It’s been 100 years since the United States and the world has encountered a pandemic like COVID-19. The Spanish flu, responsible for the 1918 flu pandemic, was unusually deadly. Lasting almost 36 months from January 1918 to December 1920, it infected 500 million people, about a third of the world’s population at the time.
While the medical community doesn’t seem to feel that the current pandemic will produce anything close to the death count of the Spanish flu, the staggering damage done to the world economy will resonate for quite some time. Across Wall Street, there has been much debate over whether we have a V-, U- or W-shaped recovery coming.
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Given the extraordinary circumstances, and the velocity of the selling and corporate balance sheet damage, it is almost impossible to predict the outcome with any certainty. The analysts at Raymond James have come up with lists of stocks to buy under all three recovery scenarios. They noted this in the report:
Eventually, economic activity is going to drive a recovery in profits, but because the world has never been through a disruption like this, no one knows with any certainty how fast economic activity will return. For this reason, we believe thinking in terms of scenarios makes the most sense at this point, and note that, historically, “U” shaped recoveries tend to occur where earnings bottom, and stabilize for a while, before returning to pre-recession levels over the course of 3-4 years. The “V” shaped recovery is less and less likely, in our view, given the lack of a proven therapeutic near term, but certainly a potential if a medical cure or virus mutation is found in the coming months. Finally, a “W” shaped recovery would be one in which economies are open and closed periodically over the next 1-2 years as effective therapeutics and vaccines are not discovered, forcing not just a deeper recession, but a longer recession than typical with corporate earnings likely not reaching 2019 levels again until after 2023, and likely locking in what seems like short term consumer behavior today, into a “new normal” for several years.
The Raymond James analysts created three lists of 30 to 35 companies. All stocks on the lists are currently Strong Buy or Outperform rated by the analysts, and they have been curated by each analyst for each economic scenario. Then they arranged the lists based on market cap, leverage and sector preferences that would be likely under each scenario.
We screened each of these lists looking for companies that also have had strong insider buying during the recent downturn and comeback rally. Here we look at five companies that could excel in a V-shaped recovery.
Avnet
The analysts see this as a sleeper in the huge technology supply arena that could be poised for a big move. Avnet Inc. (NYSE: AVT) is a global distributor of electronic components (such as semiconductors, passives and connectors). The company ships over 117 billion electronic components annually (from more than 1,400 suppliers) to upward of 2 million customers. Customers include original equipment manufacturers, electronics manufacturing services companies and original design manufacturers.
Avnet has two operating segments: Electronics Marketing and Premier Farnell. The catalog business (Farnell) can see lower margins as component lead times compress, but if a V-shaped recovery renews product purchasing, the company could fire right back up. Trading at very reasonable multiples, this is an excellent pick now.
Shareholders receive a 2.85% dividend. The Raymond James price objective for the shares is $47, and the Wall Street consensus target price is $31.25. Shares closed Monday’s trading session at $29.52, up almost 5% on the day.
Delek
This small-cap refiner could do well if we can get back into our cars and go to work and travel the country this summer. Delek U.S. Holdings Inc. (NYSE: DK) is an independent U.S. refiner headquartered in Brentwood, Tennessee, with core operating assets located in Tyler, Texas, and El Dorado, Arkansas.
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