Three Stocks to Watch for the Week of June 13th, 2022

Stocks finished last week with steep losses after the Labor Department released its May consumer price index (CPI) inflation reading. The report, released Friday, showed that May’s annual inflation rate rose to a 40-year-high of 8.6%, above expectations of 8.2%.    

Last week’s decline marks the ninth in the past ten weeks for the S&P 500 and Nasdaq and the tenth in the past eleven weeks for the Dow. The Dow declined 4.6% for the week, the S&P 500 contracted 5.1%, and the Nasdaq retreated 5.6%.

Recession concerns are intensifying on Wall Street ahead of the upcoming FOMC’s two-day policy meeting, which kicks off Tuesday. On Wednesday, investors will be focused on the committee’s critical interest rate decision, when the central bank is expected to raise its benchmark federal funds rate by 50 basis points. Many are questioning the Fed’s ability to execute a soft economic landing as it continues to ramp up aggressiveness in the fight against inflation.  

Though many questions remain unanswered, conditions are favorable for specific stocks. This week our team is recommending three tickers that are appealing for various reasons. Continue reading for all the details.  

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While bank stocks had factored in rate hike benefits to a certain extent, more rate hikes than projected also mean potential for banks to generate higher revenue in 2022. As one of the perennially most rate-sensitive banks out there, Comerica (CMA) is one to watch as the market adapts to a more hawkish Fed.  

Until recently, Comerica’s management had only expected four 25 basis point rate hikes this year. According to its annual filing, a 1% move higher in the federal funds rate would lead to a whopping 12% increase in net income interest over the next twelve months. Considering the implications, the upside potential is undeniable.  

Furthermore, Comerica has high levels of cash right now, which it will earn a lot more yield on as rates go up. With roughly 90% of total loans in various commercial segments, many of its loans also have floating rates that will reprice higher with the federal funds rate.

With a forward 12-month P/E of 10, CMA is still attractively priced. Plus, the conservative 33% payout ratio means the 3% dividend yield isn’t going anywhere anytime soon. 

Baird analyst David George recently upgraded Comerica (CMA) to Neutral from Underperform with a price target of $85. Following the significant underperformance of the shares and a “generally more constructive” pre-provision net revenue outlook for regional banks, the “aggressive short case for regionals is getting tougher to make given current valuations,” George told investors in a research note.  

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Headquartered in Arlington, VA, the AES Corporation (AES) is one of the world’s leading power companies, generating and distributing power in 15 countries. The company’s diverse portfolio of thermal and renewable generation facilities and distribution businesses spans the Americas, Europe, the Middle East, and Asia. The stock has a history of outperforming the market following rate hikes.    

The Fed’s most recent rate hike cycle began in 2015, during a time when inflation had fallen below the central bank’s 2% target, and interest rates were increased from 0.25% to 0.5%. In the six months following the hike, the S&P 500 saw a series of ups and downs but finished the period with a modest 0.3% gain. AES, however, managed to stack on almost 19% during the six months following the most recent rate hike.  

Prior to that, Federal Reserve Chairman Ben Bernanke and his colleagues initiated an unprecedented two-year campaign in June 2004 to keep a lid on inflation following the recession of the early 2000s with a 0.25% hike to 1.25%. Six months after the initial rate hike, the S&P 500 had gained 6.2%, while AES stacked on an impressive 37%.    

Will history repeat this time around? There’s no telling, but the pros on Wall Street seem to see that potential. The stock garners an 83% Buy rating among the analysts offering recommendations. A median 12-month consensus price target of $28 represents a 35% upside from the last price.  

Most recently, Goldman Sachs analyst Insoo Kin initiated coverage of the stock with a Buy rating and a $30 price target citing the company’s potential to take advantage of the material clean energy investment pipeline. The analyst predicts an approximately 8% EPS CAGR through 2025 that she sees as underappreciated at current valuations.  

A quick review of their dividend history should provide inspiration if you need another reason to consider AES. The company has steadily increased its dividend over the past ten years while maintaining a sustainable payout ratio of around 70%. AES raised its dividend 5% in February to $0.158 per share or 2.55%.  

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As one of the leading e-commerce giants in China, Alibaba Group (BABA) has an Amazon-like ingrained foothold among China’s consumers, but it trades at less than 25 times forward earnings, a much better valuation compared to Amazon. 

Over the last few years, the company has transformed itself from being a traditional e-commerce company to a conglomerate with businesses ranging from logistics and food delivery to cloud computing represented by Alibaba.com, Taobao, and Tmall. The company’s businesses account for over half of all online retail sales in China, one of the world’s fastest-growing e-commerce markets. Taobao is one of Alibaba’s most profitable marketplaces, accounting for more than 80% of its sales, thanks to soaring demand for high-quality imported brands in China. The company is well-positioned in the New Retail space, where it aims to bring together digital payments, e-commerce, food delivery, and other parts of the business into one big ecosystem. 

Since its October 2020 peak, BABA’s share price is down more than 65%. The stock garners a solid Buy rating from the Wall Street pros offering recommendations and a median price target of $149.26, representing a 36% increase from Friday’s closing price.

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