Three Stocks to Watch for the Week of July 11th, 2022

Equities finished last week on a positive note, and Treasury yield rates rose after the release of the Labor Department’s employment report for June revealed unexpected strength in the labor market. Nonfarm payrolls increased 372,000 last month, surpassing expectations of 250,000 additional jobs. Recession concerns intensified as evidence of accelerated jobs growth could fuel the Federal Reserve’s aggressiveness during the July 26-27 policy meeting.

For the week, the Dow rose 0.8%, the S&P 500 gained 1.9%, and the Nasdaq added 4.6%.   The yield on the 10-year U.S. Treasury note dropped below that of the 2-year note, leading to an inversion of the yield curve that lasted into Friday’s close, with the 10-year Treasury note yielding 3.09% while the 2-year note yielded 3.11%.

Earnings season kicks off this week, with big banks set to report second-quarter results. JPMorgan Chase, Morgan Stanley, and First Republic Bank will report on Thursday, followed by Wells Fargo, BlackRock, Citigroup, U.S. Bancorp, BNY Mellon, and PNC Bank on Friday. Relative to recent quarters, Q2 expectations are low.   Analysts recently surveyed by FactSet were expecting companies in the S&P 500 to post earnings increases averaging 4.3% compared with the same period a year earlier. In the first quarter, the year-over-year growth rate was 9.0%. 

Wall Street will also be focused on inflation data this week with the release of the latest update to the Consumer Price Index (CPI) on Wednesday, followed by the Producer Price Index (PPI) reading on Thursday. Our team has three recommendations for the week ahead, including one company with a reputation for stability and rewarding investors, as well as a more speculative name that’s beginning to gain attention as investors start to search for diamonds in the beaten-down tech sector.  

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As investors look for ways to improve their risk-return profiles, many seek stability and companies with a reputation for rewarding investors with regular payouts. Real Estate Investment Trusts (REITs), one of last year’s top-performing sectors, are popular among investors due to the booming real estate market, dividend advantages, and portfolio diversification. Commercial real estate is the third-largest asset class in the U.S., and REITs may provide a diverse mix of real estate assets and long-term total returns comparable to other stocks.

When rates rise, investors often forsake high-dividend-paying equities in favor of bonds, which offer a similar return but pose less risk and volatility. According to recent statistics, REITs have one of the lowest average risks, illustrating the performance of various asset classes following rate rises across three periods. REITs did well throughout both high and low inflation eras. This implies they’re less vulnerable to prediction risk or the chance that investors accurately forecast periods of high inflation.

Life Storage, Inc. (LSI) is a self-storage REIT that invests in, owns, and manages self-storage facilities. It provides services for business, automobile, and wine storage. With over 1,000 sites in the United States and Canada, LSI owes to e-commerce driving warehouse demand and the requirement for product storage and the tech industry’s servers. Occupancy and rental rates have remained high due to supply chain concerns, giving LSI an advantage over other REITs.

LSI has the kind of robust financials we all look for in a stock. They have an impressive earnings report history, most recently beating quarterly EPS projections by 6.83% and revenue expectations by 4.78%. LSI shows very healthy year-over-year numbers, with notable revenue growth of 33.03% and EPS growth of 56.14%. Until reporting again, the company offers $230 million in sales at 90 cents per share. LSI currently has a dividend yield of 3.48%, with a nice annual cash payout of $4.00 per share.

LSI has a consensus price target of 132.00, implying an increase of 16% over current pricing and a sturdy Buy rating.

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Multi-national healthcare and managed care provider Centene Corporation (CNC) has been a beneficiary of the latest uptick in healthcare and seems ready to build on that strength amid a market being rocked by fears of recession. 

Over the past four quarters, earnings increased an average of 21%, and revenue increased an average of 15%. Centene beat first-quarter predictions, with revenue rising 24% year over year. Analysts predict that CNC earnings per share will increase by 8% in 2022. Profits are seen ramping up, with 9% growth seen this year and growth of 13% expected in 2023.

Centene recently increased its 2022 full-year guidance, citing increased Medicaid premium revenue and “favorable” performance so far in the second quarter. For 2022, the company increased its Premium and Service Revenues guidance range by $2.0 billion to a new range of $134.3 billion to $136.3 billion and has increased its Adjusted Diluted EPS guidance range by $0.15 to a new range of $5.55 to $5.70.

Funds and other institutional investors are key backers of the stock, with 67% of shares currently held by big money. As of March, 2,269 funds owned CNC shares, an increase of 124 since December, according to MarketSmith.

As the leader in managed care, Centene provides high-quality, affordable products to nearly 1 in 15 Individuals across the nation, mainly through government-sponsored healthcare programs. The $100-billion plus enterprise ranked No. 24 on the 2021 Fortune 500. The pros covering CNC give it a solid Buy rating and a median price target of 96%, representing a 12% increase from Friday’s closing price.  

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Israel-based Nice Ltd. (NICE) is a provider of enterprise software with more than 27,000 customers (including 85% of the Fortune 100) from 150 countries. Its operating segments consist of Customer Interactions Solutions and Financial Crime & Compliance Solutions. Over the past year, the company generated $2.0 billion in revenue, and approximately $1.1 billion was cloud-based revenue. Over the past three years, the company’s revenue grew 22.3%, from $1.57 billion in 2019 to $1.92 billion in 2021.   In terms of profits, its operating profit rose 10.6% to $263.9 million from $238.7 million a year earlier.   

Building on the stellar growth, the company reiterated its ambitious targets when it unveiled its NICE3D strategic plan during its recent investor’s day event. The company outlined its updated financial goals through fiscal 2026, headlined by 30%+ operating margins and double-digit revenue growth. Nice currently trades at 6.74x sales, considerably less than its main competitor Five9  at 10.03x.

The current consensus among 12 polled analysts is to Buy NICE. A median price target of $265 represents an increase of 29% from Friday’s closing price.

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