For Immediate Release
Chicago, IL – January 3, 2018 – Zacks Equity Research Alphabet Inc. (GOOGL - Free Report) as the Bull of the Day, Sony Corp. (SNE - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on FedEx (FDX - Free Report) and Qualcomm Inc. (QCOM - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Stocks have looked stronger in recent trading sessions, lifting hopes that the worst of December’s selling would not extend into the New Year and encouraging investors who were looking forward to a strong 2019.
If the bottom does indeed hold, it won’t take long for Wall Street to jump on the newly-created bargains formed by market-wide volatility. And one area that is sure to attract bargain hunters is large-cap technology, which was previously one of the market’s hottest segments.
An example of a tech behemoth that looks attractive in the wake of the selloff is Alphabet Inc. The Google parent is sporting a Zacks Rank #1 (Strong Buy), and its shares are trading on the cheap right now.
The foundation of the Zacks Rank are earnings estimates and earnings estimate revisions. When analysts become more optimistic about a company’s earnings outlook, typically that’s a bullish indicator for the stock.
But earnings trends take time to develop, and share prices move up and down every day, so an even better way to capitalize on estimate revisions is when a stock has not yet followed the bullish move in earnings estimates.
What we have here is a divergence between the share price trend and the earnings trend. While Alphabet’s earnings outlook for 2019 and 2020 has moved sharply higher in the past month, the stock is down about 6.5% in that time.
This is a solid indicator for timing when to buy a stock, since share prices and earnings estimates eventually move in the same direction most of the time. We can already start to see this with GOOGL, as the stock found a bottom during the Christmas Eve selloff and is on the move higher.
Luckily though, Alphabet still looks cheap compared to its recent valuation history. This is another advantage to buying on the rebound. As we can see, GOOGL is not only cheaper than its industry’s average earnings multiple, but also below the stock’s average valuation over the past 52 weeks.
If those two indicators weren’t enough, Alphabet also sports impressive growth prospects. The internet behemoth is expected to finish the current fiscal year with EPS growth of 31%. That bottom-line growth is projected to continue to the tune of 13% in the upcoming fiscal year. Analysts are also estimating that Alphabet will see 20% revenue growth in 2019.
Alphabet is the king of internet search, and its core advertising business is firing on all cylinders as the number of connected devices continues to grow. But Alphabet’s growth outlook for the next few years feels more a result of the company’s new initiatives, including its hardware products. The Pixel phone is certainly a powerful device that runs on a familiar platform, while the Google Home is a massively popular automation assistant—just to mention a few things.
The truth here is that Alphabet is among the FAANG stocks that led our relatively smooth bull market for years. December’s volatility stopped just short of ending that bull market, but it’s clear that the extent of its remaining life is uncertain. Nevertheless, we should expect the stocks that have steered the ship for years to serve as a primary signal of that life.
If Alphabet’s recent bottom holds, that’s good news for other tech stocks and the broader market, and that will reinforce the fundamental argument we just laid out here.
Bear of the Day:
Investors are rightfully on the hunt for bargains, as stocks have shown stronger signs in recent trading sessions and some of the market’s most-battered companies welcomed a rebound. With that said, even some of the most beaten down stocks still look like ones to avoid thanks to sluggish trend in earnings estimates.
One such example is FedEx. The shipping giant has lost nearly 30% of its value over the last six months, largely because of a weak earnings report and guidance issuance that was delivered in mid-December.
FedEx posted adjusted earnings of $4.03 per share in the most recent quarter, missing the Zacks Consensus Estimate by two cents. Revenues managed to improve 9.3% from the year-ago period to reach $17.8 billion and beat consensus estimates, but Wall Street was unimpressed with the rest of the story FedEx told.
Namely, FedEx trimmed its earnings per share guidance for fiscal 2019. The company now expects adjusted earnings in the range of $15.50 to $16.60 per share, down significantly from prior guidance of $17.20 to $17.80 in earnings per share.
Another notable piece of FedEx’s outlook was management’s commentary on its Express segment. The company had planned for this unit to reach $1.2 to $1.5 billion in revenue by fiscal 2020, but it now thinks that is unlikely to happen.
FedEx said this weakness is attributable to lower-than-expected express package volume due to sluggishness in the European economy. Overall, the company said that the major segment’s performance is declining, thanks to a global slowdown in trade over the past few months. FedEx Express accounts for a plurality of the company’s total revenue.
Weakness in Europe and other key markets is a real concern for FedEx. This is not only troubling for near-term results, but also long-term growth plans. For instance, FedEx opened a new hub in Shanghai earlier this year in order to boost its presence in China. With trading activity slowing in the Asian economic powerhouse, this initiative is likely off to a slow start.
Sluggish activity comes at a particularly tough time for FedEx, as the company is also shelling out large amounts of cash in an effort to upgrade facilities and integrate a new acquisition, TNT Express. FedEx’s total capital expenditures were up 11% to $5.66 billion in fiscal 2018, and the company has forecast for roughly the same amount of spending this year.
FedEx is also relatively highly leveraged. The company has a long-term debt-to-capitalization ratio of 45.9, which compares unfavorably to the market’s average of 42.9.
Moreover, FedEx is sporting a Zacks Rank #5 (Strong Sell) right now. The foundation of the Zacks Rank are earnings estimates and earnings estimate revisions. When analysts become more optimistic about a company’s earnings outlook, typically that’s a bullish indicator for the stock.
But the opposite is also true, so investors should avoid stocks with slumping EPS estimates. And of course, FedEx has seen a plethora of negative revisions since its earnings outlook and weak guidance. The Zacks Consensus Estimate for its fiscal 2019 is down to $15.90 from $17.34 thanks to 11 negative revisions, and that’s just near the middle of the company’s guidance. If the aforementioned pressures pile on, FedEx could even underperform that muted consensus, which would drag the stock down further.
Unfortunately, investors looking for better options in the transportation business have limited options. In fact, our “Transportation - Air Freight and Cargo” group falls in the bottom 11% of the Zacks Industry Rank, and no stocks in the category have a buy rank.
3 Blue Chip Tech Stocks to Buy Now
Recent volatility has spooked individual and institutional investors alike, but as the dust settles, it is likely that money will find refuge in strong, consistent companies with businesses that can withstand near-term headwinds.
This might mean that the world’s tech leaders, which have dominated Wall Street over the past several years, are now on sale. Tech has been at the helm of our historic bull market, and it seems likely to remain that way, so long as the bull regains its footing.
Of course, this year’s volatility has made some investors hesitant, with bearish traders quick to draw similarities between this latest tech rally and the infamous dot-com bubble of the late 90s and early 2000s.
However, unlike the dot-com bubble, there is real earnings and revenue growth fueling this tech rally. In fact, the average P/E ratio of our “Computer and Technology” sector currently sits at 18.4, which compares favorably to the dot-com era’s average that soared into the 100s for a few weeks.
Another interesting trend in today’s tech rally is that, rather than obsessing over the next big thing, investors seem to rewarding tried-and-true brands for their respectable growth. This means that some of the strongest tech stocks are the household names that consumers already know and love.
With that said, check out these three blue chip tech stocks to buy now:
1. Alphabet Inc.
Google parent Alphabet has found itself with a Zacks Rank #1 (Strong Buy) rating after several months of down trading. The position comes after the internet giant witnessed positive revisions to its earnings estimates. Analysts, on average, now expect Alphabet to record $47.45 in earnings per share in 2019, up from $47.33 a month ago. This would represent EPS growth of 13% from Alphabet’s projected 2018 earnings.
Alphabet shares are down about 18% from their all-time highs and looking cheap compared to recent history. The stock now has a P/E of 24.9, which is a discount to the industry’s average of 26.1. GOOGL also has a PEG ratio of 1.4, so its earnings growth outlook is coming at a decent price as well. Alphabet sports a beta of 0.99, meaning that it is a solid low-volatility option if recent unpredictability picks back up again.
2. Qualcomm Inc.
Qualcomm is one of the world’s largest telecommunications equipment and semiconductor manufacturing companies. QCOM currently sports a Zacks Rank #1 (Strong Buy). One feature of the stock that tech investors looking for stability might like is its dividend. QCOM yields about 4.4% annualized right now, and management has a great track record of adding to the payout every year since 2009.
Chip stocks have been widely battered recently, but QCOM likely holds up better because it offers exposure to different business, including large swaths of untapped growth in 5G. This is one thing that could help the company reach its long-term projected annualized EPS growth rate of 10.9%. Continued earnings growth will, in turn, help Qualcomm improve its balance sheet and offer investors more dividends and buybacks going forward.
3. Sony Corp.
This Japanese electronics giant has a dominant position with many key products, including audio and video equipment, televisions, displays, semiconductors, game consoles, computers and computer peripherals, and telecommunication equipment. Even with recent selling, Sony shares have managed to stay in the green over the past year, and the stock is still reasonably valued. SNE is trading at about 10.7x earnings and has a PEG ratio of 1.1, both of which present discounts to their industry averages.
Meanwhile, management is generating $5.94 in cash per share, which should strengthen the company’s ability to invest in new technologies. Earnings growth is expected to reach nearly 38% this fiscal year, and that should be inspired by revenue growth, as marginal expansion is expected to continue on the top line going forward.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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