Three Stocks to Watch for the Week of December 13th, 2021

Stocks rebounded last week, as investors processed worries around the current variant of concern, which seems much less severe than originally expected.  On Friday, a late wave of buying solidified the gains, lifting the S&P 500 3.8% for the week to a fresh record close.  The Dow Jones Industrial Average rose 4% for the week, snapping a 4-week losing streak, while the Nasdaq Composite gained 3.6%.   

While Congress reached a deal to raise the debt ceiling and keep the government open, uncertainty around interest rate policy remains.  We may get more clarity on that this week with the release of the December FOMC meeting slated for release on Wednesday.  

Our team has a few recommendations on stocks to watch for the week ahead with the current backdrop in mind.

The Senate has repeatedly challenged it, but economists at Goldman Sachs, Evercore ISI, Morgan Stanley, and J.P. Morgan have written in recent weeks that they believe it’s a matter of time until the Senate passes Biden’s Build Back Better legislation.

If a boom in infrastructure spending is on the horizon, then it’s hard to avoid Caterpillar (CAT), the world’s leading maker of construction and mining equipment.  The company also makes diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.  Caterpillar is a cyclical business that tends to boom and bust to the tune of the broader economy. 

Caterpillar has traded in a range for the past few years, unable to get much traction.  Weakness in emerging markets really took the wind out of the stock’s sails.  Something interesting happened in 2020, however.  Yes, Caterpillar tanked along with the rest of the market in February and March.  But it not only recouped its losses in the rally that followed, it actually broke out of a three-year trading range.

Caterpillar is not purely a play on American infrastructure, of course.  In fact, over half of its sales are now generated outside North America — which has helped its performance throughout the pandemic. Caterpillar continues to expand its manufacturing capabilities and product offerings in China, which is one of its hottest growth regions right now.  The company has a strong global presence and should benefit from a recovery in emerging markets as well.

Even without the infrastructure bill, Caterpillar is forecasting that 2022 will be a year of growth as dealer inventories begin to rise and the company prepares for an upswing in the business cycle. 

With over 25 years of consecutive annual dividend raises, Caterpillar has proved its resilience through difficult market cycles.  Shares of Caterpillar have cooled down considerably as Wall Street buckles in for what could be record revenue and earnings in the coming years.  Caterpillar’s stock is one to watch with a 1.9% dividend yield and plenty of growth prospects. 

One of the biggest threats to corporate America is ransomware. The growing possibility of losing access to essential or confidential digital property is a nightmarish scenario for executives as the financial consequences can be enormous.  

Bank of America Corporation (BAC) provides banking and financial products and services for individual consumers, institutional investors, large corporations, and governments worldwide. It operates through the following segments: consumer banking; global wealth & investment management; global banking; and global market segments.

Thanks to its global investment banking and financial services portfolio, most are familiar with this financial titan.  In the U.S., BAC currently operates via 4,300 retail financial centers, 17,000 ATMs, and digitally serves 41 million active users. Furthermore, the company is also present in 34 other countries across the globe.

After more than doubling since its pandemic-era low, let’s take a look at the factors that could boost BAC going forward.  For one thing, the Fed has signaled two interest rate hikes, and they could both come next year, which should help BAC increase its interest income down the road.  According to Globe Newswire, zooming in a little closer, the global financial services market is expected to grow at a 9.9% CAGR to hit $22.5 trillion this year.    

Furthermore, BAC’s shift in focus towards the digital space seems to be benefiting the company.  Earlier this month, BAC reported that its Bank of America app facilitates 85% of deposit transactions on its network now.  This accounts for nearly 48 million checks that BAC customers deposited in the second quarter.

Jim Cramer recently cited Bank of America as one of the potential beneficiaries of rising rates.  He thinks that BAC will “make a killing if the Federal Reserve is forced to tighten.”

Consider BAC’s uninterrupted 21-year history of rewarding investors through dividends if you need another reason.  The company recently raised its quarterly dividend to $0.21 per share, up 16.7% from the previous quarter. 

Palo Alto Network Inc. (PANW) has been helping customers stay ahead of quickly evolving cybersecurity threats for more than a decade.  For nine years straight, the company has been named as a market leader in network firewalls by leading research and advisory company, Gartner.  In fact, it achieved the highest position for ability to execute and the furthest position for completeness of vision in Gartner’s Magic Quadrant for Network Firewalls for 2020. Still, they haven’t been letting the recognition go to their head.  Over the past few years, Palo Alto has been aggressively expanding its portfolio with big investments and acquisitions.    

Most recently, their groundbreaking acquisition of Bridgecrew, a developer-first cloud security company, enabled Palo Alto’s Prisma Cloud to become the first cloud security platform to deliver security across the full lifecycle of an application, from the building stage to deployment to run.  This is the most recent in a string of additions to its portfolio of NGS (next-generation security) services.

In fiscal 2021, which ended this July, Palo Alto’s NGS services generated $1.18 billion in annual recurring revenue (ARR), representing roughly 28% of its top line and surpassing its prior ARR guidance of $1.15 billion.  That segment’s accelerating growth complemented the stable growth of its on-site appliances and services, and its total revenue increased 25% for the full year. 

Palo Alto serves more than 85,000 customers today, compared to about 9,000 customers nine years ago. It expects its revenue to rise 24%-25% in fiscal 2022, and its stock trades at about nine times that forecast. 

Several analysts lifted their price targets after PANW’s impressive analyst day in September.  The 33 analysts offering a 12-month price forecast have a median target of $550, representing a 10.5% increase from the last price.  The consensus among 37 analysts offering recommendations for the stock is to Buy PANW.  There are currently 32 Buy ratings, 4 Hold ratings, and 1 Sell rating.  

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