Is the bull market about to take a long breather? Not according to Goldman Sachs. In fact, the firm believes the bull market has a long way to run yet; Chief global equity strategist Peter Oppenheimer recently noted that the market was moving from a “’Hope’ phase to a longer ‘Growth’ phase.”
The firm’s economists are expecting the economy to sprout higher by 6.8% in 2021 and believe that by the end of the year the unemployment rate could drop to 4.1%.
And there’s enough evidence to suggest the economy is on the mend. Although unemployment rates remain high, claims have dropped since early January and retail sales have bounced back strongly. The drop in Covid-19 cases and a growing vaccinated population are an additional boost. So is the massive federal stimulus.
“We’re extremely likely to get a very high growth rate,” Goldman’s chief economist Jan Hatzius added. “Whether it’s a boom or not, I do think it’s a V-shaped recovery.”
With this in mind, the firm’s analysts have pinpointed 3 stocks they think are primed to roar ahead. And in a better sign for investors, these three stocks have a ‘Perfect 10’ from the Investing Insights platform.
The platform gives every stock a single-digit score, based on a summing up from 6 separate factors. The factors used are known to correlate with future overperformance; when they align together it’s a strong indication for buyers to consider. Let’s take a closer look.
Constellation Brands (STZ)
Some companies need an extensive introduction, some we are familiar with. Constellation Brands (NYSE:STZ) is in the latter category. The company is the largest beer importer in the US, measured by sales, and consistently among the top three when measured by market share. Constellation’s portfolio includes more than 100 brands of beer, wine, and spirits, and is best known as the US owner of Mexico’s Corona and Modelo beers.
In its last reported quarter, 3Q20, STZ showed solid yearly gains. Specifically, the company posted $2.44 billion at the top line, for a 22% year-over-year gain. Non-GAAP EPS was up, too, at $3.09 per share, beating consensus estimates of $2.39. It was the fourth quarter in a row that STZ beat the expectations.
The company has gotten into a small spot of trouble, however, around Corona – the beer, not the virus. A lawsuit was filed by Grupo Modelo, the Mexican branch of international beverage giant AB InBev against Constellation, alleging violation of an agreement over use of the Corona brand name. Constellation purchased the US rights to that name in 2013, when AB InBev acquired Grupo Modelo, maker of Corona beer. In 2020, STZ launched Corona Hard Seltzer, and ABI now alleges that STZ’s ownership of the name applies only to beer. Constellation has hit back with filings claiming that it owns all exclusive rights to the Corona brand in the US.
Bonnie Herzog, Goldman’s beverage industry expert, notes that Constellation has already won an arbitration session on the Corona issue (after all, Corona Hard Seltzer was launched in February 2020).
“While we take no view on the outcome of this litigation, we believe the selloff in STZ’s stock is overdone and has provided a nice entry point especially considering how small Corona Hard Seltzer is to STZ’s total portfolio today,” Herzog noted. “We continue to expect the stock to re-rate higher over the long term driven by faster & more profitable growth.”
Herzog continues to see STZ as a solid portfolio addition, and maintains her Buy rating and $275 price target. At current levels, this implies ~23% upside on the one-year time frame.
Wall Street generally likes STZ, as shown by the 10 Buy-side reviews compared to just 5 Holds. This gives the stock a Moderate Buy analyst consensus rating. Shares are priced at $223.93, and their $253.20 average price target suggests room for 13% growth. (See STZ stock analysis)
Kornit Digital (KRNT)
Kornit Digital (NASDAQ:KRNT) inhabits an interesting niche in the tech and manufacturing worlds, producing high-speed, industrial-grade, inkjet printers, along with pigmented ink and chemical products. The company’s business customer base comes from the apparel, garment, and textile industries.
Textiles make up a huge segment of the world’s economy, finding use in a wide range of sectors and appearing pretty much everywhere we go – so Kornit has no lack of customers, and even the corona crisis could not derail its business for long. This was apparent from the company’s share performance and quarterly finances over the past year.
The share price has appreciated 180% in the last 12 months, while revenues, after a dip in Q1:20, have shown sequential gains in every quarter since and year-over-year gains in Q3 and Q4. The fourth quarter results included $72.3 million at the top line, a 45% year-over-year gain. The company beat the estimates on the bottom-line with Non-GAAP EPS of $0.24 coming in $0.02 above the Street’s forecast.
Goldman’s Rod Hall attributes Kornit’s strength to “broad-based demand outperformance as the company continues to see tailwinds from the shift to digital printing and e-commerce.”
The analyst goes on to note unexpected effects of the COVID pandemic on Kornit’s business: “While we had originally believed that current growth might be unsustainable as we exit COVID we are increasingly convinced that COVID has actually accelerated adoption of personalized fashion enabling technology. We also believe COVID might have driven companies to adopt this technology to reduce physical inventory.”
Everything that KRNT has going for it convinced Hall to upgrade the stock from Neutral to Buy. In addition to the call, the analyst boosted his price target from $83 to $135, suggesting 17% upside potential.
Kornit holds a unanimous Strong Buy rating from the analyst consensus, having received 6 Buy reviews recently. This stock has appreciated strongly in recent weeks, pushing the share price almost up to the average price target of $124. This leaves room for ~8% upside from the current trading price of $115. (See KRNT stock analysis)
NRG Energy (NRG)
From manufacturing, we move to the energy sector. NRG Energy (NYSE:NRG) is a $10 billion utility provider, with dual head offices in Texas and New Jersey. The company provides electricity to more than 3 million customers in 10 states plus DC, and boasts a over 23,000 MW was generating capacity, making it one of North America’s largest power utilities. NRG’s production includes coal, oil, and nuclear power plants, plus wind and solar farms.
In its most recent quarterly report, for 3Q20, NRG showed $2.8 billion in total revenues, along with $1.02 EPS. While down year-over-year, this was still more than enough to maintain the company’s strong and reliable dividend payment f 32.5 cents per common share. This annualizes to $1.30 per common share, and gives a yield of 3.1%.
Analyst Michael Lapides, in his coverage of this stock for Goldman Sachs (NYSE:GS), rates NRG a Buy. His $57 price target suggest an upside of ~55% from current levels.
Noting the recent acquisition of Direct Energy, Lapides says he expects the company to deleverage itself in the near-term.
“After NRG’s acquisition of Direct Energy, one of the larger electricity and natural gas competitive retailers in the US, we view NRG’s business as somewhat transformed. The integrated business model — owning wholesale merchant power generation that supplies electricity that gets used to serve customers supplied by NRG’s competitive retail arm — reduces exposure to merchant power markets and commodity prices, while increasing FCF potential,” Lapides wrote.
The analyst summed up, “We view 2021, from a capital allocation perspective, as a deleveraging year, but with NRG creating almost $2bn/year in FCF, we see a pick up in share buybacks as well as 8% dividend growth ahead in 2022-23.”
We’re looking at another stock here with a Strong Buy analyst consensus rating. This one based on a 3 to 1 split between Buy and Hold reviews. NRG is trading for $41.84 and its $52.75 average price target suggests a 26% upside from that level on the one-year time frame. (See NRG stock analysis)
To find more ideas for stocks trading at attractive valuations, visit Investing Insights.