The coronavirus pandemic hit hard in the first half of 2020, prompting a series of extraordinary governmental measures to combat the disease: extreme social lockdowns, economic shutdowns, massive fiscal stimulus and support. The combination has created an unusual market circumstance, with economies in freefall, pummeled by the strongest recessionary pressures since the 1930s, while at the same time stock markets have rallied from the initial blow and given investors an 11-week bull run.
David Kostin, head of US equity strategy for Goldman Sachs, notes the unusual situation and writes, “Many of our client discussions have centered on the apparent disconnect between financial assets and the economy. Most institutional investors have been stunned by the juxtaposition of the sharpest GDP contraction on record with a 36% market rally, as have we.”
That’s the bad news. Kostin goes on to add the good news, “[The] combination of incremental data improvement and extraordinary policy support has been sufficient to assure the forward-looking market that the earnings damage resulting from the virus will ultimately be short-lived.”
Looking at the light at the end of the tunnel, Goldman’s stock analysts have tapped three equities which they see as likely to benefit – and benefit strongly – as economies return to a more ‘normal’ level of activity. We’ve used the TipRanks database to pull up the details, and find out what makes Goldman’s picks so compelling.
Post Holdings (POST)
We’ll start in the food industry, where Post Holdings holds a major portfolio of brands, including such breakfast staples as Raisin Bran and Shredded Wheat. At $6.1 billion in market cap, Post is a giant in its segment, with a secure niche based on quality products and strong branding. Nevertheless, the company has showed mixed results in recent quarters.
The social lockdowns in place for much of 1H20 prompted a consumer shift to in-home cooking and dining, which benefited Post’s sales. The company saw strong sales numbers in Q2, including 7.7% year-over-year growth to $1.494 billion in total revenue. Margins and profits contracted, however, and EPS came in at 65 cents, well below the 91-cent estimate.
The mixed results come as individual consumer demand for Post’s products is increasing. Those sales increases are overbalanced by reduced institutional demand. The restaurant, hospitality, and education sectors have all contracted, and demand for food stuffs there has not yet recovered.
At the same time, Post’s solid foundation in retail foods gives it strong prospects for the future. Goldman Sachs analyst Jason English covers this stock, and has upgraded POST shares from Hold to Buy. He writes, “[We] expect the company to emerge as one of the scarce growth leaders in 2021 and believe its relative valuation is currently disconnected from this likelihood… POST has over $1.1 bn cash on its balance sheet… our FY20 sales estimates move higher for POST driven by the continued strong demand within its retail business (specifically US cereal and refrigerated foods).”
English puts a $120 price target on POST shares, indicating his confidence in a robust 38% one-year upside potential. (To watch English’s track record, click here)
The Wall Street view of Post is in-line with English’s. The stock has a Strong Buy analyst consensus, based on 6 recent Buys and just one Hold. Shares in this food company are selling for $86.14, and the average price target of $110.25 implies an upside of 28% for the coming 12 months. (See Post stock analysis on TipRanks)
Pinnacle West Capital (PNW)
Next up, we head west. Pinnacle is the Phoenix-based holding company owner of Arizona Public Service and Bright Canyon Energy, the major electric utilities in the state of Arizona. The company’s asset portfolio totals some $18 billion, and Pinnacle boasts both an $8 billion market cap and a place on the S&P 500 index.
Everyone needs electricity, so Pinnacle has had no lock of a customer base even during the coronavirus crisis. Even so, the economic turndown depressed demand, and the company saw sales slip in the first half. The Q1 results showed $661.9 million in revenues, down 10% yoy and missing the estimates by over 11%. EPS, at 27 cents, beat the 16-cent forecast by 68%.
Despite lower earnings, company management is maintaining the dividend. Earlier this month, PNW declared its next payment, of 78.25 cents per share, to be paid out on September 1. The dividend has been stable at this level for four quarters now, and the annualized payment of $3.13 per share gives a yield of 4.26%. This is more than double the average yield found among PNW’s peer companies on the S&P 500.
Analyst Insoo Kim has upgraded PNW shares for Goldman Sachs, bumping the stock from Hold to Buy. Kim’s $93 price target suggests a strong one-year upside of 31%. (To watch Kim’s track record, click here)
Supporting this bullish outlook, Kim sees a clear path forward for PNW: “The Rocky Mountain region (including Arizona) has recorded positive YoY electric demand, a stark contrast to most other regions in the US (Exhibit 9). For Arizona, we believe favorable weather and state re-opening contributed to the increased usage, which should help PNW’s prospects of achieving its reiterated 2020 EPS guidance range…”
Overall, Pinnacle West gets a Moderate Buy rating from the analyst consensus, based on 7 reviews including 5 Buys and 2 Holds. Meanwhile, shares are selling for $71.27, while the average price target of $85.40 suggests the stock has room for nearly 21% growth this year. (See PNW stock analysis on TipRanks)
Compania de Minas Buenaventura (BVN)
We’ll end with Buenaventura, a Peruvian mining company. BVN operates solely in Peru, where it has operations throughout that country’s Andes Mountains. The company produces gold and silver, along with zinc and other base metals. Other operations in Peru include chemical lime production and electric power transmission.
Peru’s strict lockdown policies to combat the coronavirus pandemic impacted business and production, but even so, BVN reported over 89,000 ounces of gold production, along with 3.8 million ounces of silver during the quarter. Lead, zinc, and copper production also continued during the period.
At the same time, production volumes were down, especially in precious metals. This was partially alleviated by increases in the average realized prices of gold and silver per ounce. Net sales at $108.8 million were down 40% year-over-year.
On a positive note, during the first quarter BVN was successful in negotiating new financing on a $275 million syndicated loan facility. The company finished Q1 with $222 million available on the balance sheet.
BVN shares have fallen 25% in the current market cycle, and Goldman Sachs analyst Thiago Ojea sees that drop as bringing the stock into line with its true value.
Ojea believes that BVN now has a clear path forward, writing, “…we have been cautious on LatAm precious miners given ongoing operational issues and declining volumes. However, specifically on Buenaventura, we believe that investors’ expectations on lower volumes have already been reset and [that] higher gold prices could be an important catalyst for the stock. Moreover, we expect a small improvement on costs due to the full roll out of the debottlenecking initiative”
Ojea has upgraded BVN – making this stock Goldman’s third important upgrade – to a Buy rating, and set an $11.50 price target that implies a 27% upside potential. (To watch Ojea’s track record, click here)
Ojea’s is the only recent review on BVN stock, making this the default view among the analyst corps.
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