JPMorgan Picks 2 Stocks to Buy (and 1 to Sell)

Last month, the S&P 500 hit bottom at 2,237 (it touched 2,192 in intraday trading) and has staged a mild rally since. The index closed out last week at 2,488. These numbers are important – if they hold, they’ll give traders a degree of confidence that the worst is past, at least in the stock market.

JPMorgan strategist Jason Hunter is making the case for just that: “The number of states with above 20% COVID-19 confirmed daily case growth already saw a sharp drop from 40 to below 10 into early April. We are interested to see if that deceleration continues and starts to impact the number of states with growth rates above 10%. Based on the recent correlation, case growth deceleration in that group can help put further downward pressure on implied equity volatility and blunt the nature of a retest of the March equity price low.”

Hunter sees 2,100 serving as a floor to the S&P 500 moving forward in April, with a ceiling in the range of 2,750 to 2,850. The strategist expects the index to level out at or near its current level, as volatility dampens in response to slowdown in the spread of coronavirus. In New York and New Jersey, the hardest-hit states in the US, Sunday saw the first declines in the daily report of COVID-19 deaths. Hunter sees it as hopeful, saying, “As NYC marked one of the earlier major outbreaks in the U.S., we suspect further growth rate deceleration over the next week or so could help improve market sentiment.”

There’s hope that improving sentiment may mark the beginning a virtuous cycle, and perhaps the turn of the tide for the markets. In the meantime, JPMorgan stock analysts are scrutinizing the market, looking the for the right stocks to get that kickstarted.

We’ve pulled up three of the investment bank’s recent calls, and run them through the TipRanks database. It turns out that two of the firm’s bullish picks have received significant support from other members of the Street. That being said, one name stands out as being an investment to avoid, falling out of favor with JPMorgan as well as the broader analyst community. Let’s take a closer look.

Cabot Corporation (CBT)

We’ll start in the chemical industry, where Cabot provides a wide variety of products, including carbon and carbon compounds, ink colorants, rare elements such as tantalum, niobium, ad germanium, and a range of specialty fluids. The company’s products have applications in adhesives, air, water, and chemical purification, construction, coatings, light industry, oil drilling – and even in the food and beverage niche.

Cabot reported its fiscal Q1 earnings early in February, for the period ending in December, and the results were disappointing. Revenues were down 11% year-over-year, to $727 million, while the 69 cents EPS missed the forecast by 9% and was down 20% year-over-year. It was not a good footing for the company as the coronavirus epidemic was ramping up.

Nevertheless, there were some high points. The company’s cash flow exceeded capex by $37 million, and Cabot ended the quarter with $173 million in cash on hand – a 22% increase from year before. Looking forward, management is guiding toward full year earnings of $3.60 to $3.90 per share, in line with previous estimates.

The solid cash position underlies the company’s dividend, which Cabot has been paying out reliably for the last 19 years. The current quarterly payment, after three increases in the past three years, is 35 cents, and the annualized payment of $1.40 gives a yield of 5.4%. The average yield among peer companies in the consumer goods sector is 2.5%, making Cabot’s more than double. The payout ratio, at 50%, shows both a commitment to sharing profits with shareholders, and plenty of room for additional increases.

Reviewing Cabot for JPMorgan, analyst Jeffrey Zekauskas saw fit to upgrade the stock from Neutral to Buy. He wrote, “The likely strength of Cabot’s cash flows gives us confidence that Cabot will pay its dividend, which now represents a 5.4% yield in a longer-term interest rate environment close to 1%… We believe that Cabot is likely to return to its 2019 level of value and earnings over a three year period (by F2022), and so we think that the returns to the equity holder will approach a doubling of value over that period.”

Zekauskas also raised his price target by 19%, to $31, indicating his confidence in a 19% upside for the stock. (To watch Zekauskas’ track record, click here)

Over the past 3 months, four other analysts have thrown the hat in with a view on the chemicals and materials maker. The three additional Buy ratings provide Cabot with a Strong Buy consensus rating. With an average price target of $35.25, investors stand to take home an 36% gain, should the target be met over the next 12 months. (See Cabotvstock analysis on TipRanks)

T-Mobile US (TMUS)

It’s been a memorable spring for T-Mobile, for more than just the obvious reasons. The company on April 1 completed its long merger process with Sprint, making Sprint a wholly owned subsidiary company. The companies were the third and fourth largest wireless carriers in the US market, and together boasted 140 million subscribers at the end of 2019, along with a combined $77.5 billion in top-line revenue. The merger process has taken two years to complete.

T-Mobile started the merger process in 2018, with an eye ahead toward 5G. The company sought to increase its customer base, infrastructure, and available capital resources for the rollout of the new networks. That rollout got started this past December, before the merger was complete, when T-Mobile launched 5G digital in over 5,000 cities and towns, covering some 200 million people.

The good news for TMUS did not end there. The company saw positive results in the fourth quarter, reporting 87 cents EPS and $11.9 billion in top-line quarterly revenue. The EPS was 4.8% above the estimates, and up 16% year-over-year. The revenue number also beat the forecast, and gained 3.4% yoy.

5-star JPMorgan analyst Philip Cusick looks at the implications of the completed Sprint merger for TMUS, and writes, “We believe that T-Mobile will continue to offer a solid product for a lower price than peers AT&T and Verizon, and that the combined company’s network in a few years will be closer to parity with larger peers than it is today, offering more relative value to customers over time.”

“Trading at 7.3x 2021E core EBITDA (or 6.0x including full EBITDA synergies) vs 6.6x Verizon and 6.3x AT&T we see T-Mobile as attractive,” Cusick concluded.

Cusick is impressed enough by the possibilities to initiate coverage of the stock with a Buy rating. His $110 price target suggests an impressive 34% upside potential. (To watch Cusick’s track record, click here.)

T-Mobile’s Strong Buy consensus rating is based on 11 Buys that overbalance the single Hold. Shares are selling for $81.98, and the average price target of $103.36 implies a 26% premium. (See T-Mobile’s stock analysis at TipRanks)

Tesla, Inc. (TSLA)

Tesla has had its ups and downs, and Elon Musk’s genius for generating headlines has made sure that everyone knows about it. In recent weeks, the company has met the COVID-19 crisis with a ventilator prototype made from electric car parts, which is good, and not just as a possible aid in meeting a serious public health need.

The electric car giant is facing an automotive production shortfall, as its Shanghai Gigafactory, part of Tesla’s battery supply chain, is unlikely to meet the supply needs of the company’s US, UK, and Australian operations. And in the US, Tesla has been forced to shut down production at its Fremont, California plant since March 23. The shutdown comes just as the company was intending to scale up Model Y SUV production to meet increased demand.

Production shortfalls are meeting increased demand, as Tesla earlier this month boasted high electric vehicle sales in Q1. The company reported over 88,000 vehicle deliveries in the quarter, with 76,200 of those being the lower-priced Model Y and Model 3. Quarterly production reached over 102,000 units, and marked the company’s best ever Q1 performance. This was, simply put, a bad time for the COVID-19 epidemic to hit the production lines.

Investors have taken notice. TSLA shares are down 47% in the current market slump, a severe underperformance compared to the broader markets.

JPMorgan’s 5-star analyst Ryan Brinkman believes “2Q will prove much more challenging (we forecast deliveries -36% q/q to just 57,000), including of course because of COVID-19 but possibly also as a result of the stronger than expected 1Q figures which may have left [production] channels full.”

As a result, Brinkman maintains his Sell rating on TSLA shares, with a price target that, at $240, suggests a 50% downside in the coming year. (To watch Brinkman’s track record, click here)

Wall Street agrees that Tesla is a risky play. The stock gets a Hold from the analyst consensus, based on a mix of reviews including 4 Buys, 14 Holds, and 10 Sells. The stock is not cheap, and even now sells for $480, while the $505 average price target implies a modest upside of 5.24%. (See Tesla’s stock analysis at TipRanks)

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