The major indices continued their descent last week, driven by recession concerns after the Federal Reserve raised its benchmark federal funds rate by 75 basis points. On Monday, the S&P 500 joined the Nasdaq in bear market territory after a 3.9% sell-off drove the index to a price 20% below its January 3rd high. The Dow closed the week just shy of a bear market,18.7% below its record set in January. The Dow and Nasdaq declined 4.8% for the week, while the S&P 500 contracted 5.8%. Declines were led by cyclical stocks and growth stocks, mainly in the travel industry and the technology sector.
In the holiday-shortened week ahead, market watchers will be looking for more clues on the housing market, with new and existing homes data for May slated for release. We can also expect the University of Michigan’s June reading of the Consumer Sentiment Index (MSCI). The preliminary reading, released last week, showed consumer sentiment falling to a record low. Markets will be closed Monday for the Juneteenth holiday.
With the current conditions in mind, our team has a few recommendations of stocks to watch this week, including a steadily growing biopharma company that seems ripe for expansion for years to come. We’ll also be discussing one of the most rate-sensitive names from the financial sector and a mid-cap tech firm that should appeal to our long-term-minded readers.
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Vertex Pharmaceuticals (VRTX) is the undisputed leader in cystic fibrosis therapies. The company’s portfolio of approved CF drugs will deliver at least an estimated $8.4 billion this year, made possible by an intense level of market penetration and decades-long devotion to research and development in the space.
So far, the company hasn’t had trouble convincing regulators that its products are effective and safe for wider and wider populations of patients. It has also remained strongly profitable and continued to expand revenue within the CF market at a steady pace.
Suppose management’s plans for expanded approvals for younger cohorts continue to come to fruition over the next few years. In that case, Vertex will eventually be treating as many as 90% of all people with CF. That means investors can look forward to a steadily increasing flow of new revenue and expanded approvals, both of which should support the stock’s price significantly.
Furthermore, the company is moving its pipeline beyond CF with a handful of mid-stage clinical programs for pain relief, kidney disease, and hematologic genetic disorders like sickle cell disease. In other words, even if it eventually corners the entire CF therapy market, there will still be other growth opportunities.
Of 26 analysts offering recommendations for VRTX, 18 give the stocks a Buy rating, and 8 rate it a Hold. There are no Sell ratings. A median price target of $289.50 represents an increase of 7.42% from Friday’s closing price. It seems likely that Vertex will reward patient investors as the steadily growing biopharma company seems ripe for expansion for years to come.
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DXC Technology Co. (DXC) Technology provides information technology services and products. DXC targets IT modernization, including both on-premises and cloud services, as well as data-driven operations and workplace modernization. The company serves 6,000 customers across the private and public sectors globally.
For its fourth quarter of 2022, which ended March 31st, DXC Technology reported $4 billion in revenue, down 8.6% year-over-year and just shy of the $4.1 billion Wall Street was expecting. The company reported $0.84 earnings per share for the quarter, missing the consensus estimate of $0.99 by 15%.
In the days following the May 25th call, Investors snapped up shares, overlooking the lackluster quarter and focusing on the bigger picture for the mid-cap tech firm. Most analyst firms maintained their positive view of DXC, and the consensus price target of $38.50 per share remains well above the current price.
Credit CEO Mike Salvino, who joined the company from Accenture in September 2019 for the positive move higher. The company’s top executive has made progress on DXC’s operating issues, setting the company for a robust fundamental rebound over the next year and beyond. Salvino has replaced about 75% of the senior management team, many from Accenture.
Further to his credit, Salvino also successfully convinced investors that DXC’s transformation — which includes a plan to shrink its total revenue while at the same time de-risking its balance sheet — is still on track. The term “better place” was used nine times during the call about the company’s self-imposed overhaul.
DXC shares had fallen 18% from August’s high as of Friday’s close, leaving them priced at only around seven times this year’s projected earnings. Short-term, prolonged market weakness could continue to weigh heavily on the stock, but those with a longer-term outlook will likely appreciate a deeper pull-back as an opportunity to get in at a better price.
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While bank stocks had factored in Fed rate hike benefits to a certain extent, more rate hikes than projected also mean the 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 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 15, CMA is still attractively priced. Plus, the conservative 33% payout ratio means the 3% dividend yield isn’t going anywhere anytime soon.
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