November was an eventful month for stocks in terms of newsflow and price action. The S&P 500 ended the month up almost 11% and helped the Dow Jones Industrial Average make its biggest monthly gain since 1987. However, most of the gains took place in the first week, following the election with the move climaxing three weeks ago, when the market gapped up to new, all-time highs on Pfizer’s (PFE) positive vaccine news.
Today the S&P 500 broke out the 3,525 – 3,650 trading range it had been in the past few weeks. And there are good reasons to think this rally will continue. Because of the recently announced COVID-19 vaccines the world returning to normal is expected to happen more quickly than previously forecast.
A return to normal should benefit the most oversold parts of the market like financials, energy, and travel-oriented sectors. Further, short-term rates will remain low as the Fed is determined to not hike until inflation meaningfully ticks above 2%. These circumstances will certainly boost earnings.
However, there are some reasons for investors to be cautious. Bears argue that the market is already overvalued by many measures. This means the vaccine news might be a “sell the news” event. There’s an ongoing surge in coronavirus cases which will depress economic activity in the next couple of months. Many intermediate and near-term sentiment measures have reached bullish extremes. Finally, there are some pockets of froth in the market which can often be a sign that investors need to be more mindful of risk.
Four Stocks to Buy
While the bearish arguments are compelling, I still lean towards the bullish side, especially because the S&P 500 reached an all-time high today.
In the short-term, there are also some additional good reasons to be bullish such as positive seasonality, the dynamic of underperforming fund managers forced to chase stocks, and more than 70% of companies topping earnings expectations in Q3.
Given this bullish momentum, investors should consider buying Google (GOOG), Paypal (PYPL), Brinker International (EAT), and Disney (DIS).
One challenging aspect of the current market environment is that there is likely going to be a lot of bifurcation in terms of performance. For years, growth stocks have outperformed value stocks due to underwhelming economic growth, and long-term and short-term rates consistently trending lower.
Currently, long-term rates are moving higher which is resulting in depressed, oversold sectors like energy and financials outperforming relative to tech stocks. Tech stocks have underperformed as many benefitted from the changes in behavior due to the pandemic such as increased eCommerce demand, more time spent online, and offices going remote.
However, GOOG is a technology company that should see revenues sharply increase if the world returns to normal. With travel increasing, demand from travel companies for ads would increase. In 2019, Google earned $18 billion in revenue from travel ads. It’s expected that this figure will be closer to $5 billion in 2020.
The world returning to normal would also be a boost for small businesses who are another large segment of Google’s customer base. Currently, Google is rated a “Strong Buy” by the POWR Ratings. It has an “A” across all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Internet stocks, it’s ranked #1 out of 59.
Paypal is another tech stock that I believe will thrive in the near-term even if the rotation from growth to value continues. The digital wallet is going to be the next, disruptive trend that will have a meaningful impact on commerce, banking, and the economy.
PYPL is at the forefront with its native product and also through Venmo. It’s recent introduction of letting its users trade cryptocurrency is another catalyst for the stock. It could be particularly potent in the short-run given bitcoin’s parabolic rise and proximity to its previous, all-time highs.
The cryptocurrency move is an indication that PYPL is only in the early innings of fully monetizing its user base. Additionally, digital wallets are more ubiquitous and full of features in Asia which shows that many younger people will use them for all types of financial services like insurance, wealth management, investing, financial advice, etc.
Currently, PYPL has 246 million users with another 70 million on Venmo. In the long-run, PYPL has the scope to introduce higher-margin products and services to its customers which gives the stock tremendous upside potential.
The POWR Ratings are also bullish on the stock as it has a “Strong Buy” rating with an “A” for Trade Grade and Buy & Hold Grade and a “B” for Industry Rank. Among Consumer Financial Services stocks, it’s ranked #2 out of 46.
Brinker International (EAT)
EAT owns and operates 1,663 dining chains like Chili’s, Maggiano’s, Kona Ranch, and On the Border. Like many restaurants, it’s been badly affected by the pandemic. However, the company has done better than expected. In Q3, Brinker’s sales were 10.8% lower compared to 2019 as it’s been able to offset the decline in indoor dining through takeout and delivery.
However, the vaccine is a gamechanger for restaurant stocks as it means that indoor traffic will return sometime next year. There will likely be pent-up demand due to many people not eating out for many months.
Brinker is in a prime position to take advantage of this pent-up demand. One tragic consequence of the coronavirus is that many family-owned restaurants have gone out of business with more possibly going out of business in the coming months due to the increase in case counts. Brinker has the resources to survive, thus they will likely have more market share when the world returns to normal.
Brinker is rated a Strong Buy by the POWR Ratings. It has an “A” across all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Restaurant stocks, it’s ranked #7 out of 49.
The coronavirus has negatively impacted Disney’s parks and entertainment business. In the last quarter, Disney’s parks business lost $2.4 billion due to decreased attendance and increased costs to comply with social distancing and sanitation measures. Parks in California and France are closed, while others are seeing attendance that is 50% lower than in previous years.
However, the pandemic has been a major catalyst to Disney’s streaming offerings. In Q3, Disney+ reached 73 million subscribers. Including Hulu and ESPN+, it has 110 million subscribers which makes it the second-largest streamer behind Netflix’s 191 million. However, based on current growth rates, Disney could pass Netflix sometime in 2022.
Now, with an impending vaccine, there’s a light at the end of the tunnel for Disney’s parks and entertainment business. The company will benefit from pent-up demand which should translate into increased revenues and more pricing power especially over the first twelve to eighteen months of the economy improving. Additionally, the gains made by its streaming channels will be sustained and remain the company’s growth engine.
DIS is rated a Strong Buy by the POWR Ratings with an “A” across all categories including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Among Entertainment – Sports and Theme Park stocks, it’s ranked #1 out of 15.
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PYPL shares were trading at $216.54 per share on Tuesday afternoon, up $2.42 (+1.13%). Year-to-date, PYPL has gained 100.18%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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