After almost 4 weeks of bullish trading, investors are growing used to the idea that we’re in a true rally. Yes, markets are still down from their February peak; yes, the coronavirus epidemic is still going strong; and yes, the lockdowns in place to combat the virus’ spread are still wreaking havoc on the economy – but for now, at least, the stock markets are trending up.
On Wall Street, Chris Harvey, Wells Fargo’s head of equity strategy, sees opportunities in current market conditions. “Destruction in stock prices has really uncovered a significant amount of value,” Harvey says, although he does add a warning that investors should avoid companies with “fundamental issues” resolvable under current conditions. He specifically points out the travel and leisure sectors as particularly hard hit right now.
But within what he describes as the best risk/rewards, the Wells Fargo team believes investors can find strong returns.
That in mind, what exactly is Wells Fargo recommending? We’ve used the TipRanks database to sort through the investment firm’s stock picks, and found some commonalities: at least 20% upside potential, combined with 13% dividend yields – and also one that may be too risky to try.
Simon Property Group (SPG)
We’ll start with a real estate investment trust, a segment well-known for high and reliable dividends. The Simon Property Group focuses on retail properties, and is known as the largest operator of shopping malls in the US. SPG has over 325 properties across 37 states, and boasts over 240 million leasable square feet of high-end retail property. The company finished 2019 on a strong note, with $1.5 billion in final quarter revenue and $7.1 billion in liquid assets.
Even with the difficult quarter now, SPG has maintained its generous dividend. The quarterly payment is a $2.10, making the annualized payout an impressive $8.40 and the yield an equally impressive 13.72%. SPG has been raising the dividend steadily over recent years, and the payout ratio is now 70%, showing that the company can afford the payment – and has room to increase it again.
Tamara Fique covers this stock for Wells Fargo, and sees fit to give a Buy rating. Her review includes a bullish $130 price target, implying a healthy upside potential of 112% for the coming year. (To watch Fique’s track record, click here)
Backing her stance, Fique points out all of the current weaknesses in the shopping mall industry: declining customer traffic, closed shops, a halt in tourist traffic, and reduces her 2020 and 2020 FFO estimates. At the bottom line, however, she states, “The regional mall industry has consolidated into the hands of a few public REITs that benefit from their scale, access to capital, and strong tenant relationships. Those REITs with national platforms and high-quality portfolios are likely to attract the best tenants and the best personnel. Simon is the largest of these consolidators.”
Overall, Simon Property boasts a Moderate Buy consensus rating with 6 recent Buy ratings vs. 7 Holds. Meanwhile the average price target of $130 indicates upside potential of 128%, with the stock down 64% year-to-date. (See Simon Property stock analysis at TipRanks)
Goldman Sachs BDC (GSBD)
Investment management is a core function of Wall Street’s major banks, and Goldman Sachs BDC lives squarely in that niche. The company is the specialty finance subsidiary of the eponymous investment banking firm that figured prominently in the 2008 financial crisis. GSBD focuses on closed-end management investment for middle-market companies in the US.
Through 2018, and into 1H19, GSBD strongly exceeded its earnings expectation. In the last few reported quarters, however, the bank has just managed to meet those forecasts, with Q3 and Q4 earnings coming in at 47 and 48 cents respectively. Looking ahead, the Street expects to see 49 cents EPS, for another small sequential gain.
Along with modest gains in earnings, GSBD offers investors a steady – and rock-solid reliable – dividend, with uninterrupted payments going back five years. The quarterly payment, 45 cents, annualizes $1.80 and gives a yield of 13.84%. This is almost 7x higher that the average dividend yield found in the broader markets, and while GSBD has kept the payment steady, rather than increasing it gradually, the reliable payout and high yield combine to make it a steady income stream for shareholders – and an attractive point for income-minded investors.
Well Fargo analyst Finian O’Shea saw fit to upgrade this stock from Neutral to Buy, setting a $15.75 price target that indicates a potential upside of 21%. (To watch O’Shea’s track record, click here)
In supporting comments, O’Shea wrote, “We are upgrading GSBD… given attractive leverage profiles in this environment… We are increasing our target yields to account for wider market spreads, and believe the space is attractive given implied loss rates and overall funding stability.”
The average price target on GSBD is $16.25, which suggests room for 24% growth from the current trading price of $13.51. The Moderate Buy analyst consensus is based on 1 Buy rating and 3 Holds set in recent weeks. But the main attraction here is the steady dividend return. (See Goldman Sachs stock analysis on TipRanks)
Bed Bath & Beyond (BBBY)
With the third stock on our list, we get to Wells Fargo’s Sell recommendation. Bed Bath & Beyond is a staple of the suburban retail market, with branches in shopping malls and stand-alone locations. The company specializes in homewares, sheets and towels, cooking and baking accessories, soaps, shampoos, and other hygiene products – a niche that you think might do well in today’s hygiene-conscious coronavirus epidemic, but the lockdowns have brought shopping to a near-standstill and that is the deciding factor in this case.
Oddly, initial numbers might suggest otherwise. BBBY’s fiscal Q4, which ended in February of this year, showed an 80% positive surprise as EPS came in at 38 cents against a forecast of 21 cents. At the same time, quarterly earnings were down from $1.20 year-over-year, a 68% drop.
However, the company’s fiscal Q1, which will cover a time frame directly impacted by the anti-coronavirus measures, is looking decidedly glum. March sales are tracking down 32%, and quarter-to-date is down 42%. The company is looking to retrench, and has suspended $600 million in share buybacks and debt reduction while pushing $150 million capital expenditures into 2021. It’s not a pretty picture, especially when all of the company’s stores are closed and it is shifting all sales to an ecommerce platform, and adjusting to changes in upper management.
Even BBBY’s dividend, once considered solidly reliable, is not safe. The company paid out the 17-cent regular quarterly payment last month, but future dividends are uncertain. At current share price levels, the dividend gives a whopping 15.3% yield, impressive by any standard – but affordability is the question.
All of this prompted Well Fargo’s 5-star analyst Zachary Fadem to rate BBBY a Sell, with a $4 price target that suggests a 9% downside from current levels this year. (To watch Fadem’s track record, click here)
Fadem opined, “Considering BBBY’s pre-COVID challenges were already steep, we’ve long viewed a turnaround requiring considerable efforts. But with management now juggling actions to reduce costs, shore up liquidity and quickly shift sales to ecommerce, we view the path ahead increasingly onerous for BBBY’s newly minted leadership team.”
Overall, Wall Street appears to agree with Fadem that caution is required here. The analyst consensus on this stock is a Hold, based on 13 ratings that include 3 Buy, 8 Holds, and 2 Sells. However, the average price target of $10.11 reflects the potentially high rewards sometimes seen with high risk shares, implying a 46% upside should the economy see a V-shaped recovery. (See BBBY stock analysis on TipRanks)
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