JPMorgan’s Global Quantitative and Derivatives Strategy team, led by Marko Kolanovic, has been crunching the numbers on the coronavirus pandemic, and found that the forecasts can vary wildly, with predicted economic declines ranging from 20% to 70%, depending on which data the analyst chooses to start with.
There are simply too many variables right now. No one truly knows if the economic shutdown will last a few more weeks, or months, or even longer – and guessing the date that business gets back in the saddle determines the depth of the current losses. Kolanovic points out that the only certain data, gleaned from hospital records, tends lag events by up to 5 days. The hospital data point to the COVID-19 epidemic taking hold in the US during the first week in March, while differential regional effects can be traced to whether local officials over- or underreacted to the crisis.
In some ways, however, it doesn’t matter if government overreacts or underreacts, because in either case, the result is severe economic dislocation. But the JPMorgan report does offer a ray of hope: because the hospital numbers are a lagging indicator, it is possible that the social containment measures have taken hold and brought us closer to the inflection point – and that infection rates will soon start declining.
Kolanovic writes, “Taking into account the unprecedented monetary and fiscal measures being implemented, as well as unprecedented asset declines over the past month, we maintain that asset price recovery is likely and our pre-pandemic equity price target for 2020 is achievable sometime in the first half of 2021.”
So, there may be a light at the end of this tunnel, and it may be growing visible already. In the meantime, JPM’s stock analysts have been looking at individual assets, seeking those that are best positioned to bounce back when social restrictions are lifted and the economy restarts. We’ve taken three of their best picks and looked at them through the lens of the TipRanks database. These are stocks with Buy ratings and upwards of over 35% growth potential for the coming year.
Magellan Midstream Partners (MMP)
We’ll start with a pipeline company, in the midstream sector of the petroleum industry. Magellan is based in Tulsa, Oklahoma, and controls a network of terminals and transport pipelines for both crude oil and refined products across the US, east of the Rockies. The company also owns and operates marine oil terminals on the Texas Gulf Coast.
Breaking down the earnings, Magellan’s Crude Oil and Marine Storage divisions expanded, while the Refined Products segment showed a year-over-year loss. Distributable cash flow was reported at $357.8 million, up 18.3% from the year-ago quarter.
MMP used that distributable cash flow to fund its $1.0275 quarterly dividend. The regular payment is already high, but it annualizes to $4.11 with an impressive yield of 12.23%. It’s a strong incentive for investors, and even better, the payout ratio, at 78%, shows both that the company can afford the dividend and has room to increase it. The company has a long history of gradually raising the dividend payment.
JPMorgan’s 5-star analyst Jeremy Tonet writes of this stock, “MMP enjoys one of the lowest costs of capital in the MLP space, allowing the partnership to outbid competitors for choice assets, while still achieving the desired accretion. We see MMP’s peer-leading stable liquids logistics businesses and best-in-class corporate governance as serving the partnership well in this energy downturn and believe recent price declines offer an attractive entry opportunity.”
Tonet’s $59 price target on MMP implies an upside of 77%, clearly supporting his upgrade on this stock from Neutral to Buy. (To watch Tonet’s track record, click here)
Overall, Magellan Midstream has 14 analyst reviews, including 11 Buys and 4 Holds, giving the stock a Moderate Buy from the analyst consensus. The stock’s price is low as a result of the recent downturn, at just $33.60, and the average target of $51.37 suggests room for 54% growth to the upside in coming months. (See Magellan stock analysis on TipRanks)
Commercial Metals Company (CMC)
Next up is a small-cap industrial stock, a Texas-based steel and metal manufacturer. CMC owns a series of still mills across the US – in Texas, Oklahoma, Alabama, Florida, South Carolina, New Jersey, Tennessee, and California. In addition, the company has a recycling and fabrication mill located in Poland. CMC’s total production capacity is 7.1 million tons, with 5.8 million in the US. Company operations brought in $5.83 billion in top line revenue in fiscal 2019, providing a net income of $198 million.
The first quarter of fiscal 2020 showed an 8% year-over-year revenue increase, to $1.4 billion for the quarter. The company reported high margins for its American mills in the quarter, and a debt reduction of $51.5 million.
In addition to the positive fiscal news for the quarter, CMC kept up its dividend payments. The company pays out 12 cents per share quarterly, or 48 cents annually, giving the stock a dividend yield of 3.6%. This is well above the average yield among S&P listed companies, which stands at just about 2%. CMC boasts a low payout ratio of 22%, indicating that the dividend is easily affordable at current levels.
Covering this stock for JPMorgan, 4-star analyst Michael Gambardella writes, “Though CMC has seen essentially no disruption to its operations so far as a result of COVID-19, we anticipate that the company could see an impact on new project awards and even temporary stoppages at existing construction sites depending on the length of COVID-19 containment efforts and the economic repercussions. We believe the potential impact from lower shipments will be short lived, and the company also has a strong balance sheet to be able to weather potential volatilities in the days ahead.”
Gambardella is sanguine about CMC’s prospects, and that shows in his Buy rating and $19 price target. His target suggests an upside here of 35% from current levels. (To watch Gambardella’s track record, click here)
CMC shares sell for a bargain right now, at just $14.07. The stock has an average price target of $22, implying an upside of 63% for the next 12 months. The analyst consensus here is a Strong Buy, based on 5 Buy-side ratings and single Hold. (See Commercial Metals stock analysis at TipRanks)
Varex Imaging Corporation (VREX)
For the last stock on today’s list, we move over to the medical technology sector. Varex is an independent supplier in the medical imaging segment, providing X-ray tubes and image processing solutions. Varex products also include flat panel digital detectors, ionization chambers, and solid state automatic exposure control systems, among others. Varex’s products are used in mammography, computed tomography scans, and computer-aided detection systems.
The company reported fiscal Q1 results in February, and showed top line revenues of $200 million, up 7.5% year-over-year. Gross margin was in line with Q4, at 31%, and adjusted net earnings, at 21 cents per share, underperformed the 28-cent estimate. Varex invested 11% of total revenues into R&D, up from 10% the year before. VREX reduced its debt by $14 million in the quarter, and finished Q1 with $30 million cash on hand.
JPM’s Mark Strouse, another 5-star analyst, sees a clear path forward for VREX, and upgraded his stance on the stock from Neutral to Buy. In doing so, he puts a $32 price target on the shares, suggesting a 56% upside. (To watch Strouse’s track record, click here)
Strouse notes that the company has ‘strong growth opportunities’ in both digitization and the Chinese medical market. He writes, “Despite mixed execution since the 2017 IPO, we believe the discount is unjustified and expect the stock to outperform the mean of our coverage over the next 6-12 months.”
The discount noted by Strouse is real; VREX shares are selling for just $20.50. The average price target is $34, indicative of a 66% upside potential for the coming year. The Moderate Buy analyst consensus rating is based on 3 recent reviews, including 2 Buys and 1 Hold. (See Varex’s stock analysis at TipRanks)