After the World Health Organization raised the alarm over the new Omicron variant, investors were once again reminded that the stock market can rapidly change direction over the course of this pandemic. As a result, nervousness has set in. For instance, the “Fear Index,” as the CBOE Volatility Index (VIX) is known, is currently over 30, a level last seen in February.
There was already enough uncertainty on the horizon, including overpriced valuations, higher interest rates, supply chain disruptions, and in particular, a rising inflation rate. Despite a bull market, the next step for the Street currently looks as vague as ever. Against this backdrop, I’ll discuss seven stocks to watch as the Omicron variant becomes the market’s new wildcard.
Given the current level of investor anxiety, what the Federal Reserve might do in 2022 has become even more important. On Nov. 30, Fed Chair Jerome Powell testified before the Senate. He cited: “…the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Therefore, investors need to have a long-term game plan and not act spontaneously based on short-term volatility. Their portfolios should be able to offer lucrative returns during a bull market but also manage to preserve their capital during an economic downturn.
In the light of such uncertainty, here are seven stocks to watch during this holiday season.
- Coca-Cola (NYSE:KO)
- Johnson & Johnson (NYSE:JNJ)
- Palo Alto Networks (NASDAQ:PANW)
- Stanley Black & Decker (NYSE:SWK)
- Texas Instruments (NASDAQ:TXN)
- Verizon Communications (NYSE:VZ)
- WBI Power Factor High Dividend ETF (NYSEARCA:WBIY)
Stocks to Watch: Coca-Cola (KO)
- 52-Week Range: $48.11 – $57.56
- Dividend Yield: 3.14%
Atlanta, Georgia-based Coca-Cola is the biggest nonalcoholic beverage company worldwide. It owns a portfolio of roughly 200 beverage brands, including Coke, Fanta, Sprite, Minute Maid, Georgia Coffee, Dasani, and sports drink brand Powerade. In recent months, soaring demand for its beverages has boosted revenue and profits.
Coca-Cola reported third-quarter results in late October. Net revenue increased 16% year-over-year (YOY) to $10 billion. The beverage maker generated net income of $2.47 billion, or 57 cents per diluted share, compared to $1.74 billion, or 40 cents per diluted share, in the prior-year quarter. Year-to-date (YTD) free cash flow was a whopping $3 billion higher, YOY, at $8.5 billion .
On the metrics, CEO James Quincey remarked: “Our strategic transformation is enabling us to effectively navigate a dynamic environment and emerge stronger from the pandemic. We are updating our full-year guidance to reflect another quarter of momentum in the business.”
Investors were pleased that profitability is moving toward record highs. Management sees significant growth potential in developing markets, such as China and India. As a result, it is bullish on its top-line growth prospects.
KO stock is a dividend king, and the price currently supports a 3.1% yield. The stock hovers around $53, down around 2% YTD. KO shares are trading at 22 times forward earnings and 6.1x trailing sales. Analysts’ 12-month median price target is $63.00.
Johnson & Johnson (JNJ)
- 52-Week Range: $147.69 – $179.92
- Dividend Yield: 2.66%
New Brunswick, New Jersey-based Johnson & Johnson is among largest and most diverse healthcare conglomerates. It offers a wide range of pharmaceutical drugs, consumer products, and medical devices worldwide.
Johnson & Johnson released Q3 results on Oct. 19. Earnings beat Wall Street’s bottom line expectations but missed on revenue forecasts. Total sales increased 11% YOY to $23.3 billion. Adjusted net earnings came in at $6.97 billion, or $2.60 per diluted share, up 19% YOY from $5.87 billion, or $2.20 per diluted share, in the prior-year quarter.
Following the announcement, J&J CFO Joseph Wolk told CNBC the revenue miss is due to the Covid vaccine and the ongoing recovery in its medical device unit.
Management recently announced plans to spin off the slower-growing consumer health business. Instead, it is shifting the focus toward generating newer treatments and products for its higher-margin pharmaceuticals and medical devices businesses. Pharmaceutical sales, excluding the net impact of acquisitions and divestitures, grew at an impressive 14% in Q3.
JNJ is also a dividend king stock. It offers a 2.7% dividend yield and boasts the highest possible AAA credit rating from S&P Global (NYSE:SPGI). While JNJ returns may not necessarily outpace the broader market by a significant margin, long-term investors will receive dividend payments that should grow at a steady pace over time.
JNJ shares currently hover at slightly below $160 territory, up only 1% this year. Shares are trading at 15 times forward earnings and 4.7 times trailing sales. Analysts’ 12-month median price target stands at $180.
Stocks to Watch: Palo Alto Networks (PANW)
- 52-Week Range: $292.82 – $559.54
Santa Clara, California-based Palo Alto Networks is a pure-play cybersecurity stock that sells security appliances and software subscription to enterprises and government institutions. Its product portfolio includes virtual firewalls, endpoint protection, cloud security and analytics.
Management has put significant resources into cloud-based security services and artificial intelligence (AI)-powered threat detection services. The security ecosystem includes cloud security platform Prisma and AI-powered threat detection platform Cortex. Around three-quarters of the Fortune 100 companies are customers.
Palo Alto released Q1 FY22 results (October quarter) on Nov. 18. Revenue grew 32% YOY to $1.2 billion. Non-GAAP net income came in at $170.3 million, or $1.64 per diluted share, up from $158.1 million, or $1.62 per diluted share, a year ago. Cash and equivalents ended the quarter at $2.3 billion.
After the announcement, CEO Nikesh Arora remarked, “Q1 was a strong start to fiscal year 2022, driven by strength in both our product and Next-Generation Security businesses, giving us confidence to raise our revenue and billings guidance for the year.”
Given the level of digitalization we are witnessing, corporate clients need to invest in cybersecurity regularly to stay ahead of competitors. Management anticipates top line growth for fiscal 2022 to come in between 26% and 27%.
PANW stock boasts a well-diversified cybersecurity business with substantial upside potential. Shares currently hover at $525 territory, up 47% YTD and 76% over the past year. They are currently trading at 72 times forward earnings and 11 times trailing sales. Analysts’ 12-month median target stands at $615.
Stanley Black & Decker (SWK)
- 52-Week Range: $167.66 – $225.00
- Dividend Yield: 1.74%
New Britain, Connecticut-based Stanley Black & Decker is a leading manufacturer of hand and power tools worldwide. It operates in three business segments: tools and storage, security, and industrial. Analysts expect the recent MTD and Excel acquisitions to contribute to margin performance and long-term growth.
Stanley Black & Decker announced Q3 results in late October. Net sales increased 11% YOY to $4.3 billion. The company generated net earnings of $414 million, or $2.56 per diluted share, up from $385.5 million, or $2.44 per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $303 million.
On the metrics, CEO James M. Loree cited, “We are pleased to deliver 10% organic growth and record third-quarter revenues as customer demand remains robust across the majority of our end markets.”
Like many manufacturers, the company is coping with rising raw material costs and supply chain issues. While management is bullish on top-line growth in 2022, it has nonetheless decreased the 2021 earnings outlook to $10.90 – $11.10 per share from $11.35 – $11.65 on an adjusted basis.
SWK stock currently hovers at $182, up less than 2% YTD. Based on the 2022 guidance, the stock seems like an attractive pick for value investors with its reasonable valuation. Shares are currently trading at 15 times forward earnings and 1.7 times trailing sales. Analysts’ 12-month median price target is $221.
Stocks to Watch: Texas Instruments (TXN)
- 52-Week Range: $159.56 – $202.26
- Dividend Yield: 2.38%
Semiconductor giant Texas Instruments is one of the most important names in analog chips and embedded processing products. Analog chips are used to process real-world inputs such as sound and power. In addition, its digital signal processors are used in wireless communications and microcontrollers are found in many electronics applications.
Texas Instruments released Q3 results in late October. Revenue increased 22% YOY to $4.6 billion. Net income stood at $1.95 billion, or $2.07 per diluted share, up from $1.35 billion, or $1.45 per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $5.66 billion.
CEO Rich Templeton remarked: “Revenue increased 22% from the same quarter a year ago due to strong demand in industrial, automotive and personal electronics. Our cash flow from operations of $8.5 billion for the trailing 12 months again underscored the strength of our business model.”
Analog and embedded chip manufacturing is less capital-intensive compared to higher-end chips. Therefore, the company has been able to generate $7.1 billion in free cash flow during the quarter. The board returned $4.2 billion to shareholders over the past year via dividends and share buybacks. TXN stock currently supports a 2.4% dividend yield.
In the light of the global chip shortage, TXN stock looks primed to stay resilient against economic downturns. It hovers at $193 territory, up 18% YTD. Shares are trading at 23 times forward earnings and 10.3 times trailing sales. Analysts’ 12-month median price target stands at $201.75.
Verizon Communications (VZ)
- 52-Week Range: $49.74 – $61.83
- Dividend Yield: 4.98%
Verizon is America’s largest wireless service provider serving about 91 million postpaid and 4 million prepaid phone customers. The communications giant also connects another 25 million data devices through its nationwide network. Put another way, potential investors are looking at a stable business generating steady, predictable revenue.
Management released Q3 results in late October. Revenue grew 4.3% YOY to $32.9 billion. Net income increased 45.5% YOY to $6.6 billion, or $1.55 per diluted share, up from $4.5 billion, or $1.05 per diluted share, in the prior-year quarter. The company ended third-quarter 2021 with a free cash flow of $17.3 billion.
“We had a strong third quarter, delivering on our strategy and growing in multiple areas,” said CEO Hans Vestberg. “We fully expect to have a strong finish to the year as we accelerate deployment of 5G to our customers across the country.”
As the largest wireless service provider, the telecom giant boasts significant cost advantages related to its overall scale. Accelerated 5G adoption stateside should help Verizon distribute generous dividend payments. The current 5% yield makes it a solid pick for income investors.
VZ stock hovers at $51 per share, down 12.5% YTD. Shares are trading only at 9.5x forward earnings and 1.6 x trailing sales. Verizon’s depressed valuation may suggest upside potential in the near term. Analysts’ 12-month median price target is $60.
Stocks to Watch: WBI Power Factor High Dividend ETF (WBIY)
- 52-Week Range: $22.30 – $28.68
- Dividend Yield: 4.34%
- Expense Ratio: 0.70% per year
We conclude our discussion with an exchange-traded fund (ETF), namely the WBI Power Factor High Dividend ETF. It provides exposure to companies that generate high-dividend yields based on fundamental value characteristics. The fund is balanced quarterly.
The ETF, which currently has 51 holdings, started trading in December 2016. The top 10 names comprise around 52% of net assets of $62.5 million. WBIY tracks an index of 50 U.S. firms selected for high forecast dividend yield and strong fundamental factors.
Among the leading names on the roster are the pharmaceuticals group Abbvie (NYSE:ABBV), Verizon, tobacco giant Philip Morris (NYSE:PM), materials science conglomerate Dow (NYSE:DOW), and gold miner Newmont Mining (NYSE:NEM).
In terms of the sub-sectoral breakdown, basic materials stocks account for the highest portion with 15.28%; followed by healthcare (11.40%); consumer defensive (10.71%); and communication services (6.27%) shares.
The ETF has gained more than 17% YTD. Given inflationary pressures, WBIY could gain further traction in 2022 among income investors.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
