Marko Kolanovic, the well-known quant strategist with JPMorgan, sees a positive feedback loop forming that will drive the markets higher next year. Kolanovic believes that a decline in volatility and favorable monetary policies will combine to make stocks the go-to investment for 2021, fueling further market gains. Officially, JPM is forecasting a 25% gain in the S&P 500 over the next 12 months.
With investors gravitating toward stocks, volatility low, and cash cheap, Kolanovic is predicting that institutional investors will also step up. In his recent note, the strategist says that $550 billion in combined hedge fund activity is likely for the stock markets in the mid-term. Taken together with the other factors, Kolanovic writes that “these inflows would overpower equity supply to drive equity markets higher.”
Getting to the nitty-gritty details, Kolanovic points out three key segments that investors should watch in the markets: financial stocks, energy stocks, and value stocks. He sees the first two benefitting from falling unemployment as the economy ramps back up, while the third will gain at the expense of growth stocks. Growth stocks and government bonds will lose ground generally during what JPM sees as a bullish year for the stock market.
In addition to Kolanovic’s look at the macro situation, analysts from JPMorgan have also been diving into specific stocks. Of particular interest, we’ve pulled the TipRanks data on two stocks that the firm predicts will show powerful double-digit growth in the next year. And just for contrast, we’ve included one that JPMorgan says to avoid.
Dollar Tree (DLTR)
First up is Dollar Tree, a major name in the discount retail segment. Dollar Tree operates more than 15,000 big-box stores across the US and Canada, offering a wide range of products, with many priced at $1 or less. Store departments include food and snacks, dairy and frozen groceries, housewares, household cleaning supplies, toys – in short, all the items customers can find at higher-end department stores and retailers, but for a discount price.
The pandemic period has had less of an impact on Dollar Tree than on other retailers, at least in part due to the company’s business model. Offering a ‘one-stop shop’ for most households, and the lowest possible price during a serious economic downturn, have helped the company maintain sales and store traffic. This was clear from the company’s 2020 quarterly earnings, which tracked their historical pattern rather than the general economic conditions. Yes, Q1 EPS dipped, and was down year-over-year, but Q1 is generally the company’s slowest. Q2 and Q3 earnings both showed sequential gains – and beat the forecasts while also gaining year-over-year. Revenues for 2020 have been stable, between $6.29 billion Q1 and $6.18 billion in Q3.
Solid performance and a strong retail niche underlay JPM’s analysis of this stock. Analyst Matthew Boss writes, “Multi-year, we see DLTR returning to a double-digit EPS “compounder” with top and bottom-line drivers in place at the core DT banner (w/ DTPlus roll-out incremental) and stabilization at the Family Dollar concept.”
To this end, Boss upgraded his stance on DLTR from Neutral of Overweight (i.e. Buy), and sets a $130 price target, indicating confidence in a 20.5% upside potential. (To watch Boss’s track record, click here)
The analyst consensus rating here is a Moderate Buy, based on 17 reviews that include 10 Buys and 7 Holds. Dollar Tree’s shares are selling for $108, and their $121.33 average price target suggests a 12% upside from current levels. (See DLTR stock analysis on TipRanks)
Mohawk Industries (MHK)
As a source of employment, and as an indicator of underlying economic health, few industries get as much attention as home building. And that will bring us to Mohawk, a contractor in the home construction sector, specializing in residential and commercial flooring. The company employs over 37,000 worldwide, and boasts operations in North and South America, south Asia, and Australia.
Mohawk’s performance – in financial results and share appreciation – has tracked the pandemic over the course of the year. Revenues declined in 1H20, bottoming out in Q2, but have turned back up in Q3. The third quarter top line, at $2.57 billion, was the highest so far in 2020. Earnings followed the same pattern, rising from a Q2 trough to hit an EPS of $3.26 in Q3, the highest in more than 2 years.
JPM analyst Michael Rehaut is impressed with Mohawk’s recent performance, enough to upgrade his stance on the stock. He has shifted his rating from Neutral to Overweight (i.e. Buy), and set a price target of $157, suggesting an 18% one-year upside. (To watch Rehaut’s track record, click here)
“Following nearly three years of relative underperformance, we believe both the sellside and buyside are overly conservative on MHK’s earnings growth prospects over the next 1-2 years. On this point, we note our 2021E EPS of $10.60 is well above the Street’s $9.87 as well as even more bullish buyside expectations that we believe are around $10.00, based on our conversations with investors,” Rehaut noted.
Overall, Wall Street remains cautious on Mohawk shares, as evidenced by the Hold consensus rating. This is based on 6 Buys, 4 Holds, and 4 Sells. The stock is priced at $132.60, and the average price target of $116.15 indicates a possible downside of 12.50% for the coming year. (See MHK stock analysis on TipRanks)
Northern Trust (NTRS)
Last and least is Northern Trust, a financial services company catering to individuals of ultra-high net worth, along with institutional investors and corporations. Northern Trust, based in Chicago, boasts $1.3 trillion in assets under management, and another $10.1 trillion assets under custody. The company has a market cap of ~$19 billion, and claims $152 billion in banking assets.
With all of that, however, Northern Trust has been having a hard time in recent months. The company missed the estimates in the Q3 results, with the EPS of $1.32 falling 9.5% sequentially, over 21% year-over-year, and missing the forecast by more than 5%. At the top line, revenues fell 2.2% from Q2, to $1.3 billion in Q3.
On a positive note, Northern Trust has maintained its dividend payment during this pandemic year. The company pays out 70 cents per common share, and has done so consistently for the past five quarters. The next payment is due at the start of 2021. Annualizing to $2.80 per share, the dividend yields over 3%, an attractive value in these days of near-zero interest rates.
Vivek Juneja, one of JPM’s 5-star analysts, sees the negatives overbalancing the positives on Northern Trust. Accordingly, the analyst downgraded his position on the stock to Underweight (i.e. Sell). His price target, at $90, suggests nearly 6% downside from current levels. (To watch Juneja’s track record, click here)
Backing his bearish stance, Juneja sees several key points, including: “1) [Northern Trust’s] P/E premium to trust bank peers is almost two standard deviations above its long term average premium, despite sharp narrowing in revenue growth versus peers; 2) Northern is more vulnerable to money market fund outflows than peers – its disclosed institutional asset management money market fund AUM is declining faster in 4Q, down 7% thus far; 3) Northern has had very little institutional money market fee waivers thus far, but they are likelyto rise…”
All in all, the market’s current view on NTRS is a mixed bag, indicating uncertainty as to its prospects. The stock has a Hold analyst consensus rating with only 2 recent Buy ratings. This is versus 3 Holds and 3 Sells. However, the $96.38 price target suggests an upside potential of nearly 8% from the current share price. (See NTRS stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.