Given the looming U.S. presidential election, partisan animosity between Democrats and Republicans in Washington and the parties’ sharply different agendas, I think the chance of another stimulus bill passing is around 60%. Democrats don’t want to give President Donald Trump a “win” heading into the election, and the president doesn’t want to give states and cities $1 trillion, as Democrats are demanding. Still, it’s worth considering what stocks to buy if Congress does implement new stimulus measures.
If the coronavirus crisis worsens tremendously in the fall, Congress may have to act in order to prevent an economic depression before a vaccine is ready. Such a bill would likely include more money for airlines and small businesses, along with more funds for most taxpayers.
Here are 5 stocks to buy if Congress looks set to pass additional stimulus:
- Delta Airlines (NYSE:DAL)
- General Electric (NYSE:GE)
- Target (NYSE:TGT)
- Dollar Tree (NASDAQ:DLTR)
- Overstock.com (NASDAQ:OSTK)
Given the points I laid out, investors who want to benefit from such a bill should hold off on buying stocks until there is a meaningful deterioration of the coronavirus crisis at the end of September or beginning of October, and a subsequent pullback in the stock market.
Delta Airlines (DAL)
Congress provided a large amount of money to the nation’s airlines in the first stimulus bill, showing that the lawmakers are clearly intent on preventing the companies from going bankrupt. There are probably two reasons for that: the airlines employ tens of thousands of Americans, and they’re an important component of America’s transportation infrastructure.
Delta Airlines (NYSE:DAL) is on solid financial footing. But DAL stock is still likely to tumble if the pandemic worsens, and its shares will probably subsequently rebound tremendously if Congress provides more money to the airlines. As a result, it’s a good stock to buy for both growth and risk-averse investors if the scenario I described plays out.
As I noted in a previous column, as of July, Delta’s cash burn was down to $40 million per day, while its liquidity stood at $15 billion. As a result, I pointed out, the airlines “will almost definitely not need to raise more money during the pandemic.” But, if the pandemic worsens in the fall, worries about the airlines’ short-term and medium-term outlook will almost definitely cause their shares to retreat, creating a good buying opportunity ahead of a likely stimulus bill and vaccine.
General Electric (GE)
General Electric (NYSE:GE) is closely tied to the airlines’ fate, as its Aviation unit is its largest business. The unit specializes in selling and servicing engines to commercial airlines.
Even in the thick of the coronavirus crisis, the Aviation segment accounted for $4.4 billion of the conglomerate’s $16.1 billion of industrial revenue in the second quarter. In Q4, before the pandemic, Aviation generated $8.9 billion of revenue and $2.1 billion of profit.
At its pre-pandemic peak in February, GE stock price exceeded $13. Shares bottomed out at $5.48 at the beginning of the pandemic in March. During a “second wave” of the coronavirus, GE could near its previous low and then rebound to $10-$11 following a stimulus bill and the introduction of a coronavirus vaccine.
At the end of Q2, GE was holding $41 billion of cash and able to access an additional $20 billion of loans. It burned only $2.1 billion of cash in Q2, and expects to start generating cash again “by 2021.” Like Delta, whatever happens with the coronavirus crisis and Congress, GE stock clearly isn’t going anywhere.
Target (NYSE:TGT) is clearly firing on all cylinders, as consumers definitely like not only the company’s big-box stores, but its website as well.
The retailer’s Q2 earnings per share came in at $3.38, versus analysts’ average estimate of $1.64. Its revenue was $22.98 billion, $2.87 billion above the mean outlook.
Target’s comparable sales soared by a tremendous 24.3% YOY, blowing past the average outlook of 7.6%. Incredibly, the retailer’s digital comparable sales jumped 195% YOY. The increase in the digital comp was responsible “for 13.4 percentage points of [the company’s] comparable sales growth,” the retailer reported.
Target noted that it “saw unusually strong market-share gains across all five of its core merchandise categories.” The retailer added that”in the first half of the year, the Company has gained approximately $5 billion in market share.”
Clearly, Target has gained tremendous market share at the expense of small stores which were shut during the coronavirus closures. Additionally, many of those smaller stores likely have gone out of business during the coronavirus crisis.
Since Target sells food, it has been able to stay open during the closures. Given Target’s tremendous popularity, if the coronavirus crisis worsens, causing non-essential stores to be closed and resulting in more payments to most Americans, Target’s business should get a huge boost. TGT stock should follow suit.
Dollar Tree (DLTR)
There are a few reasons why Dollar Tree (NASDAQ:DLTR) should deliver strong financial results if the coronavirus crisis worsens, leading to a downturn in the economy and additional stimulus from Washington.
Of course, since many of the items that Dollar Tree sells cost just $1, millions of Americans who are struggling economically will buy many products at the company’s stores.
Further, additional stimulus payments should give The Dollar Tree a big boost. That’s because consumers who will spend their stimulus payments, instead of saving it or using it to pay down debt, are likely to be in a poor financial position. As a result, those who do spend their stimulus money will probably do so at discount retailers, including The Dollar Tree.
Given these points, it’s not surprising that, in the wake of the government’s first round of stimulus payments, the company reported stronger-than-expected Q1 results. Moreover, Dollar Tree’s sales jumped 8% year-over-year. Due to increased spending related to the coronavirus, its net income fell slightly YOY,
However, in a “second wave,” Dollar Tree’s COVID-related spending pressures should ease, largely because it likely already has bought much of the extra cleaning supplies it needs during the pandemic. Additionally, amid the closures of many stores and restaurants in strip malls, it will probably get pretty good deals on store rents going forward.
The forward price-earnings ratio of DLTR stock, based on analysts’ average 2020 EPS estimate, is 20.6 times. That’s way below the valuations of discount retailers Wal-Mart (NYSE:WMT) and TJX (NYSE:TJX), whose forward P/E ratios are 25.8 and 55.5 times respectively.
Furthermore, “Overstock’s net income came in at $36 million, versus a loss of $25 million in Q2 of 2019,” and “CEO Jonathan Johnson reported that Overstock’s ‘number of new customers more than tripled year over year.'”
Amid the pandemic, Overstock’s customer base is definitely growing rapidly. As a result, if the pandemic worsens in the fall, preventing millions of Americans from shopping at furniture and home-product stores, then Overstock, specializing in those categories, would be well-positioned to benefit from another sales surge.
And hundreds of thousands of working-class and middle-class Americans who choose to spend some or all of their stimulus money will likely buy products on Overstock.com. These trends should boost OSTK stock.
In a recent note to investors, research firm Piper Sandler initiated OSTK stock at “overweight.” According to Seeking Alpha, the firm wrote that “there are seismic forces at work that have dramatically improved the sales and profitability outlook for OSTK well into the future.” Piper expects the e-commerce company to benefit from strong demand for home furniture, with a $140 price target on OSTK stock well above the company’s current stock price of $120.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer owned OSTK stock and GE stock.