Jacob Sonenshine
Stocks bounced back Monday and Tuesday after slumping last week, but three names that haven't popped much actually look attractive.
The S&P 500 is up 1.9% this week, after having entered Monday down more than 5% from a record intraday high. Concerns that had bothered the market are subsiding.
Treasury yields had risen for months, but aren't setting new highs The worry is that higher rates -- and a Federal Reserve that refrains from lowering rates -- will eventually reduce economic and corporate-profit growth. But with yields remaining below peaks, stock prices can stabilize, and rise, from here.
Instead of chasing the market's recent winners, it's better to look for stocks that haven't yet attracted much buying, including shares of some high-quality large companies that have potential for growth ahead.
Netflix has gained in line with the market his week, but is down 7% since earnings last week. Shares of the streamer had risen headed into the report, which was strong. But good news was already baked into the stock price.
The best news is that Netflix did post more growth, which should give the market confidence in the outlook. Analysts expect sales to grow 11% or more annually to about $52 billion by 2027, according to FactSet. While the U.S. business is mature, analysts still forecast high-single-digit percentage growth of new subscribers internationally from this year though 2027, with some areas seeing higher subscription rates. Also Netflix could see advertising revenue grow without eroding healthy subscription growth.
Growth won't necessarily come at a high cost. Netflix won't increase marketing expenses by more than 6% annually, so earnings can grow about 26% annually through 2027.
That growth could lift the stock, which now trades at 29 times forward earnings estimates. The multiple is only 1.1 times expected earnings growth. Essentially, investors are only paying 1.1 price/earnings multiple points for every 1% of earnings growth they receive. The S&P's 500's 20 times multiple is roughly two times expected earnings growth, making Netflix look relatively appealing.
"We want to remain long [in] one of the highest-quality assets in the 'Net [internet] sector," writes Evercore analyst Mark Mahaney, who reiterated his Outperform rating after earnings.
Linde, one of the world's largest makers of chemicals, is down a touch this week.
But the "recent pullback presents a good entry point for [the] defensive leader," writes Mizuho analyst John Roberts, who upgraded Linde stock to Buy from Neutral because the fundamental outlook isn't darkening.
Linde's sales and earnings, to be sure, are somewhat sensitive to global economic demand. The company's fixed contacts offer some measure of stability as they require customers to purchase a minimum volume of chemicals at certain price points for multiyear periods. Price points do fluctuate, but Linde is one of just a few large chemical producers, so it has strong negotiating power. Plus, some of its customers -- those in healthcare, for example -- don't reduce purchases when the global economy suffers.
Linde's sales dropped 15% to $32.9 billion in 2023, but they're expected to grow 4.5% this year, and rise to $36.4 billion next year. Roberts says a better product mix will benefit Linde, and will sell higher-margin products moving forward.
That may not be enough to lift margins, but the company can continue buying back stock, which can help earnings per share grow almost 10% annually for the next two years to almost $17 by 2025. If the stock maintains a forward price/earnings multiple of 28 -- it's usually above the S&P 500 -- Linde shares can trade at about $475 by the end of this year, a 7% gain from the current $445 share price.
Monster Beverage is flat for the week so far. Analysts expect nearly 10% sales growth annually through 2027, when the company can hit $10.3 billion in revenue. Monster, which has seen its energy drinks catch on over the years, can lift prices almost at will. Plus, adoption of these beverages is still growing overseas -- and the company is creating zero-calorie drinks, so that it can participate in an expanding area with Red Bull.
Monster continues investing more in marketing, which means margins aren't likely to expand much. But earnings per share can still grow almost 15% annually through 2027 since the company generates more than enough cash flow every year to buy back stock. In the fourth quarter of 2023, it bought back enough stock to put it on pace for more than $170 million of repurchases annually.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 23, 2024 12:49 ET (16:49 GMT)
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