There was no relief for stocks in April. The major indices suffered a fourth consecutive week of losses as an abundance of headwinds were compounded by some disappointing earnings results, headlined by a dramatic loss from Amazon.com. The Dow fell 2.5% for the week, the S&P 500 shed 3.3%, while the Nasdaq declined 3.9%.
The major indices were all down for the month, with the tech-heavy Nasdaq leading declines, dropping 8.8% for its worst monthly performance since November 2008. The Dow and the S&P 500 lost 4.9% and 8.8%, respectively, in April. The S&P 500 moved further into correction territory, down 14% from its recent peak, while the Nasdaq and small-cap Russell 2000 fell further into bear markets, down roughly 24% from their highs.
Expectations of an aggressive Fed tightening cycle, persisting inflation concerns, lockdowns in China, rising interest rates, and the recent jump in the U.S. dollar are just some of the concerns that weighed heavily on markets in April and seem likely to continue adding pressure in May.
All eyes will be on the Fed in the coming days, with the May policy meeting set to commence on Tuesday. The central bank is widely expected to raise the Federal Funds Rate by 50 basis points to a range of 75-100 basis points, following a 25 point hike during its previous meeting in March. The Federal Funds Rate is now expected to end the year in a range of 200-225 basis points, 50 points higher than previously anticipated.
This week, several important labor market updates are expected, including the Labor Department’s Nonfarm Payrolls report for April. Consensus estimates call for a gain of 395,000 positions, following an increase of 431,000 in March.
Our team has a few key recommendations on stocks to watch this week as we round the corner into May, including a name that stands out among peers in a defensive corner of the market. We’re also highlighting a particularly attractive company specializing in organic and natural groceries ahead of its earnings call on Wednesday.
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One name to watch ahead of its earnings call this week is provider of organic and natural groceries, Sprouts Farmers Market (SFM). Last quarter the organic supermarket chain reported $0.32 earnings per share, beating analysts’ consensus estimates of $0.31. The company had revenue of $1.49 billion for the quarter, topping analyst estimates of $1.47 billion.
The company is slated to report Q1 results on Wednesday, the 24th, after the bell. On average, equities analysts expect SFM to report $0.72 EPS and $1.65 billion in revenue for the first quarter. It’s worth noting that the company has a history of beating analyst estimates, surpassing EPS expectations in the trailing ten quarters.
Considering the company’s solid cash flow, SFM seems like a bargain at just 14.17 times earnings. This is especially true compared to the natural food products industry, with a P/E of 16.33. Sprouts Farmers Market’s current price to cash flow ratio is 7.67, which looks attractive against the industry average of 10.43.
BofA analyst Robert Ohmes double upgraded Sprouts to Buy from Underperform last week. The analyst sees significant potential for EPS upside and cites compounding food inflation as a supporting factor for the acceleration of food price increases. Bank of America raised its target price on the stock to $40, up from $21, indicating a potential upside of 34% from Friday’s closing price.
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Traditionally one of the most stable and recession-resistant sectors, everyone needs healthcare at some point regardless of income status. A name offering defensive growth from the desirable sector currently is UnitedHealth Group (UNH). As the largest health insurance company by market cap and market share, UNH’s size gives it built-in advantages over peers in the group.
Despite the market slowdown this year, UNH’s share price is up more than 6%, outperforming its peers and the broader market. The Health Care Select Sector SPDR Fund (XLV) is down nearly 1% YTD, while the S&P 500 has shed more than 8%.
UnitedHealth reported double-digit revenue growth for 2021. Full-year revenue was listed at $287.6 billion, up 11.8% year over year. Full-year EPS increased from $16.03 in 2020 to $18.08. The company expects annual 2022 revenue of between $317 and $320 billion, the median of which implies an 11% upside year over year. UNH forecasts 2022 EPS of $20.20 to $20.50.
Momentum should be supported in the coming year thanks to UNH’s strong market position and attractive core business. Its expansion of international business provides substantial diversification benefits and shields against the impact of tightening U.S. regulations while allowing the Dow giant to tap into the $8.3 trillion spent annually on global healthcare.
UnitedHealth has a solid history of rewarding investors with a steady paycheck. The company went to a quarterly dividend in 2010 and, since then, has increased its dividend every year. That includes a 16% bump last year to $1.45 a share, which works out to a yield of 1.10% at its current price. UNH’s payout has increased 31% over the past five years, and the stock has a 5-year annualized dividend growth rate of 17.18%. The stock looks like a value at about 28 times earnings, compared to the healthcare industry, where the average P/E is around 37.
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Amid surging consumer prices and increasing rates, many investors are looking for stocks that offer reliable income to hedge against inflation that continues to weigh heavily on markets. M&T Bank (MTB) has been noted as “one of the biggest potential beneficiaries” of rate hikes, given management’s commitment to reinvest substantially into securities quarterly in 2022.
Shares of the regional bank surged more than 8% last week after the company topped earnings expectations and provided solid guidance. For the quarter, the lending company reported diluted earnings per share of $2.62 on revenue of around $1.45 billion.
“The first-quarter results continue to reflect M&T’s strong credit underwriting as evidenced by historically low charge-offs for the quarter and a stable allowance for credit losses,” CFO Darren King said. “Revenues were in line with expectations and expenses, including the usual seasonal increase in salaries and employee benefits expense, were prudently managed.”
King also said on the call that the bank expects solid loan growth for the remainder of the year and that management anticipates that net interest income (the profit a bank makes on loans, securities, and cash after funding those assets) will rise substantially as the Fed boosts benchmark interest rates.
During the quarter, M&T also received approval from the Federal Reserve to finalize its $8.2 billion purchase of People’s United Financial, a significant deal that propelled the bank to well over $200 billion in assets. With the acquisition now closed, M&T will soon resume share repurchases — the board of directors recently reauthorized an $800 million stock buyback program.
Morgan Stanley analyst Betsy Graseck recently double upgraded M&T Bank to Overweight from Underweight with a price target of $238, up from $179, arguing that rate sensitivity “trumps” credit fears. Baking in three additional rate hikes adds a total of $623M to 2022 net interest income and $3.01 to EPS, said Graseck, who sees M&T being “one of the biggest beneficiaries” of rate hikes given its “large cash pile” and management’s clarification that it intends to reinvest $2B of cash into securities quarterly in 2022. Anyone looking to cut back on risk in the second half of the year will appreciate MTB for its below market beta of 0.8 and a debt/capital ratio of just 18%. The cherry on top for M&T investors is the 2.84% annual yield, backed by a highly sustainable 32% payout ratio.
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