Three Stocks to Watch for the Week of January 31st, 2022

Amid last week’s elevated volatility, stocks managed to erase losses on Friday and finish with weekly gains.  The S&P 500 and the Dow notched 0.8% and 1.3% higher, respectively, while the Nasdaq finished the week flat.  Despite Friday’s jump, the three major indices have a ways to go to recoup 2022 losses.  So far this year, the Dow is down 4.4%, the S&P 500 has lost 6.9% and the tech-heavy Nasdaq is 13% lower. 

“Investors are trying to adjust to the impact of this higher rate cycle,” said Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey.  “For some of them, stocks still remain more attractive than bonds in a rising rate environment, and they have been fishing around for where a bottom might be.”

This week market watchers can look forward to earnings results from some of the biggest names in e-commerce and tech.  We’ll hear from Amazon (AMZN), Alphabet (GOOG), PayPal (PYPL), Meta Platforms (FB), Snap (SNAP), and more.  We’ll also get updates on employment with ADP’s January employment report out on Wednesday and the Labor Department’s nonfarm payrolls for January slated for release Friday.

Our team has a few recommendations of tickers to watch in the week ahead, including a recent IPO that’s been dragged down drastically amid the tech slide, offering a dreamy entry.  We’ll also investigate one area of the market that seems ripe with bargains that are ready to be pounced on. 

“While large and mid-caps trade at a 35%-40% premium to history, small caps now trade in-line with history,” said Jill Carey Hall, equity and quant strategist for BofA Securities.  “In addition to being the least expensive, they are also a better diversifier. … While asset class returns have grown more correlated vs. 20 years ago, the [small-cap] Russell 2000 is less correlated with other asset class returns on average than the Russell MidCap or S&P 500 both over the last three years and the last few decades.”

Bargain hunters would do well to expand their search to small and mid-cap investments, which seem much more appealing right now than their large-cap counterparts.  This week we’ve got a recommendation that allows investors to cast a wide net over small-cap value names.  

The Pacer US Small Cap Cash Cows 100 ETF (CALF) provides access to U.S. small-caps with an unexpected twist. The fund uses free cash flow as its primary metric for selecting holdings.   Quarterly, the fund selects the top 100 S&P SmallCap 600 stocks based on their trailing 12-month free cash flow yield, then weights them by the metric (up to 2%).

CALF is outperforming its small-cap peers on a year-over-year basis.  Over the past twelve months, the MSCI USA Small Cap Index has ticked 0.15% lower while CALF has risen nearly 15%.

We like this value play because, generally, high cash flows indicate that a company has a healthy business and can afford to invest in new opportunities.   So there is a high likelihood for growth within the basket of names. The fund currently earns a full five stars from Morningstar, and independent research firm CFRA lists it among the highest-scoring small-cap equity ETFs it covers.

With nearly $670 million in assets under management, the small-cap fund is no small potato—the fund yields 0.60%.  A low expense ratio of just 0.59% makes this one of 2022’s more appealing ETFs for those seeking value amid small-cap names.  

As the market assimilates the central bank’s plan for the upcoming rate-hike cycle, it could be time to start looking for gems among the beaten-down growth names.  Next on our list is a recent IPO caught up in the tech sell-off.

 Despite a solid balance sheet and a phenomenal growth trend, TaskUs Inc. (TASK) has suffered substantial losses over the past few months, creating a buying opportunity for investors looking to add high growth names. 

TaskUs is an outsourcing company that handles content moderation for notable names like Facebook (META) and Uber (UBER).  The company’s principal operations are in the Philippines, with about 19,000 employees located there and about 4,000 located in the United States.  

In essence, TaskUs enables and supports the expansion of other high-growth businesses.  According to CEO Bryce Maddock, the company most commonly serves companies that “realize their growth is going to be so aggressive that they can no longer do it all themselves.”  TASK’s customers include Doordash (DASH), Coinbase (COIN), Netflix (NFLX), Zoom (ZM), and Autodesk (ADSK).  Due to its competitive business model, TASK is well-positioned for exposure to the growing digital economy.  

Despite solid performance following their June IPO, TASK’s share price has suffered due to the recent broader market rotation out of growth names.  TASK saw year-over-year organic revenue growth of over 64% in the third quarter, accelerating from 57% last quarter.  Plus, adjusted EBITDA margins were consistent with last quarter at around 24%.  Management also increased its full-year 2021 revenue forecast from $705 – $709 million to $747 – $751 million, representing a year-over-year growth rate of around 57%.  Nevertheless, TASK’s price is down 46% since hitting its September 23rd high of $85.49, creating a possible buying opportunity for those looking for growth potential at a bargain price.

The stock is beginning to get attention from the analyst community.  Currently, all eight analysts offering recommendations rate the stock a Buy, with more joining the camp as TASK’s story unfolds.  Most recently, Goldman Sachs’ Brian Essex initiated coverage with a Buy rating and a $77 price target, stating that he expects strong growth and margins for TaskUs this year.  

If TaskUs management keeps the business on its well-established course, investors could see excellent rewards in the not too distant future.  The pros on Wall Street see TASK making its way back to the $70s before the years end.  The 7 analysts offering a 12-month price forecast for the stock have a median target of $71, representing a 48% increase from the last price.  

“The fundamental story for utilities has improved over the last few years. Hundreds of billions of dollars of investment will be needed to achieve carbon reduction goals,” says Jay Rhame, chief executive officer at Reaves Asset Management. “For utilities, this is a major opportunity, whether investing in wind and solar generation or the infrastructure needed to support intermittent power resources and electric vehicle charging. A utility investor may expect consistent earnings and dividend growth over the long term as a result.”

Last up is Exelon (EXC), utilities giant and prospective 2022 winner.  With a market cap of $52 billion, EXC is one of the top five publicly traded utility stocks in the U.S. 

EXC touches roughly 10 million customers across the U.S. through an extensive network of power plants ranging from fossil fuel facilities to hydroelectric dams.  The unmatched scale of Exelon’s reach provides a solid foundation for EXC shares.  In fact, shares are up more than 36% over the past twelve months to outperform the border S&P which is up 17% for the same period. 

Exelon investors will likely benefit when the company breaks from one of its previous acquisitions, Pepco Holdings.  Management has come to realize that the operation is actually pretty unwieldy in its current makeup and recently announced plans to separate into two companies in 2022 by spinning off customer-facing energy businesses.  Wall Street looks rather encouraged by the commitment to focus the utility business under the Exelon name and split out other operations.  Plus, taking a stake now will give you a piece of both operations when they part ways.

EXC boasts a healthy, 2.9% dividend yield that’s backed up by a conservative payout ratio in the 65-75% range over the past five years.  The stock also garners a Buy rating from the Wall Street pros offering recommendations, along with a median 12-month price target of $63, which represents a 10% increase from the current price.  

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