, Nathan Mauck, Ph.D. Associate Professor of Finance Henry W. Bloch School of Management University of Missouri – Kansas City said that two topics will occupy investors. Those two topics are “the impact of stimulus packages and [the] partial reopening of the economy.”
“There will be some signs indicating that the pandemic is lessening and the market will swing positive,” said Kevin Sylwester, Director for the School of Analytics, Finance, and Economics at Southern Illinois University. But predicting which way the market swings will depend on the new information about the pandemic.
Thomas Gilbert, associate professor of Finance & Business Economics at the Michael G. Foster School of Business, University of Washington, agreed. “Investors can expect equity markets to remain very volatile,” he said. “There will still be many many more days of plus 3%-5% and minus 3%-5%. Every piece of news and every change in expectations driven by new data will be magnified by the current high level of fear (health and economic) that is everywhere. ”
Investors have seven stocks to watch as the volatility levels heighten:
- The TJX Companies (NYSE:TJX)
- Walmart (NYSE:WMT)
- Alibaba (NYSE:BABA)
- Match Group (NASDAQ:MTCH)
- Qorvo (NASDAQ:QRVO)
- Skyworks Solutions (NASDAQ:SWKS)
- American Express (NYSE:AXP)
Professor Mauck says volatility will moderate, “but is likely to remain high as the market will continue to update expectations often as we continue to learn more daily.”
The TJX Companies (TJX)
Sales will drop sharply for companies in the retail sector. The TJX Companies has already adjusted its staffing levels lower ahead of plans to re-open.
The company previously announced store closings effective Mar. 19. It also closed its online business, offices, and distribution centers as a result of the stay-at-home order. But as re-openings vary by state, TJX plans to temporarily furlough employees.
In the filing, TJX said that its CEO and Executive Chairman will each see a 30% base salary reduction. Other executive officers will get a 20% pay reduction. In leading by example through cutting costs at the top, the company signaled its willingness to save its investors money.
When stores re-open, it remains to be seen if “treasure hunt” shopping habits will resume. Alternatively, fears of a virus spreading due to shoppers touching the goods could hurt future sales.
TJX reports quarterly earnings late next month. It will report big losses, but the market will be focused on looking forward to assess its rebound prospects for the rest of the year.
TJX is on the stock screener results because of an overall rating score of 81/100 and a forecast for earnings per share growing 38% next year:
|Sales Growth Next Year||11.70%||12.30%||10.90%|
|Sales 1‑Year Chg (%)||7.00%||8.80%||15.00%|
|Sales 3‑Year Avg (%)||7.90%||5.90%||11.80%|
|Sales 5‑Year Avg (%)||7.50%||9.70%||6.10%|
Table courtesy of Stock Rover
As an essential service, Walmart did not need to close its stores during the novel coronavirus pandemic. More importantly, customers may adhere to stay-at-home orders by shopping at Walmart online. In fact, business is so healthy that the company recently announced a pledge to hire 50,000 more workers. This is on top of meeting a commitment to hiring 150,000 associates.
Higher food, general merchandise and health and personal care sales from the past two months of retail sales report suggests that Walmart benefited from the lockdown. Plus, panic buying at grocery stores will give the retailer a sales lift. And since the lockdown started toward the end of March, the sales drop in consumer discretionary categories will only get bigger moving forward.
This will only lead to increased shopping at Walmart as customers buy more food and essential goods and less clothing. At physical stores, a requirement for staff to wear masks starting Apr. 20 may increase foot traffic as customers previously hesitant to visit will be less fearful of catching the virus.
On Tipranks, the average price target is $130, with 16 of the 20 Wall Street analysts rating the stock as a “buy.”
Strong positioning in e-commerce will widen Alibaba’s addressable market in the consumer space. The Chinese online giant will likely report a strong Gross Merchandise Value (GMV) in the quarter.
In the Feb. 2020 conference call, Alibaba said the “outbreak is having [a] significant impact on China’s economy and may potentially affect the global economy. It will present near-term challenges to the development of Alibaba’s business across the board, but at the same time, we will see opportunities created by the forces of change.”
Alibaba’s warning of a negative impact on its business because of fewer people available to make goods and handle delivery in China will prove short-lived. Now that the lockdown is lifted in the region, those problems should ease.
Also, a permanent shift in consumer behavior shifting to e-commerce for meeting more product needs will benefit Alibaba. In the last few years, Alibaba dominated online shopping from the desktop. Since then, it strengthened its mobile shopping app and continues to drive much of its growth that way.
Match Group (MTCH)
Shares of Match bottomed at around $48 when the stock market closed at multi-year lows. Since then, the market erased many of those losses after the company eased worries.
The company forecast first-quarter results will meet the lower end of its guidance ranges. Instead of lower usage from its existing users, due to self-isolation and stay-at-home orders, the site is seeing strong activity. Users under the age of 30 are using Match’s products to “cope and connect.”
Worldwide, the company said that “on Tinder, there’s been an increase in the number of conversations that people are having, along with the length of these conversations, which are up anywhere from 10-30% since the outbreaks started in many countries.”
And since Tinder’s “Passport” feature, which allows users to connect to other users worldwide, is currently free rather than a paid add-on, the app’s popularity may grow once the lock-down ends.
With few investors expecting long-term restrictions in travel and face-to-face meetings, MTCH stock is a good hedge. For example, the 30% increase in messages on Hinge in March may continue after the lock-down ends.
On SimplyWall.St, the fair value of Match stock is $94.58.
Slowing smartphone sales in the near-term will hurt Qorvo’s sales for the coming quarter. Despite the weakness, expect volatility increasing for this broad line semiconductor supplier as markets await the company’s updated outlook. The company has already cut its fourth-quarter fiscal 2020 guidance.
Qorvo said that it expects its Mar. 2020 quarterly revenue in the range of $770 million, just $50 million below its previous midpoint. The company will post results on or about May 5.
As a supplier of Radio Frequency solutions, a necessary component for connectivity on smartphones, the sales slump is temporary. Eventually, customers who delayed upgrading their devices will need to do so sometime this year.
Apple (NASDAQ:AAPL), for example, launched an iPhone SE despite the lockdown on Apr. 15. With the option to buy the device online during the lock-down, strong unit sales will benefit chip companies like Qorvo.
Skyworks Solutions (SWKS)
Expectations of weak smartphone sales pulled Skyworks stocks lower. But SWKS stock rebounded in the last month on expectations that unit sales will recover. Plus, it posted second-quarter preliminary results that were less bad than feared.
Skyworks said that its revenue for Q2/2020 will exceed the midpoint of its Mar. 4, 2020 guidance. At $766.1 million, earnings per share should also meet previously provided guidance.
Due to the Covid-19 outbreak, the company temporarily suspended its operations in Mexicali, Mexico. This will continue through Apr. 30, 2020. But the shutdown in that location will not have a material impact on Skyworks’ business.
However the company did warn that “an extended suspension of the Mexicali Operations beyond April 30 would likely impact Skyworks’ ability to meet customer demand and would likely impact its operating results.”
Talk of a lift in restrictions in the U.S. and in Germany may follow with Mexico doing the same. As more major countries end the lockdown, even at preliminary levels, this will help the smartphone industry recover.
American Express (AXP)
Markets expected higher consumer delinquencies for credit cards. But American Express posted February net write-off rates rising to 2.8% in March, up from 2.6% in February. Similarly, its small business card net write-off rate rose slightly in March to 2.0% compared to 1.9% in February.
At a price-to-earnings ratio near the 11 times range, markets appear to have priced in the downside risks in AXP stock. Investors may expect delinquency rates from small businesses to increase for April. But government loans and a stimulus package will minimize write-off rates.
Weak corporate travel spend is another headwind facing American Express. But when the stock trades at P/E multiples three times lower than its competition, investors may want to take that risk. Visa (NYSE:V) trades at a P/E above 30 times. Mastercard (NYSE:MA) also trades at similar valuations.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.