Today’s news:
• Guess? (GES) rises 8% on bullish research recommendation.
• Tyson Foods (TSN) – China is ready to buy U.S. poultry.
• Citigroup (C) – a brief comparison of 5 bank stocks.
A brief portion of an investment firm’s commentary on apparel retailer Guess? (GES – yield 2.1%) made the news yesterday, sending the stock up over 8%. MarketWatch reported:
Guess shares rise after upgrade on management’s new efficiency focus
Guess Inc. shares rose 4% in Tuesday premarket trading after the apparel retailer was upgraded to outperform from market perform at Cowen based on management’s new focus on efficiency rather than store growth. Cowen’s new price target is $26, up from $19. Calling the stock “misunderstood and not appreciated,” analysts say Guess is striving for better margins and free cash flow. Guess has more than 1,700 stores, but its profitability declined between 2012 and 2017 in order to reach that number.
GES is a greatly undervalued, aggressive growth, small-cap stock. Profits grew 40% last year, and are expected to grow 39% and 20% this year and next year. Show me another retail apparel company with similar profit growth!
The high point on the share price during the last two years was 24 in April 2018. It’s unlikely that GES will surpass 24 without first resting for several months, so if you’re a trader, 24 is your price target. But even then, the P/E will only be about 14.7, so if you want to hold the stock longer-term, you won’t have to worry about it being overvalued. Strong Buy.
Here’s an excerpt from a December 16 Reuters article on Tyson Foods (TSN – yield 1.9%):
Tyson Foods cleared to ship poultry to China from all U.S. plants
“Tyson Foods Inc received approval from U.S. and Chinese authorities to export American poultry to China from all 36 of its U.S. processing plants and expects to begin taking orders early next year, a chief supply chain officer for the company said.”
“U.S. chicken companies are eager to resume sales in China after Beijing last month lifted a nearly five-year ban on imports as Chinese consumers seek pork alternatives. A deadly hog disease has killed millions of pigs and raised meat prices in the pork-loving country.”
[It’s worth noting that African Swine Fever has killed over 300 million hogs in China, not merely “millions,” as cited in the article.]
In yesterday’s weekly update, I coincidentally wrote, “Please keep in mind that potential increases in meat purchases from China, which are currently making news headlines, are not factored into Wall Street’s revenue and profit projections for Tyson.” (I hadn’t seen the aforementioned Reuters article until after I sent my weekly update to my editors at Cabot.)
There’s a strong likelihood that Tyson will end up selling more meat products next year than previously expected. That means Wall Street analysts will update their research reports with increased revenue and profit projections, and send those new reports to their institutional clients – the folks who buy large amounts of stock.
Tyson is already projected to grow earnings 24% in 2020, so any increase in profits is just icing on the cake. TSN rose to a new all-time high of 93 in August 2019, pulled back briefly, and is now rising. I would expect the stock to surpass 93 and begin a new run-up soon. Caveat: If African Swine Fever comes to the U.S., I will immediately recommend that investors sell the stock. If you can handle that risk, buy TSN now. Strong Buy.
One of my subscribers questioned me about bank stocks yesterday. I thought it might be worthwhile to reprint that Q&A for you today, because the research I did into the various bank stocks really reiterated to me that I find Citigroup (C – yield 2.6%), featured in our Growth & Income Portfolio, to be the superior investment.
Question: What are your thoughts on bank stocks—GS, HSBC, WFC, JPM?
Answer: Presuming that you’re interested in buying one or more of these bank stocks, the one with the best price chart is Wells Fargo (WFC). The chart is very bullish, appearing as if the stock will immediately begin a run-up.
From an earnings growth point of view, the most attractive selection is Goldman Sachs Group (GS). HSBC Holdings PLC (HSBC) has only one analyst covering the stock, so I wouldn’t consider that one. Wells Fargo (WFC) is projected to see earnings fall a bit in 2020, and JPMorgan Chase’s (JPM) earnings are projected to barely increase in 2020.
So basically, if I wanted to buy a stock to catch a near-term run-up, I’d go with WFC; and if I wanted to buy one of those four for quality earnings growth, I’d go with GS.
All that being said, I still like Citigroup (C) better than GS, and the price chart is also bullish – the run-up has begun.
Banks, and other companies that loan money to businesses and consumers, tend to profit when an economy is thriving and/or when interest rates are rising. During strong economic times, people and businesses have more cash flow, so they’re more likely to be approved for loans while also feeling confident (or courageous) enough to repay the loans on time. And when interest rates rise, companies that loan money are able to increase their profit margins on the loan transactions.
As for Citigroup, it’s got the best 2020 earnings growth projection of the aforementioned banks, but not quite strong enough growth for me to give it a Strong Buy recommendation. Barring unexpected bad news or a sudden downturn in the broader market, I think the stock will continue rising immediately. Buy C now. Buy.