There are so many opinions, theories, strategies and forecasts out there on COVID, its cures, its impact on consumers, impact on the economy, the possibilities of a recovery and length of the downturn. Then there are theories about how to invest in all the different scenarios. So much of conversation can be confusing after a while, and may even feel like noise.
So what has actually happened now? The Fed decided not to raise interest rates this year, meaning that the economy is not recovering as fast as some had hoped. Moreover, Fed officials think the GDP shrinkage could be as much as 6.5% this year, with a 5% recovery in the next.
This will mean that job losses will continue, and because we’re still not much closer to a vaccine despite all the encouraging sounds from drug developers and the government, companies may be looking at different methods of operation that will use less people. So some of the jobs lost may not be immediately recovered with the economic turnaround.
But if you think about it, most analysts weren’t really expecting to see a V-shaped recovery anyway. The Fed’s dovish stand makes cash hoarding unprofitable, thus pushing you to keep money in the market.
So now that you’re required to keep money in the market, the biggest question out there is, what stocks you should go for. While capital intensive stocks may sound like a good idea because this is the time they can take advantage of low interest rates to refinance their debt load. But let’s face it, debt loads increase the risk profile of companies with the interest paid generating a corresponding negative impact on earnings, and therefore, returns. So while these companies can do better in a low-interest rate environment, the focus is on their ability to offer income. These stocks wouldn’t be worth buying now (or at other times), if they didn’t offer dividend/income.
But companies with low debt burdens are always less risky. Moreover, a low interest rate environment also benefits them if they need/want to increase leverage. So the first factor considered in selecting this crop of companies is a debt to total capitalization ratio of less than 25%.
Also, companies generally pay dividends when they are relatively mature, i.e., their growth is small relative to their entire business. So they don’t have to reinvest most of their profits. Growth stocks on the other hand, may not pay a dividend because they are less mature. Investors are willing to pay more for the profits they are expected to earn in the future. So earnings growth is a more significant factor when considering them.
With a view to the current market uncertainties, I’ve picked stocks that are expected to grow their earnings at least 10% this year, as well as in the next 3-5 years.
Also, whether growing, investing, or not, liquidity is an important consideration right now given the uncertainties in the current environment. For this purpose, I’ve also included a quick ratio of more than 2X, indicating that the company can easily pay off any short term liabilities with its more liquid current assets.
Zacks Rank #1 (Strong Buy) stocks satisfying these criteria are-
Acacia Communications, Inc. ACIA
Headquartered in Maynard, Massachusetts, Acacia Communications designs, develops, manufactures and markets communication equipment, specifically, coherent optical interconnect products for cloud infrastructure operators and content and communication service providers. It operates primarily in the Americas, Europe, the Middle East, Africa and the Asia Pacific region.
Zacks Rank #1
Debt/Total Capital Ratio 3.2%
2020 EPS growth estimate 27.4%
3-5 year growth estimate 30.0%
Quick Ratio 4.48X
Activision Blizzard, Inc ATVI
Activision Blizzard is a leading developer and publisher of console, online and mobile games. The company benefited from the shift to the dgital download format. Its Call of Duty is one of the most popular gaming franchises globally. Its Overwatch League can be considered a pioneer of the esports concept.
Zacks Rank #1
Debt/Total Capital Ratio 17.04%
2020 EPS growth estimate 22.9%
3-5 year growth estimate 18.81%
Quick Ratio 2.78X
Dividend Yield 0.56%
Career Education Corporation PRDO
Based in Schaumberg, U.S., Perdoceo Education Corporation provides educational services including bachelor's, associate and non-degree programs in information technology, visual communication and design technologies, business studies and culinary arts.
Zacks Rank #1
Debt/Total Capital Ratio 10.4%
2020 EPS growth estimate 10.2%
3-5 year growth estimate 15.0%
Quick Ratio 3.59X
Semtech Corporation SMTC
Headquartered in Flynn Road Camarillo, CA, Semtech Corporation designs, manufactures and markets a wide range of analog and mixed- signal semiconductors that are used in computing, communications, industrial, military-aerospace and automotive applications. It also offers a limited amount of wafer foundry services to other electronic component manufacturers.
Zacks Rank #1
Debt/Total Capital Ratio 22.38%
2020 EPS growth estimate 7.61%
3-5 year growth estimate 12.50%
Quick Ratio 3.88X
Tradeweb Markets Inc. TW
New-York-based Tradeweb Markets is an operator of electronic marketplaces for the trading of financial products and securities. Other than access to markets, it offers data and analytics, straight-through-processing and reporting to clients in the institutional, wholesale and retail markets.
Zacks Rank #1
Debt/Total Capital Ratio 0.71%
2020 EPS growth estimate 66.88%
3-5 year growth estimate 21.87%
Quick Ratio 3.53X
Dividend Yield 0.49%
Vertex Pharmaceuticals Incorporated VRTX
Boston, MA-based Vertex Pharmaceuticals is focused on the discovery, development, and commercialization of small molecule drugs targeting serious diseases. The company’s main area of focus is cystic fibrosis (CF).
Zacks Rank #1
Debt/Total Capital Ratio 7.62%
2020 EPS growth estimate 67.15%
3-5 year growth estimate 28.33%
Quick Ratio 3.42X
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.