Humana, DigitalBridge, Pepsi, J.B. Hunt, and T-Mobile
While analysts have warned that earnings growth may slow from previous quarters due to inflation and supply chain issues, analysts say there are still a few top buying opportunities.
Humana, DigitalBridge, Pepsi, J.B. Hunt, and T-Mobile are among them.
According to Morgan Stanley, the beverage giant’s earnings report on Tuesday is shaping up to be a big one.
“We expect another PEP EPS beat in Q3, as well as another quarter of strong organic sales growth confirming higher LT topline growth following Pepsi’s recent reinvestment in marketing/cap-ex,” analyst Dara Mohsenian said.
According to the firm, Pepsi is gaining market share in the snacks category and has a better cost outlook than many of its competitors.
Mohsenian also referred to Pepsi’s snack business as best-in-class and a “consistent 4-5 percent organic sales topline grower.”
“This consistent sequential improvement and results give us confidence that the recent topline growth acceleration is sustainable,” he said.
According to him, the stock is also attractively priced and “compelling,” with higher long-term revenue growth potential than peers in the sector.
Pepsi’s stock finished the week down 2%.
Earlier this week, investment firm Leerink initiated a buy rating on the health insurance behemoth.
While rapidly rising medical and coronavius pandemic costs have lowered expectations for the rest of 2021, analyst Whit Mayo sees it as a buying opportunity for investors.
“Against the backdrop of muted 2H Managed Care expectations, we see opportunities to invest in the post-COVID accelerating growth environment and associated 2022 inflection,” he said.
Meanwhile, stocks have been trading sideways and are down more than 4% this year.
Mayo, on the other hand, has urged investors to remain calm and to consider the big picture.
“We see a compelling 2:1 risk/reward against an undemanding valuation, positive skew to 2022 estimates,” Mayo added.
The insurance company, according to the firm, is now better positioned and less exposed than at any other point during the pandemic.
According to Mayo’s analysis, Humana’s decline in non-coronavirus medical care has significantly improved, which should help the company’s bottom line.
Humana’s third-quarter earnings report is scheduled to be released on November 3.
Wells Fargo analyst Eric Luebchow recently wrote about DigitalBridge Group, a real estate investment trust that primarily invests in digital infrastructure, that “opportunity knocks” for investors.
“With the stock down 27% since its peak on June 21, we believe now is a compelling time to own DBRG ahead of Q3 earnings, when we expect another beat-and-raise,” he said.
Luebchow praised the company’s strong balance sheet and stated that DigitalBridge has the “most appealing risk/reward prospects” among the companies covered by the firm.
“We value DBRG at Overweight because we see estimate upside as DBRG executes on its digital rotation and invests in high-quality digital infrastructure assets,” he said.
The firm is particularly optimistic about DigitalBridge’s two data center businesses, Vantage and Databank, and expects them to carry the majority of the company’s future growth. A data center is a structure that typically houses computers or other types of telecommunications systems.
“In the short term, it appears DBRG is set on investing more capital into its Vantage and Databank data center platforms rather than acquiring any new data center or tower logos at elevated multiples,” he added.
In early November, DigitalBridge is expected to report third-quarter earnings.
Overweight rating for J.B. Hunt- Stephens
“Intriguing 2022 Set-Up Unchanged. We anticipate that JBHT’s 3Q21 results will either meet or slightly miss current Street estimates. When it comes to the positives, we anticipate a gradual increase in the benefits of a strong intermodal pricing environment, the continuation of robust dedicated demand, and strong brokerage results given the current capacity constraints. However, we believe that these tailwinds will be muted in the near term by continued network congestion / challenges, which are likely to drive a y/y decline in intermodal volumes and poorer-than-expected results in the Final Mile segment.”
Morgan Stanley has assigned Pepsi an Overweight rating.
We anticipate another PEP EPS beat in Q3, as well as another quarter of strong organic sales growth, confirming higher LT topline growth following Pepsi’s recent reinvestment in marketing/cap-ex.
This consistent sequential improvement and results give us confidence that the recent topline growth acceleration is sustainable. Finally, we believe PEP’s valuation remains compelling, with PEP trading at only a 3% CY23 EV/EBITDA premium to much lower growth food peers, despite significantly higher LT revenue growth potential (4-5 percent at PEP LT vs. 2.0-2.5 percent at food peers) and higher margins ROIC.”
Buy rating for Humana- Leerink
“Near-term concerns about rising medical costs and COVID costs are factored in. Against the backdrop of muted 2H Managed Care expectations, we see opportunities to invest in the post-COVID accelerating growth environment and associated 2022 inflection point. The current valuation spread between HUM and UNH is significant, and we expect it to narrow. We see a compelling 2:1 risk/reward against an undemanding valuation and a positive skew to 2022 estimates.”
Wells Fargo, DigitalBridge Group Overweight classification
Opportunity comes knocking. With the stock down 29% since its peak on 6/21, we believe now is a good time to buy DBRG ahead of Q3 earnings, when we expect another beat-and-raise. In the short term, it appears that DBRG intends to invest more capital in its Vantage and Databank data center platforms rather than acquiring any new data center or tower logos at high multiples. ……. We rate DBRG as Overweight because we expect estimates to rise as the company executes on its digital rotation and invests in high-quality digital infrastructure assets.
Outperform rating for T-Mobile by Credit Suisse
“We believe T-Mobile remains compelling for patient investors, with rural/enterprise share gain opportunities, an improved wireless network priced well below AT&T and Verizon, 10%+ remaining growth in margin percentage driven by merger synergies, and the potential for $60 billion in stock buybacks over the next five years vs. its $160 billion market cap.”
Merck stock (NYSE: MRK)
Merck, based in New Jersey, and Ridgeback Biotherapeutics, based in Florida, announced on Friday that their antiviral drug, molnupiravir, reduced the risk of hospitalization or death by around 50% for patients with mild or moderate Covid cases. The late-stage trial participants were all unvaccinated and had at least one underlying factor that put them at a higher risk of developing a more severe infection.
“I believe it is real,” Cramer said on “Squawk Box.” “It’s a game changer.”
Merck intends to apply for emergency use authorization for the drug in the United States as soon as possible. Molnupiravir, if approved by regulators, could be the first oral antiviral treatment for Covid.
Rivals such as Pfizer in the United States and Roche in Switzerland are also racing to develop an easy-to-administer antiviral Covid pill. However, so far, only intravenous antibody cocktails have been approved for the treatment of non-hospitalized Covid patients.
“We have to get away from the idea that if you’re not vaccinated, you’re going to the hospital, even though we don’t necessarily want to promote no vaccine. This is the game changer we’ve been looking for,” the “Mad Money” host said, adding that it could alleviate people’s concerns about getting Covid at work.
Merck’s stock rose as much as 12% to a 52-week high of $84.34. In late 2019, the stock reached an all-time high near $90.
“Merck has significantly underperformed….” It’s a great company with a great balance sheet. It has simply underperformed, as have many other drug stocks, according to Cramer. “With the exception of Merck’s cancer portfolio, I don’t like the rest of Merck’s portfolio. But guess what? This is extremely important.”
Bitcoin began the third quarter in the low $33,000 range, still navigating a two-month correction period following a string of negative stories. It finished the quarter 25% higher, at around $43,800. Ether gained 32% in the quarter, finishing at around $3,000.
Bitcoin is up more than 60% year to date, while Ethereum is up 340%.
“The first two weeks of July were pretty rough, with a lot of momentum sellers continuing to pile on and a lot of fear coming into the market,” said Jeff Dorman, Arca’s chief investment officer. ”One by one, the factors that people were citing as reasons to be bearish on the market were all knocked out.”
China banned cryptocurrency mining at the start of the quarter, followed by a ban on crypto transactions.
There were also concerns that the institutional interest that had fueled the bitcoin bull run that was set to begin in 2021 was dwindling. Bitcoin fell by 7% at the end of September.
“September hasn’t been a great month, but there has been fairly consistent buying and fairly consistent interest across what is quickly becoming five distinct sectors of the digital asset economy” – Dorman mentioned DeFi, gaming and NFTs, Web 3.0 and Ethereum competitors, in addition to bitcoin.
According to Katie Stockton of Fairlead Strategies, the comeback triggered a short-term buy signal based on the MACD technical analysis signal on Friday, but she was hesitant to become outright bullish just yet.
Bitcoin maintained its dominance, but it did not lead the market.
While bitcoin and ether finished higher and remain the largest assets by market cap, emerging assets led the charge through Q3, according to Dorman.
According to him, the popular Ethereum-based game Axie Infinity increased by up to 900 percent in the quarter, while another game, Illuvium, increased by up to 600 percent.
According to data compiled by The Block, monthly volume in NFT marketplaces totaled $3.25 billion in August, up from $304.7 million in July. According to Noelle Acheson, head of market insights at Genesis, the second quarter NFT boom was about athletes, musicians, and representing changing lifestyle tastes, but the third quarter was all about infrastructure.
“It’s becoming more sophisticated, and I believe we’ll start to see some bear fruits in terms of products coming to market, such as lending products or the inclusion of NFTs in the overall crypto marketplace,” she said.
According to Pete Humiston, manager at Kraken Intelligence, emerging Ethereum competitors such as Solana and Cardano were on market participants’ minds. According to CoinGecko, Solana’s sol token is up more than 5,000% in 2021. He also stated that Solana is now the most staked layer 1 blockchain, surpassing peers such as Ethereum and Cardano.
“Over the three-month period, they all performed pretty differently, but for the most part, up and to the right, and it was pretty healthy to see completely different factors driving the strengths and weaknesses across these different sectors,” Dorman said.
Dorman stated that bitcoin is still very important, but it is “no longer leading or necessary to invest in other areas,” such as DeFi, NFTs, or gaming. Axie Infinity, for example, has 1.5 million daily active users, but the vast majority have never used bitcoin, he adds.
“People who have never invested in digital assets before are coming directly to them,” he said. “You’re starting to see these different on ramps that will benefit the entire ecosystem.” It used to be bitcoin first and everything else second, but now it’s the opposite.”
Increase in the fourth quarter?
Dorman and Acheson expect bitcoin and ether prices to rise in the coming quarter, but they advise investors to look beyond three months.
According to Ari Wald of Oppenheimer, bitcoin has fallen below $46,000 support at its 200-day average, which may have pushed some short-term technical traders out of the market for the time being.
“Next support is at $40,000 and generally appears listless, so we’re on the sidelines,” he explained. “Ethereum is still trading above its 200-day moving average, which we interpret as a sign of relative strength. Look for technical traders to buy this pullback with a stop loss at $2,635 to mark the end of this smoothed trend.”
Dorman pointed out that historically, the fourth quarter has been favorable for bitcoin. In 2020, it was only up about 45 percent to 50 percent for the year by the end of the third quarter, but it finished the year up 300 percent. However, that surge may not occur this year.
“All of the catalysts this year had nothing to do with bitcoin,” he said. “I think there are reasons to be optimistic for the fourth quarter; I just don’t expect bitcoin to catch up as quickly as it did last year; I believe it will likely continue to lag as we see growth in Ethereum and other ecosystems and gaming entities.”
The call for regulation became louder in the third quarter as lawmakers fought over the inclusion of cryptocurrency in the infrastructure bill. According to Securities and Exchange Commission chair Gary Gensler’s hints, crypto observers expect a bitcoin futures ETF to be approved in the coming quarter.
“That will be significant,” Acheson said, “even if only in terms of sentiment.” “I’m not convinced it will be a big market mover,” she added, noting that a futures-based ETF isn’t exactly what investors want, but it is what Gensler prefers.
She also mentioned that there have been rumors that stablecoin regulation will be implemented in the fourth quarter.
“None of this is bad,” she stated emphatically. “Regulation is a positive force, but it causes market anxiety.”
General Mills (NYSE: GIS)
The Wall Street firm raised its rating on the food company’s stock from neutral to buy. Citi also raised its 12-month price target from $63 to $70 per share, implying a 17 percent increase in the next year.
“GIS reported a much better-than-expected fiscal first-quarter profit last week, and the market barely noticed. “We believe this is a good story in a difficult sector that merits a second look,” Citi analyst Wendy Nicholson wrote in a client note.
General Mills shares are up less than 2% in 2021, trailing the S&P 500, which is up about 15%.
Citi believes General Mills is particularly cheap in light of its earnings report last week.
The company earned 99 cents per share in adjusted earnings, compared to 89 cents per share expected. Revenue for the quarter also exceeded expectations.
“GIS is trading today at a 20% discount to the market, whereas the stock has historically traded at a 9% premium to the market over the last ten years,” said Nicholson.
“Given GIS’s strong start to FY22 and our belief that some investors may soon begin to nibble on high-quality, consumer staples stocks that offer relatively less risk to their outlooks,” she added, “we believe that a more appropriate valuation for GIS today is for the stock to trade at a 10% discount to the market.
Okta Stock (NASDAQ: OKTA)
Okta shares have underperformed the market this year, falling 5% in 2021 through Monday’s close, compared to the S&P 500’s 18.3 percent gain. However, Okta’s underperformance makes it relatively inexpensive in comparison to peers, as the stock is poised to benefit from work-from-home tailwinds, according to Morgan Stanley.
“While investors are concerned about topline slowing over the last year, we believe much of this is due to a temporal shift in spending as enterprises prioritized WFH enablement and are now refocusing on larger, strategic initiatives to modernize their [Identity and Access Management] infrastructure in order to secure a larger remote workforce,” Morgan Stanley’s Hamza Fodderwala said.
According to Morgan Stanley, Okta is the IAM sector leader and is expanding its market share.
Okta was promoted from equal weight to overweight. Morgan Stanley raised its price target on the stock from $275 to $315. The new forecast implies a 30.5 percent increase from Monday’s close.
Morgan Stanley also believes Okta’s acquisition of identity company Auth0 will be “transformative to the Okta story” and will result in rapid market share gains.
According to Fodderwala, Auth0 provides “a stronger overall moat for the combined company as their authentication service becomes the standard in app development, creating a higher barrier for new entrants.”