As the coronavirus crisis drags on painfully, the damage to the real economy continues to deepen with no sign of a comeback anywhere on the horizon. The major portion of the U.S. economy is shut, people are losing their jobs and the companies are warning of a major decline in their profitability.
And yet, it appears that Wall Street is signalling that the worst is behind us. U.S. stocks climbed back into bullish territory on optimism that the coronavirus cases are peaking and that the U.S. is preparing for another round of stimulus.
The benchmark S&P 500 Index jumped 3.4% yesterday, sending the gauge more than 20% over its March 23 low, which tradition says signals a bull market. If we are already in a bull market and the rebound persists, it's worth looking at which stocks from different sectors of the economy are more likely to outperform on the way up. Below is our shortlist of three.
1. Nvidia
After soaring 76% in 2019, shares of NVIDIA Corporation (NASDAQ:NVDA) are withstanding the current sell-off much better than its chip peers. Its stock is down 15% from the all-time high reached in February, hugely outperforming the Philadelphia Semiconductor Index. It closed yesterday at $266.95 after gaining 3% for the day.
While the chipmaker is unlikely to escape the demand slowdown due to COVID-19 closures, analysts are focusing on the company’s balance sheet, cash flow, and product categories that are expected to remain strong in the current environment.
Last month, Needham upgraded the stock to buy, forecasting higher demand for chips used in medical applications, as well as for artificial intelligence technologies.
Susquehanna Financial Group raised its Nvidia price target by $10 to $330, saying that “enterprise demand remains strong and supply constraints have (basically) been alleviated,” while the remote-work trend is “helping overall demand” for cloud-computing chips.
2. Apple
Shares of iPhone maker, Apple Inc (NASDAQ:AAPL) were among the hardest hit in this market rout. They had plunged 35% by March 23 from their peak of $327.85 on Jan. 29.
But as markets began to recover from their worst downturn since the 2008 financial crisis, Apple also staged a smart rebound, gaining about 25% from the lowest point in March. The shares closed yesterday at $266.07, after gaining 2.56%.
The outbreak of, and response to, COVID-19 has raised several challenges for Apple, including disruption of its China-based supply chain for manufacturing. Apple’s stores outside China are closed until further notice, for example, and many regions in the U.S. are under stay-at-home orders until the end of April.
Analysts are also fearing that the disruption caused by the coronavirus could delay the launch of Apple’s new iPhones, slowing the roll-out of 5G-powered handsets which offer huge growth potential.
But these are temporary challenges which could impact revenue and profit for the next couple of quarters. However, what’s attracting investors to Apple stock is the company’s massive innovation ecosystem and its huge cash hoard.
Cash-rich tech stocks are some of the “best positioned to weather the storm,” Evercore ISI analyst Amit Daryanani said in a note last month. The maker of the iPhone “has the largest net cash position within our coverage,” Daryanani noted. Apple currently has about $207 billion in cash on hand with about $108 billion in both short-term and long-term debt.
3. Home Depot
Home Depot (NYSE:HD) is one of those retailers that are best-positioned to survive the increasingly-likely impending recession.
Just before the deadly pandemic hit, HD was reaping the reward for its $11-billion spending to modernize the company’s stores, upgrade digital options and enhance offerings for its key trade customers. Armed with these upgrades, there is a good chance that HD’s same-store sales will revive quickly in the post-crisis era.
The strength of the U.S. housing market is also going to help Home Depot thrive once the COVID-19 outbreak is contained, as lower borrowing costs boost home prices, making it easier for home owners to increase spending on renovations.
As well, this retailer is a reliable dividend payer. Its quarterly dividend has expanded 380% over the past decade and, with a healthy payout ratio of 42%, it has much more room to grow them.
Home Depot stock currently yields 3.12%, paying $6 a share annual dividend. Trading at $194.82, the shares have dropped 11% this year.