Covid cases are declining and the economy is about to reopen. However, playing it will not be so easy this time around.
The seven-day average of new Covid-19 cases in the US has fallen to 357,000, down nearly 40% from the past week alone, while online searches for Covid are down about 75% since mid-January. In the past, when the pandemic appeared to be ending, investors piled up in stocks of airlines, hotels, restaurants and casinos. People, after being trapped inside, wanted to get out and see the world. And with their bank accounts emptied from stay-at-home and government payments, they had the money to do it. The Federal Reserve, meanwhile, made sure that companies could spend debt cheaply, keeping them afloat during lockdowns and ready to thrive when they ended.
This time it’s different. 22V Research Strategist Dennis DeBusschere Says Reopening Stocks – His Company’s List Includes:
Hilton Grand Vacations
(ticker: truck),
Bally’s
(BALY), and
Mesa Air Group
(MESA) – does not outperform past reopening activities, even as optimism about Covid has increased. Uncle Sam has stopped sending checks and the pandemic restrictions are less severe, meaning the backlash may not be as strong.
But the real blame lies with the Fed, which is expected to raise interest rates several more times in 2022. “Until the Fed achieves its goal of containing inflation, a recovery of stocks heavily impacted by Covid will be hampered by the Fed’s desire to slow economic growth,” said DeBusschere. “You have to look at which companies do best when the financial conditions get tighter.”
That requires a focus on quality, says Brian Rauscher, Head of Global Portfolio Strategy at Fundstrat. Quality usually includes stable earnings, stable returns on equity, and most importantly, strong cash flow. Those traits will help investors navigate a regime they have not yet experienced — a reopening of trading at the start of a tightening cycle.
Here are six stocks that fit the bill:
Booking Property
The pandemic hasn’t diminished consumer wanderlust – and that’s good news for
Booking
.
The parent company of Priceline and OpenTable is expected to earn $98.90 a share in 2022, more than double its 2021 estimated $43.57. It’s also a cash flow machine, expected to report about $5.1 billion in free cash this calendar year. That gives the stock a free-cash-flow return of 5.1%, higher than the
S&P 500‘s
4.4%. Booking is trading at about 25 times 2022 earnings, but its stock has held up better than other high-quality stocks. Through Thursday, it was up 1.6% this year, compared with the S&P 500’s 6.1% loss.
Chevron
Not so long ago it was almost impossible to find quality in the oil slick. Enter
Chevron
.
It should generate nearly $25 billion in free cash flow by 2022, bringing the FCF yield to nearly 10%. The balance also improves. Chevron has net debt of about $26 billion, up from more than $38 billion at the end of 2020. And a reopening of the economy should support petro prices, which have risen. Referring to the energy giant’s solid balance sheet and prudent spending, Mizuho says Chevron offers “high oil price exposure with lower risk” — a good way to play off rising interest rates and higher inflation.
Intuitive Surgical
Elective surgeries should increase as Omicron declines, benefiting
Intuitive Surgical
,
a maker of robotic surgical systems. Revenues are likely to grow modestly in 2022, but should accelerate as the pandemic fades further in history. Sales have grown at an average rate of nearly 13% per year for the past 10 years and should do so again in the next three years. Operating margins, around 30%, are about 10 percentage points better than the average healthcare company. The stock’s 20% drop in the past month has prompted UBS analyst Matthew Taylor to upgrade it to Buy from Hold.
McDonald’s
Restaurant stocks will benefit as Omicron fades, and few are as high-quality as
McDonald’s
.
Revenues at the golden arches have grown at an average of about 10% per year since the turn of the century, and are expected to increase by 9.5% by 2022. Operating margins are approaching 45% and the dividend has increased by an average of 7. % per year over the past decade. Since McDonald’s is expected to generate $7.7 billion in free cash flow this year, that shouldn’t change. At 26 times 2022 profit, McDonald’s is more expensive than the market. Again, quality does not come cheap.
Raytheon Technologies
Airlines may not be the reopening games they used to be, but
Raytheon Technologies
,
that makes engines and other parts for airplanes should fly high as air traffic improves. Global traffic came in at 55% of 2019 levels in December, but should improve in 2022. That could help Raytheon increase profits by about 12% this year and generate about $6 billion in free cash flow. In fact, Raytheon doesn’t just depend on an airline’s recovery. More than half of its revenue comes from global defense contracts. That should provide ballast if another variant of the corona virus causes a new economic shock.
United Parcel Service
UPS was a beneficiary of Covid – until it wasn’t. Now it looks like a reopening game again. Investors worried about the delivery service’s ability to navigate higher costs. But fourth-quarter earnings, announced Tuesday, beat expectations, and UPS’s expectations beat Wall Street’s forecasts. Shares rose 14.1% but still hit about 18 times 2022 earnings, a discount to the S&P 500’s 20. Citigroup analyst Christian Wetherbee calls UPS a “compounder” — a company that has consistently shown consistent performance year after year. generate returns for investors. He sees “further up from here”.
write to Al Root on [email protected]