Now that the third quarter has concluded, it is time to brace for another earnings-reporting season. Much of the recovery has started to slow in the past four to six weeks, and a failure to reach a stimulus package leaves more questions about the recovery than it offers answers. The second full week of September will bring the start of major corporate earnings, and on top of earnings, the investing community and economists will be paying very close attention to forward-looking guidance for how the end of 2020 appears to be looking.
24/7 Wall St. covers many of the top corporate earnings throughout each earnings season. While there is a longstanding guessing and forecasting game about which companies will beat expectations, another effort worthwhile is trying to decide which stocks are set up to have explosive upside if there are any positive surprises. 24/7 Wall St. is not previewing every single earnings report for the Dow Jones industrial average, but we do want to see which of the Dow stocks could most easily see their shares surge after earnings.
Before getting into predictions, the first consideration needs to be that no one will be able to pinpoint consistently every earnings report ahead of time. What is possible ahead of earnings is to decipher which stocks are already priced for perfection, compared with those stocks that have very low expectations heading into earnings. In the latter group, sometimes even less than robust news can be received quite well by investors.
The stock market does of course react to news about past quarters, but the real game in investing is to remember that the stock market is effectively a real money vote about where things will be in the coming quarters. Sometimes it is the worst-performing stocks that offer the biggest upside gains. Other times, the previous winners keep on winning.
We have selected the top two performing Dow stocks, as they are both defensive and have their “forever” appeal to investors. We have then selected seven in which expectations are not overly elevated and where any additional positive views ahead could create sizable upside for their stocks. All consensus analyst price targets and earnings expectations come from Refinitiv.
Can Apple and Salesforce Hold Their Leads?
Apple Inc. (NASDAQ: AAPL) has been the best performing Dow stock, with a gain of 54% year to date. Salesforce.com Inc. (NYSE: CRM) is among the newest Dow stocks, and its gain, after joining the Dow and after its most recent earnings report had its stock up almost 54% so far in 2020. This does not assure that Apple and Salesforce are priced for perfection, but the companies cannot expect shareholders to be very happy if they post bad earnings and have weak guidance.
The good news is that Apple is the biggest company in the world and now has a defensive stock status in the age of COVID-19. Apple has its upcoming iPhone 12 and the coming supercycle, and that likely will be previewed before the company’s earnings report, but it already had its euphoric trading after its last stock split. Some even think Apple should be a stock to own forever.
Salesforce is still up well over 20% from when it was announced as the newest Dow member, and then its earnings beat in August. The company has a much later earnings report due to a different reporting cycle.
Intel Tries to Recoup Its Losses
Intel Corp. (NASDAQ: INTC) was brutally punished after its last earnings report contained a delay in being able to roll out smaller and more advanced chips. With shares back above $52, the stock is acting like it is ready to close the gap from its prior report, when shares fell from above $60. Intel is also valued at only about 10 or 11 times expected earnings, and it still yields close to 2.6%.
With all the focus on Nvidia/ARM and AMD, Intel’s dominance in the computing world is under fire. Still, with over $20 billion of operating income and a strong balance sheet, Intel has every opportunity to recapture some of its losses at a time that its direct peers are priced high enough that they have to keep outperforming expectations over and over.
Intel took on 10 or more downgrades in July when it reported earnings, it has moved to make up some of its lost ground. Its consensus price target of $56.50 signals that any continued demand and any improvement are just not priced into the stock, even if there are zero guarantees that these are to be expected.
IBM Out of the Ginni Bottle
International Business Machines Corp. (NYSE: IBM) now has Arvind Krishna as its CEO and Jim Whitehurst as president. With the combination of Red Hat, IBM is now much more focused on the cloud and other strategic imperatives, while the legacy IT-services business dribbles off. IBM is a stock that has managed to keep disappointing in good times and bad, but the new leadership and the new focus offer a very strong potential win for shareholders.
IBM’s core valuation of about 10 times earnings also should keep even a disappointing earnings report from destroying shareholders. Analysts and investors alike have been burned trying to get behind IBM for the better part of a decade, but the 5.3% dividend yield still has plenty of coverage as IBM looks to press its next wave of growth.
At $123.50 a share, IBM is down about 9% year to date, but it is still up over 20% from the March lows. The $135.19 consensus price target has very low earnings valuations, and independent research firm Argus and Credit Suisse both have set $155 price targets on IBM over the summer. Any good news at all likely would create more upside than downside here.
Microsoft Floating in the Cloud
One tech stock that has performed well in 2020 (though not at the same rate as Apple and Salesforce) is Microsoft Corp. (NASDAQ: MSFT). Satya Nadella and the team there have been on a strong rise since the panic-selling lows of March through the peak at the start of September. Since then, the stock has traded mostly sideways in a range of $200 to $210. This tight band sets Microsoft up for a springboard effect in either direction if the company is muted or excited about earnings and guidance.
Microsoft’s valuation at about 28 times forward earnings is not unreasonable, but it is higher than it used to be. Nadella had led the cloud migration like a champion, with the growth of Azure and Office 365, and there is now the Teams effort that may act as a binding agent keeping its Office 365 clients paying. Microsoft still has robust traditional software sales from the recent explosion of PC demand, and it has the upcoming refresh of the Xbox video game console. The JEDI contract also now looks all but set for Microsoft over Amazon as well.
Microsoft’s consensus target price is close to $230, and multiple analysts are calling for it to go to $250 or even $260.
3M Co. (NYSE: MMM) was still down about 8% year to date, but the stock is now up over 5% from a year ago. Despite strong demand for many of its PPE products due to the pandemic, 3M still has been struggling to get sales growth up in 2020. The stock peaked just above $170 in September before pulling back to $165.
The consensus target price has remained low at $166.93, and very few analysts have been willing to endorse Buy ratings and much higher targets. One firm that did stick its neck out was Credit Suisse, with a $197 price target and an expectation that the coming years would look better than the disappointments from before the pandemic was even here. Jim Cramer also has been talking up 3M and its monthly numbers for a turnaround.
3M is unlikely to maintain its rate of dividend hikes (now with a 3.6% yield to boot) as fast as it had been doing (nearly 200% over the past decade). That said, the stabilization of late seems to bring ample earnings coverage to justify keeping its 62-year streak of dividend hikes (and over 100 years of ongoing dividends) alive. It likely will be a long time before 3M hits an all-time high, but investors will remember that it peaked at $250 at the very start of 2018.
Visa’s Long-Term Legacy
Visa Inc. (NYSE: V) has a history of squeezing out gains over time. The credit card processing player only cares about transactions and has no credit risk like the banks issuing the cards have. Fintech remains a risk as the number of ways to transact business grow, but Visa seems to have escaped much damage from competition.
With card use in travel and dining remaining very weak, Visa’s stock petered out at about $215 per share and has spent a month mostly between $195 and $205. The current $200 share price compares to a $223.64 consensus target, but Mizuho recently suggested that its stock should be worth as much as $250. Visa is not cheap, at more than 30 times earnings, and its 0.6% dividend yield is embarrassingly low for a Dow stock. It pays out less than one-fourth of its adjusted income in dividends.
Any talking up of the holiday season and any talk of travel spending picking up into 2021 could mean that the actual earnings numbers are given a pass entirely.
Walgreens Needs to Prove Its Relevance
Walgreens Boots Alliance Inc. (NYSE: WBA) just never got the memo that the stock market was recovering, that health care was coming back or that it is an essential business. It hasn’t even benefited from joining the Dow, as the index creators would have hoped. Despite bottoming above $40 a share in March before the V-bottom recovery took the stock back above $50, every recovery effort since has failed.
With shares trading close to $37, Walgreen is down an embarrassing 39% year to date, and its dividend yield is now accidentally high at $5.2%. The consensus price target also is barely above $40, and the stock is valued at about eight times expected earnings, despite a small revenue growth expectation. It seems that Walgreens should have recovered with other retail plays, but rival CVS has been weak as well, and there are always risks from the election and from telehealth competing with in-store health services.
The valuations and expectations for Walgreens are so low that any remotely decent news should act to boost the stock. If it continues to disappoint, then it is unlikely Dow investors will care for very long because it could be time to reconsider “just how Dow” this stock really is as the lowest weighting of them all.
Walmart Beyond Low Prices
Walmart Inc. (NYSE: WMT) has seen its shares rise 18% so far in 2020, and the stock is up over 30% since peak selling in March. Walmart has proven that it is an absolutely essential business for America in the pandemic.
Other retailers also have been forced to close, either permanently or temporarily, and Walmart’s omnichannel is making it attractive. With its shares trading at close to $140, and with a high just over $150, Walmart’s $146.09 consensus target price has a lot of room to improve with any continued good news.
Walmart did note previously that it had seen consumer spending start to soften after the enhanced unemployment benefits ran out, but the new valuation of 26 times expected earnings just is not as expensive as it would have been in the past, before it proved its worth. Some analysts see Walmart rising above $150 a share, and even $160.
Before assuming every weak Dow stock comes roaring back, note that history has proven otherwise. Some do keeping back after weakness. Those that cannot recover end up being booted out of the index and sometimes go on to flop, and some even disappear. Here are just some of the more recent and distant companies that have left the Dow: Exxon Mobil, Pfizer, General Electric, Citigroup, U.S. Steel, Eastman Kodak, Sears Roebuck, Navistar, Bethlehem Steel, Alcoa, Hewlett-Packard and Kraft Foods.