Wall Street had been expecting a downturn in the second quarter results, but so far the reported earnings have given us a much-needed surprise to the upside. While 77% of the forecasts were negative, in the first week of reports more than 80% of reporting companies gave positive results. It was shot in arm, and a sign that analysts and corporate execs may have set the bar too low.
Now, summer may be a slow season for the markets, but there are stocks out there that stand to benefit from seasonal swings – especially summer’s increase in available leisure time – and the June quarter is the time to see it. Theme parks, hotels and resorts, and airlines are all well-positioned to gain from your good time. Here, we look at three ‘strong buy’ summer stocks. These are stocks that have an overwhelming consensus of ‘buy’ ratings from Wall Street’s analysts, and a concomitant positive outlook.
Six Flags Entertainment Corporation (SIX)
The popular amusement park operator just received a rare gift from the Street’s analysts: three upgrades in a row, all in just the last month. The upgrades come just as SIX is preparing to report second quarter earnings, coming off of seasonal losses in Q1.
Six Flags parks rely on outdoor attractions and are dependent on warm, pleasant weather; in the winter months, they typically shut down for maintenance, repair, and upgrades, and the company generally reports an operating loss at that time. Earnings turn positive in Q2, peak in Q3, and slip in Q4. The upcoming Q2 report, on Wednesday, July 24, is expected to show a solid $1 EPS.
Strong seasonal earnings, along with positive results from a membership push and an international expansion effort, prompted James Hardiman, of Wedbush, to give the first upgrade. On June 19, he wrote, in reference to the membership and expansion moves, “While none of these are a sure thing, any of them likely results in meaningful upside to SIX shares, particularly given the sell-off of the past year that has resulted in a discounted valuation with respect to the sizable dividend.”
SIX’s dividend yield is 6.2%, with a $3.28 annualized payment; as Hardiman pointed out, that’s a sizable payout for stock selling at only $52 per share. Considering everything, he bumped SIX up to a buy rating and set a price target of $62, suggesting a 17% upside.
KeyBanc’s Brett Andress, on July 1, set the second upgrade. He moved SIX from neutral to buy, also with a $62 price target, on anticipation of a strong summer and fall season for the park operator.
Timothy Conder, writing from Wells Fargo, gave the most recent upgrade. He pointed out “potential upside catalysts of improved weather entering July-August months [SIX’s peak period]…” and went on to add, “…expensing combined with the ability to keep prior accelerated depreciation will minimize cash taxes to a greater degree than previously assumed.” Conder puts a $56 target on SIX, for a modest upside potential of 6%.
SIX has an overall rating of strong buy from the analyst consensus, based on 4 recent buy ratings. As mentioned above, the stock sells for $52; it has an average price target of $59, giving an upside potential of 12%.
Wyndham Hotels & Resorts, Inc. (WH)
Wyndham Hotels & Resorts spun off of Wyndham Worldwide last summer, as a separate company to manage the hotel operations. WH now operates over 9,000 hotels offering more than 800,000 rooms. The coming quarterly report, July 25, will be the company’s fifth as an independent publicly owned entity, and will cover the fiscal second quarter. Expectations are for 80 cents EPS, a 14% increase from last quarter. WH has beaten EPS expectation in the last three reported quarters.
Like SIX, Wyndham offers investors a moderate cost of entry and a steady dividend. The stock sells for less than $60, and the company has paid out a dividend to common shareholders each quarter since going public as WH. The current yield is 1.98%, with annual payout of $1.16 per share.
Also like SIX, WH has been attracting positive attention from Wall Street’s top analysts. Earlier this month, Anthony Powell, of Barclays, opened coverage of the stock with a buy rating and a $72 price target. He describes WH as “…a leading franchisor in the global midscale/economy lodging segment with an appealing business model.” He also notes that despite “improving growth metrics and a broad acquisition opportunity set,” shares in WH sell for a “material valuation discount” when compared to peers. His price target suggests room for a 23% upside.
Writing more recently, Merrill Lynch’s Shaun Kelley bumped his price target on WH up by 8%, to $67. He maintained his buy rating on the stock. His new 14% upside indicates continued confidence in the company’s profitability.
Wyndham’s consensus rating of strong buy comes from a unanimous 4 buy ratings given over the past three months. Shares trade for $58, so the average price target of $68 suggests 16% upside potential.
United Airlines Holdings, Inc. (UAL)
The airline industry, always a prisoner of slim margins and unpredictable fuel costs, has been dealing with another of its fickle hazards this year. Since March, Boeing’s 737 MAX aircraft have been grounded in response to two fatal crashes attributed to software flaws in the autopilot system. The 737 MAX was the most popular model of Boeing’s best-selling narrow-body airliner, and the groundings have imposed second order effects on airlines as the carriers have had to reassign aircraft, reschedule flights, and alter flight crew training and assignments. With all of that, however, UAL reported a 3.4% positive earnings surprise in its Q2 report on July 16.
The company reported EPS of $4.21 against an expectation of $4.07, and listed a number of other positive results as well. Carrying capacity increased by 3.6%, at the low end of guidance – this was undoubtedly held down by the 737 MAX groundings. Nonfuel unit cost increased by only 0.6%, while UAL’s average price per gallon for fuel dropped from $2.26 to $2.16. Total quarterly revenues were up 5.8% from the year-ago quarter, to $11.4 billion. And finally, in a key metric for the airline industry, the PRASM (passenger revenue per available seat mile) was up 2.5%. All in all, Q2 was ahead of the curve.
Writing in May, and looking ahead to next year, Morgan Stanley analyst Rajeev Lalwani upgraded UAL to a buy rating, with a $110 price target. He said at that time, “United has done a solid job of executing on its strategy which we foresee continuing as the competitive backdrop remains benign in a high-cost environment.” Three months – and a solid quarterly report – later, Lalwani’s outlook still holds; his price target suggests a 17% upside to the stock.
More recently, Jack Atkins of Stephens noted his own surprise that “United isn't getting more love” after the solid Q2 report. He adds, “The stock's multiple is below those of peers Southwest (LUV) and Delta Air Lines (DAL), [and] the current valuation does not reflect the company's execution track record over the past 18 months.” Atkins sets a $112 target on UAL, up from $107, and indicative of a 19% upside potential.
Like the other stocks we looked at here, UAL shows a strong buy from the analyst consensus. This rating is based on 6 buy ratings given in the last three months. Shares are selling for $93, and the average share price of $111 suggests a potential upside of 18%.