J.P. Morgan Bets on These 3 Cyclical Stocks

Divide up the factors that impact markets and you’ll generally find three distinct categories: the long-term secular trends, the shorter cyclical trends, and the unexpected black swan events. Sometimes, it’s clear what is going on; after a steep drop in the last week of February, markets are bouncing up and down in response to the coronavirus epidemic – a classic black swan event. And last week, the Bureau of Labor Statistics monthly jobs report showed that the US economy and labor market are still going strong, continuing a decade-long expansion that some see as a secular trend.

Investment bank J.P. Morgan has been monitoring both the market gyrations and the international response to the spread of COVID-19, and believes that now is the time for investors to move into stocks. The bank’s analysts see the current downturn as chance to grab a low point of entry, while “risk/reward [is] increasingly skewed to the upside.”

Writing on current conditions, JPM global asset strategist Marko Kolavovic stated, “We expect the impact of COVID-19 to be temporary and mitigated by broad policy stimulus, even as the virus spread is proving more severe than anticipated.”

JPM’s upbeat view of near-term market conditions is not limited to theory – it includes specific stock recommendations. We’ve picked up three of their recent calls, and looked at them through the lens of TipRanks’ Stock Screener. These are investment opportunities with a Buy rating – and better than 25% upside potential. Let’s dive into the details.

First Solar, Inc. (FSLR)

We’ll start with an alternative energy company, First Solar. This company produces photo-voltaic solar panels for utility-scale projects, using thin film semiconductor technology. First Solar’s packages provide full support for their panel systems, including financing, construction, maintenance, and recycling.

First Solar reported mixed results in Q4 2019. A one-time charge for litigation losses pushed down hard on EPS, and the company reported earnings of $2.02 per share – well below the forecast of $2.79. Losses were worse for the full year, with 2019 earnings loss coming in at $1.48 per share against the estimate of $2.45.

At the top line, sales were sharply up from Q4 2018, rising an impressive 102% to reach $1.4 billion for the final quarter of 2019. Despite the gain, sales revenue was still 20% below forecasts. Full year revenues showed a similar pattern, with the $3.06 billion reported missing the forecast by 11% but improving 36% year-over-year. On a positive note, cash, restricted cash, and marketable securities increased from $1.6 billion at the end of the prior-year quarter to $2.3 billion.

In recent weeks, the stock has taken hits from both Q4’s rocky performance and the general market slide. FSLR shares are down 23% year-to-date – and since February 19, when the virus panic hit the markets, FSLR has dropped 24%.

JPM analyst Paul Coster sees First Solar’s current low price as advantageous for investors. He writes, “We expect the stock to re-rate as margins expand and investors get better visibility into future earnings power… FSLR could have a sustainable competitive advantage in the global solar PV panel market, which could fuel profitable growth over the longer term… FSLR is one of our top picks within Alt Energy owing to its differentiated technology, roadmap, solid order visibility, and strong net-cash balance sheet.”

Coster puts a $76 price target on this stock, indicating room for an impressive 75% growth potential and supporting his Buy rating. (To watch Coster’s track record, click here)

First Solar’s Moderate Buy analyst consensus rating is based 6 Buys, 3 Holds, and 2 Sells set in recent weeks, and reflects the stock’s recent mixed performance. The potential here is clear from the $62 average price target, which suggests room for 43% growth from the current $43.37 share price. (See First Solar price targets and analyst ratings on TipRanks)

General Motors Company (GM)

GM is a long-time staple of the market, a classic blue-chip stock. The largest of Detroit’s Big Three automakers, the company is headquartered in the iconic Renaissance Center and owns some of the car industry’s most storied nameplates, Cadillac and Chevrolet among them.

The company’s shares took a hit in Q4 from a 40-day labor strike that cut into quarterly profits. According to GM sources, the strike cost it $2.6 billion during the quarter, and took $1.39 off the quarterly EPS. Adjusted earnings for Q4 came to just 5 cents – but that compared favorably to the 1-cent forecast. Revenue was reported at $30.8 billion, slightly below the $31.04 billion estimate.

GM has seen sales in China slip two years running, falling 15% in 2019. The company has plans to compensate with a new line-up of pickup trucks, a popular niche in the US, and a reintroduction of the Hummer, the civilian version of the military Humvee – and a popular ‘status’ SUV despite its gas guzzling reputation.

The company offers investors a reliable dividend, to sweeten a stock that has been buffeted recently. The 38-cent quarterly payment annualizes to $1.52 per share, with a yield of 5.3%. With a 6-year history of slow-but-steady dividend growth, and a yield far higher than average, this is a clear inducement for income-minded investors.

Ryan Brinkman, 4-star analyst with JPM, gives GM a clear Buy rating, with a $46 price target implying robust 60% growth. (To watch Brinkman’s track record, click here)

Brinkman writes of the stock, “We are attracted to the shares based on both valuation and what we see as several upcoming positive catalysts… We see capital allocation as the primary catalyst that is likely to lead to a re-rating in the shares, as we expect investors to stop ascribing a discount to GM’s cash balance as visibility on use of excess cash to enhance shareholder return increases… strong sales performance for recently refreshed full-size pickup trucks and SUVs, including success of GM’s three (pickup) truck strategy, is another likely catalyst…”

GM holds a Strong Buy consensus rating, based on no fewer than 9 Buy reviews against a single Hold. Shares are selling for a discounted $28.69, and the $45 average price target suggests room for 57% growth to the upside. (See General Motors stock analysis on TipRanks)

Qualcomm, Inc. (QCOM)

This semiconductor chip maker saw gains in 2H19, after concluding several legal battles. The most important was a royalty fight with Apple, which resulted in a settlement that saw Qualcomm solidify its position as the iPhone maker’s primary supplier of modem chips and take home a significant (though undisclosed) financial award.

The legal settlements came just as QCOM started fiscal 2020, and the company’s Q1 report showed some gains. Revenue was up 4.9% year-over-year, and at $5.08 billion beat the forecast by 5.2%. EPS also beat estimates, by 14%, and came in at 99 cents per share. That was, however, a sharp 17% drop year-over-year.

Qualcomm has been cautious in its forward guidance, accepting that the coronavirus outbreak will slow down 5G implementation in China, along with impacting factory supply lines to smartphone manufacturers. In the long run, however, the company sees 5G as an important driver of chip demand, both for the new infrastructure and the updated handsets. The Apple settlement, locking in the giant company as a chip customer, is seen as a clear positive in this regard.

QCOM, like GM, is a high-yield dividend stock, paying out $2.48 per share annually, or 62 cents per quarter. The yield, at 3.1%, is more than 50% higher than the S&P average, and the company has kept the payments reliably for the last 16 years while making periodic increases. The payment was last raised in 2018.

Writing for JPM, 4-star analyst Samik Chatterjee cites QCOM’s strong 5G moves, and says, “We expect Qualcomm’s QCT group to benefit substantially from 5G modem and RFFE sales to smartphone manufacturers and non-handset OEMs as well. In addition to the strong growth expectations for the QCT group, Qualcomm will stabilize its QTL licensing revenue as a consequence of a landmark agreement reached with Apple, which will also mitigate potential risk from litigations from other OEMs.”

Chatterjee gives this stock a Buy rating with a $105 price target, suggesting a solid upside potential of 36%. (To watch Chatterjee’s track record, click here)

Overall, Qualcomm has a Moderate Buy consensus rating based on 10 Buys and 7 Holds. The stock is selling for $77.47, and the $99.80 average price target suggests an upside potential of 29%. (See Qualcomm stock analysis on TipRanks)

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