The markets have been showing mixed messages lately. A look at the chart shows that the NASDAQ’s rate of climb has been slowing recently, although it remains at record high levels. At the same time, the S&P 500 is holding just over 3,200, putting the index back within 5% of its all-time peak.
At the same time, uncertainty is up. The coronavirus has come back for a ‘second wave,’ prompting shutdown orders once again – although, with the exception of California, the shutdowns are somewhat less extensive than this past spring. The riots in major urban centers continue, along with the related political shenanigans that always precedes the quadrennial elections. And just for kicks, it’s earnings season, too.
From investment bank JPMorgan, strategist Marko Kolanovic has taken a wide-angle look at the big picture. Pointing out that Q2 GDP contracted sharply, Kolanovic adds that earnings are going to be grim this quarter. However, he says, “investors may largely look through the overall weak 2Q performance to focus more on guidance and commentary on intra-quarter trends.”
Kolanovic gets to the heart of the Q2 ambivalence: “US GDP shrank in the second quarter, as expected, due to the COVID-19 pandemic, and market watchers are predicting aggregate earnings to be down 45% year-over-year, in the worst performance since the financial crisis of 2008. But … Q3 is expected to see sharp economic rebound when the coronavirus finally subsides.”
Bearing this in mind, we used TipRanks’ database to take a closer look at three stocks that just received J.P. Morgan’s stamp of approval. What’s more, in addition to receiving a higher rating, the firm sees each surging by at least 30% in the year ahead.
First on the list is AutoNation, a nationwide retailer of new and used cars, parts, and service. The company has over 360 physical locations, as well as a major online presence, and saw $21 billion in revenues last year.
With the social lockdown policies in place, it may seem that a car retailer would have had trouble in 1H20. However, AutoNation benefitted from its online sales – customers could order their vehicle, and only show up at the brick-and-mortar location for pick-up. It’s a sales model that minimized social contact – and was perfect during the COVID-19 crisis. AN reported strongly positive earnings in Q1 and Q2, beating expectations in both quarters. EPS grew sequentially, from Q1’s 91 cents to Q2’s $1.41. Revenue in Q2 was $4.5 billion.
JPM’s Rajat Gupta was impressed by AutoNation’s first-half performance, and upgraded his stance on the stock. Gupta wrote, “We commend AN on its strategy to build an integrated, brand-centric approach to auto retail via a cohesive experience that spreads across multiple automotive segments, including core franchised locations, exclusive used retail dealerships, branded parts & accessories, and digital channels, as well as indirectly via auctions… We also see recent de-leveraging and improving execution as positive.”
In addition to upgrading AN to a Buy, Gupta set a $70 price target, suggesting a 30% upside for the stock. (To watch Gupta’s track record, click here)
Overall, AutoNation has Moderate Buy rating, which is derived from 8 reviews, including 3 Buys, 4 Holds, and 1 Sell. Shares are selling for $54.15, and the average target price of $58.71 indicates room for modest growth of 8%. (See AutoNation stock analysis on TipRanks)
Marathon Oil Corporation (MRO)
Next up is another JPM upgrade. Marathon Oil is spin-off of Marathon Petroleum; it has been separate since 2011. MRO handles exploration and production, focusing both on Texas’ Eagle Ford, New Mexico’s Permian, and North Dakota’s Bakken. These are some of the richest oil formations in North America, and over the past decade have made the US a net exporter of petroleum products.
The corona crisis has been hard on the oil industry, and like its peers, MRO has felt the pain. Lockdowns and slowing economies have reduced demand, creating a supply glut. The April dip of WTI (the US benchmark price for crude oil) into negative territory, even temporarily, was a heavy shock to the industry, and prices have barely recovered. MRO shares are down by more than half form their 2020 peak level. As part of an effort to preserve capital, the company suspended its 3.5% dividend during the first quarter.
But not all was doom & gloom. MRO reported better-than-expected revenues in Q1, even as earnings turned negative. The top line, at $1.23 billion, was also up from the year-ago value of $1.20 billion. MRO reports Q2 results in August; we’ll have to wait until then to see if the company’s efforts at improving capital and liquidity have been successful.
Covering this stock for JPM, analyst Arun Jayaram upgrades from Neutral to Buy, saying, “[We] believe the bear narrative on the stock (downside oil production risk and the lack of perceived inventory depth) is already discounted into the stock. We expect MRO to reiterate its 2020 oil production view of 187 MBo/d (190 MBo/d less 3 MBo/d of 2Q curtailments) and capex below $1.3 billion…”
In line with this outlook, Jayaram set an $8 price target, implying room for a strong 42% upside in the coming year. (To watch Jayaram’s track record, click here.)
Overall, however, Wall Street is not so upbeat on this one. The conventional wisdom gives MRO a Hold; that analyst consensus rating comes from 1 Buy, 10 Holds, and 3 Sells. The average price target is $6.81, however, suggesting an upside of 20% from the current trading price of $5.63. (See MRO stock analysis on TipRanks)
Last on our list, Apache, is another hydrocarbon exploration company. The company got its start in Oklahoma in the 1950s, and today has operations in the Texas Permian Basin, along the Gulf Coast, and offshore in the Gulf of Mexico. Internationally, Apache operates in Egypt’s Western Desert and in the North Sea off the coast of Scotland. Apache saw $6.3 billion in top-line revenue during 2019.
The company took a heavy blow in Q1, however, as quarterly revenues fell 21% year-over-year to $1.28 billion. EPS dropped to a net loss of 13 cents. Looking ahead to Q2, the company expects to show a net loss of 97 cents per share.
One important weight on the oil industry is the Democratic Party’s hostility to hydrocarbon exploration. The Party is committed to a greener economy, and with Joe Biden leading the polls for the November election, investors have to take that into account.
JPM’s Arun Jayaram notes this, when he writes, “[We] believe APA would be a beneficiary if a moratorium on federal acreage occurs given the company’s international footprint in the North Sea and Egypt. One of the underappreciated aspects to the story is the ability of the company to create drillbit value in Egypt post the reprocessing of modern vintage 3-D seismic in new license areas.”
Jayaram upgrades APA, setting a Buy rating on the stock, and his $18 price target indicates confidence in a one-year upside of 32%. (To watch Jayaram’s track record, click here)
Overall, Wall Street’s conventional wisdom just isn’t ready to abandon caution on oil explorers just yet. APA’s Hold consensus rating comes from 18 reviews, breaking down to 5 Buy ratings, 12 Holds, and 1 Sell. The average price target is $15.03, suggesting a 10% upside potential from the current share price of $13.65. (See Apache’s stock-price forecast on TipRanks)