The Best Stock Picks For July
Earnings season is around the corner, and now is the best time to capitalise
It’s earning season once again at Wall Street, meaning stocks are going to make some of the biggest movements this quarter based on the performance results. July is also a defining moment as it marks the first full quarter since the pandemic escalated by forcing complete lockdowns across countries around the world. Major states in the US also went into varying degrees of lockdowns, shutting down factories, increased massive levels of unemployment, and curtailed consumer spending overnight. Central banks including the US Federal Reserve have had to step in multiple times to rebalance the declining economy.
Before picking up your stock portfolio this month, you need to understand the significance of what is currently happening not just in Wall Street but the Main Streets around the world. However, feel free to skip the story directly to the stock picks.
The Unprecedented Backdrop
While the pandemic has ravaged all national economies, there has been significant (and anxious) interest on its toll on the US economy. Developments in the US immediately have substantial implication for the rest of world, simply owing to the size and significance of the American economy — as it accounts for 25% of the global GDP, 35% of the world’s stock market capitalisation, one-tenth of the global trade flows, and one-fifth of the global energy consumption (source: World Bank). The US is equally interested and invested in the larger global economy — with American multinationals operating widely and prominently across the world. The US also imports one-sixth of its consumer goods, including automobiles, data processing machines, and drugs. It has deep-rooted ties to China (which accounts for two-thirds of US manufacturing imports), the EU, Mexico, and Canada. With the US economy propelled by consumer spending, naturally, the lockdowns and mini recessions in the US and elsewhere, have a direct impact on the performance figures of companies.
In response to the developments, the Fed Reserve cut interest rates to near zero in March when the pandemic reached the US shores, and the central bank has since purchased more than $2tn in treasury and mortgage securities to include liquidity ensure smooth market functioning. The Fed also predicts the US economy will shrink by 6.5% this year, announcing it would keep interest rates close to zero into 2022. It expects the US economy to rebound to growth in 2021, with unemployment falling to 9.3% and GDP increasing 5%, followed by 3.5% growth in 2022. This has been the story of this quarter.
Read the testimony by Fed Chair Jerome H. Powell on the impact of Covid before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. here
Understanding the impact on the wider US economy and the new nature of normal, here are the top stock picks for July as the earning season looms:
Tesla (TSLA): Nasdaq
Stock Value (02 July): $1,208.66
Quarter Results: 22 July 2020
Summary: Tesla’s shares have had a phenomenal run so far this year, rising a mammoth 189%, with 26% last week alone after the company topped its sales expectations for the second quarter by a mile. The company announced that it had delivered 90,650 vehicles in the second quarter, ahead of the 72,000 deliveries that analysts surveyed by FactSet had been predicting. While its main factory in Fremont was shut down for much of the quarter, the company also announced it has successfully ramped production back to prior levels. All these developments propelled the stock to new highs of 1,228.00, overhauling Toyota as the world’s most valuable automotive company.
With its unprecedented levels of innovation in Electric Vehicles (EV) technology, Tesla has emerged as a formidable auto company that has backed most gasoline-based auto companies into a corner and seems on course to deliver its promise of making EVs as cheap as conventional cars.
For a full list of what makes Tesla an innovative company unlike no other, read:
The company also has promising inroads into perfecting battery technology and is currently building a so-called “million-mile” battery lasting up to 16 years, which will significantly reduce its car prices to make it more competitive. Solid demand from the Chinese consumer market is also boosting investor sentiment.
Key News: Analysts at the stockbroker Jefferies said the coronavirus pandemic could accelerate the speed at which the world adopts cleaner fuels. “We see Covid-19 as an accelerator of the transition to EVs and renewables, from consumers and public policy,” the company said. “Tesla remains significantly ahead of peers in product range, capacity, and technology.”
Wedbush analyst Dan Ives predicts this to tick over further into the stock market, making the case that the stock still could surge another 66% over the next 12 months to hit $2,000.
Key Risk: The stock price predictions are a massive bull case, meaning all things would have to go perfectly well for the company across the world for this result. The continued rise of COVID-19 cases in the US is a significant threat, as the country has now reached a second peak. Secondly, according to data from Refinitiv, only nine of the 33 analysts who cover Tesla have a “buy” rating on the stock. The Tesla bears point out that the company has yet to prove it can be consistently profitable, which is the main reason the stock is not in the S&P 500 yet — despite its huge market value.
Bottom Line: With the earnings call in three weeks, there is a strong case for “Buy”, as the company is expected to deliver solid financials.
Additional reading materials:
Amazon (AMZN): Nasdaq
Stock Value (02 July): $2,890.30
Quarter Results: 23 July 2020
Summary: Contrary to initial expectations, Amazon has proved to be the true savior during the pandemic lockdowns around the world, as most consumers moved online for necessities. The pandemic has shown the online retail is a structural winner, and Amazon is by far the market leader globally. The company appears to have been tailor-built for weathering such a scenario as its ecosystem delivers most consumer needs in a single platform shopping including next day delivery, entertainment including e-books, audiobooks and songs, and cloud computing platforms. This suite of services, along with its robust subscription models, has truly made Amazon a monolith unlike no other.
The company is also a true innovator with a proven history of transformation unlike no other. This is evidenced by its successful foray into web services, consumer electronic products, and entertainment productions that have delivered remarkable profits. Today, Amazon Web Services represents 43% of the company’s revenue and is reported to have operating margins of 19%!
Key News: According to investment bank Needham, Amazon could continue to trade at all-time highs for years to come and eventually hit $5,000 a share, representing 90% upside from current levels. In a note published on the 17th of June, the firm said that Amazon has several “hidden value multipliers that suggest it is worth between $4,500 and $5,000 per share.” Needham thinks Amazon’s addition of media assets like video, Twitch, and music to the Amazon Prime bundle “lowers churn, keeps users in the Amazon ecosystem for an extra 3 years, and increases the lifetime value by $3,437 per user.”
RBC Capital Markets on Sunday updated its Amazon price target to $3,300 after its annual US online shopping survey, which again showed Amazon’s dominance in the industry. “COVID-specific results clearly support the idea that Online Retail is a Structural Winner from the COVID Crisis,” wrote a group of analysts led by Mark Mahaney. “And AMZN-specific results clearly support the idea that AMZN is likely the best global playoff of Online Retail.”
Key Risk: Customer satisfaction has been taking a dent recently at Amazon, as per the survey by RBC. In 2020, 64% of Amazon customers describe themselves as “extremely” or “very satisfied,” down from 73% a year earlier. At the same time, a record-high 11% of customers said they are “slightly” or “not at all” satisfied, according to the note. While the results are positive overall, there seem to be growing frustrations in the consumer base which Amazon would have to address immediately or risk losing out to newer entrants in the business.
Bottom Line: With millions of stores closed during the lockdowns globally, amazon appears to have capitalised the online delivery demand and looks set to deliver strong results at its earnings call. The company also announced it is giving away more than $500 million in bonuses for employees who worked the month of June. All these developments appear to be very good signs, making it a must “Buy” well before the earnings call.
Additional reading materials:
Apple (AAPL): Nasdaq
Stock Value (02 July): $364.11
Quarter Results: 30 July 2020
Summary: The greatest American enterprise ever continues to chug along delivering spectacular stock market performances, even during the COVID-19 pandemic despite being massively reliant on consumer spending. While the company grew 21.23% overall this year so far, it has had an astronomical rise of 62.28% between 23rd March and 2nd July, adding $600 billion to its valuation — roughly the combined market caps of Netflix, Tesla, and Adobe.
One of the strongest points for apple remains its history of innovation and rising to the challenge. While phone production numbers and in-store demand may have dropped, the company’s 5G upgrade cycle, foray into production and streaming, and demand for wearables are strong catalysts. With its subscription model and now a credit card, the company has a strong consumer attachment that goes beyond the new phone buying cycle.
The company has been quick to understand the power of interconnectivity within its ecosystem, making it harder for users to step out of the apple family. If your iPhone, iPad, and Mac can be in an effectively interchangeable loop, and you add a watch and AirPods to mix, it’s a pretty solid ecosystem. Expand it further to include other critical tasks such as the ability to operate your iPhone as a digital key to your car, you are hooked to the new ease of life, making it difficult for you to replace your Apple phone with anything else when the time comes. This is one of the ingenious technologies the company announced during its WWDC keynote on the 22nd of June.
Key News: According to HSBC analyst Nicolas Cote-Colisson, Apple Inc. has a big opportunity to leverage its installed base of devices to drive services growth. While he still has macroeconomic concerns about the company’s overall business, “there’s also potential for the company to sustain innovation that could drive further momentum for its services segment, particularly around health care” he notes. “The pandemic will, in our view, create more demand for health-related tools and Apple could play a large role in addressing that demand.”
Wells Fargo’s Aaron Rakers appears to have a more upbeat view, boosting his target to $385, noting “Despite the strong [year-to-date] outperformance we have seen in shares of Apple, we continue to believe investors will view this as a favored high-quality large cap name given continued evidence of a post-COVID recovery in smartphone demand, coupled with an expectation of a positive 5G cycle materializing into late-2020/2021.”
Jefferies appears to be a bigger bull, pricing its target to $405.
Key Risk: A premium consumer brand, Apple heavily relies on iPhones for its revenues, which account for 55%, while the services segment makes up nearly 18%. The US economic recovery and consumer spending are the critical factors at play for the company, but the growing number of COVID-19 cases in the US may damper a quick recovery.
Bottomline: The earnings season calls for a “buy” and hold, and there is great evidence the company is set has not lost its drive for innovation.
Additional reading materials:
Happy Investing!
