After a Dismal 2020, These 2 Stocks Should Shine Next Year
By Mon, Oct 19, 2020
Market historians will look back on 2020 as the “year of the disconnect.” For many, it’s been hard to square a badly slumping economy with a stock market that keeps making new highs. Of course, not all stocks are having a banner year. Many individual stocks took a deep hit this past spring and have stayed in a slump. Energy and airline stocks are just some of the firms that remain in the penalty box, and deservedly so.
Yet you can also uncover other deeply out-of-favor stocks that have a clearer path to a near-term rebound. Let’s take a look at a pair of them.
Hewlett Packard Enterprise Co. (HPE)
The mid-spring pandemic meant the phones stopped ringing for this computer equipment firm. Sales in its fiscal second quarter (ended April) slumped around 15% sequentially to around $6 billion. Pre-tax income fell by nearly half. Shares, which had traded above $17 last autumn, began sliding on the heels of those results, falling below $10. And there they remain today.
Yet HPE is already into the first phases of a gradual upturn in business. Whereas profit forecasts in its fiscal second quarter missed the consensus target by a hefty 24%, third-quarter profits of $0.32 a share were nearly 40% above forecasts. Quarterly sales of $6.8 billion remained 4% below year-ago levels, a trend that may persist in the fourth quarter ending this month as well.
Yet, thanks to a growing backlog and a smart tuck-in acquisition, sales comparisons should turn tangibly positive over the course of the fiscal year that begins next month. A September 2020 purchase of Silver Peak is expected to help HPE become a leader in the emerging field of edge computing. This is where a high volume of data traffic will be analyzed closer to where it is being generated. For example, think of the coming wave of autonomous cars. They will generate a massive amount of computing data, much of which will be needed to communicate to nearby vehicles and road networks.
Grandview Research says that the edge-computing market will grow at a 37% annual clip, to $43 billion by 2027. Hewlett Packard CEO Antonio Neri recently said he’s a “strong believer” that the edge is the next frontier.
Silver Peak’s operations are quickly being integrated into HPE’s Aruba Networks division. Aruba was acquired five years ago and is a leader in wireless data computing systems.
Meanwhile, this stock has several attributes that give it clear value. For starters, its $0.48 a share dividend looks quite safe, and represents a 4.9% yield. Second, the firm’s enterprise value (market value plus debt minus cash) stands at just 6.5 times projected 2020 cash flow. That multiple drops to just 5.7 if viewed in the context of 2022 results, according to Bank of America analysts. You simply don’t find those kinds of ultra-low multiples in the tech sector these days. (Dell Computer (DELL), for example, trades for more than nine times projected 2022 cash flow, a greater than 50% premium to HPE’s multiple.
Action to Take: Consider buying shares of Hewlett Packard Enterprise Co. (HPE) up to $11 and selling them when shares reach $16.
M&T Bank (MTB)
Some stocks are in a deep slump simply because they don’t seem especially timely. This East Coast bank with around $120 billion in assets is one of them. Low interest rates mean M&T isn’t earning the usual profit spreads between its own borrowing costs and what it charges clients (known as “net interest margin”). And that backdrop explains why shares have slumped from $170 back in February to just $100 today.
In fact, M&T will earn only around $9 a share this year, down from $13.75 a share a year ago. And after hiking its dividend by an average of 16% in each of the past two years, M&T says its dividend will likely be flat this year. Still, investors are rewarded for their patience by locking in a 4.3% dividend yield at today’s prices, a much better yield than you will find with high-quality bonds these days.
So, what’s the catalyst for shares? An upward move in interest rates. While Fed chair Jerome Powell has vowed to keep benchmark interest rates at low levels in the next few years, market interest rates, which are used for mortgages, commercial loans and other lending instruments, will be more tied to economic activity.
Indeed, the bond market is already focusing on the potential impact of Joe Biden winning the election, and the Democratic party’s plans for stimulus are expected to bring upward pressure on interest rates. Which would be great news for firms like M&T Bank. As The Wall Street Journal recently noted, bond yields, “have climbed in recent days as polls have shown a growing lead for former Vice President Joe Biden over President Trump, as well as improving chances that Democrats could end up holding both houses of Congress.”
Interest rates may also move higher if inflation starts to rise. On October 14, the U.S. Bureau of Labor statistics said that the producer price index (PPI) rose 0.4%, marking the third consecutive monthly increase and well ahead of the consensus forecast of a 0.1% gain (according to Briefing.com). M&T Bank, and other banks, are a great hedge against any resulting move back up in interest rates.
Action to Take: Consider buying shares of M&T bank (MTB) up to $120 and sell when shares re-visit their one-year high of $170.
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About the Author
Contributor David Sterman is a certified financial planner and has worked as a financial journalist and investment analyst for more than 25 years.
