After strong market gains through the summer, August was a volatile month for the stocks. The S&P 500 fell 5.6% in the first week, then bounced around for three weeks before charging into September with another 5.6% shift – a surge back up to its current 3,007.
The stock market turnaround is just one of several positive economic indicators so far this month. The August jobs report, while showing low job creation numbers, also showed increasing wages, and last week, Labor Department numbers showed that there are 1.17 million more jobs than openings in the US. It’s a bright picture. But not every stock is on its way back up. Some are struggling to gain traction.
Finding the right stock in this environment can be a challenge. That’s why TipRanks provides a variety of stock screening tools, offering you the ability to sort through the market for the right investment.
We’ve opened up TipRanks’ Trending Stocks tool to find three stocks that are underperforming right now, but are also showing high upside potential in the face of idiosyncratic headwinds. These are investment opportunities that have attracted attention from top analysts, and have the seeds for future market gains.
Domino’s Pizza, Inc.
With the rise of third-party delivery companies, such as GrubHub (GRUB – Get Report), the fast food space generally is coming to resemble the pizza delivery niche. With a phone call or an online order, the customer’s meal is only half an hour away. Michigan-based Domino’s Pizza (DPZ – Get Report), which built its customer base in the 1990s on a promise of fast delivery, has been feeling the pressure as fast food delivery diversifies. DPZ shares are down 1% so far this year, despite a general S&P gain of 19%.
This doesn’t mean that Domino’s feels itself vulnerable. Back in July, the company beat the earnings forecast in Q2, reporting $2.19 per share against a predicted $2 even. And it did that despite missing the revenue forecast by 2.5%, or $22 million. Even with the revenue miss, DPZ reported strong resources: cash on hand was up, at $108.3 million, while long-term debt was down 2.2%.
BTIG analyst Peter Saleh is impressed by DPZ’s use of resources to create innovations in the delivery space. The company is not entering into third-party agreements, but is keeping delivery in-house. Earlier this month, Saleh attended DPZ’s Innovation Garage event, and saw how Domino’s is investing in autonomous vehicle delivery and GPS tracking. He writes, “while Domino's Pizza is facing competitive headwinds from delivery aggregators, it is starting to fight back with promotions and measures to improve efficiency.” Saleh gives DPS a $325 price target, suggesting an impressive 32% upside potential.
From Oppenheimer, Brian Bittner gives DPZ shares a $295 price target and 20% upside. He sees Domino’s as “well-prepared for the delivery challengers and ready to go it alone.” In his comments, he adds, “Management believes it ultimately has technological, economic and service superiority over [competing] vendors which will be a benefit over the cycle. Nearer term, the company does not plan to react by deep-discounting or discounted/free delivery.”
Overall, DPZ has a 16% upside potential, derived from its $285 average price target and $245 current share price. The stock has a Moderate Buy rating from the analyst consensus, based on 14 buys, 7 holds, and 1 sell.
Ford Motor Company
The second largest domestic automaker, Ford (F – Get Report) possesses a combination of resources and liabilities. On the negative side of the ledger, Moody’s credit rating agency has just lowered the company’s rating below investment grade. Moody’s cited Ford’s “operating and marketing challenges” as reasons for the downgrade, and added that the company is at the start of a long restructuring effort in a bearish industry.
Ford, for its part, does not seem worried by the credit downgrade. S&P and Fitch still rate the company as investment grade, and the restructuring noted by Moody’s includes an $11 billion investment in electric and hybrid vehicles. The capital investment includes new spending on factories as well as vehicle design and autonomous driving systems.
Still, a downgrade from a credit rating agency looks bad in the headlines. Ford shares lost 1.3% by mid-week. The stock has been highly volatile this year, swinging between a low of $7.44 and a high point of $10.36.
Two analysts weighed in with buy ratings on the stock. Credit Suisse’s Dan Levy noted that Ford has $23 billion in cash on hand, giving it plenty of resources to fund its global restructuring effort. He writes, “For now, Moody’s downgrade doesn’t change the Ford story. We think the core focus at Ford remains the path to profit recovery, which we continue to believe remains intact.” Levy’s $12 price target implies an upside of 26% for Ford.
Analyst John Murphy, of Merrill Lynch, agrees that Ford has upbeat prospects. He says, “We believe Ford’s self-help turnaround should start to get more credit among investors, while improved execution and communication may also allow Ford’s multiple to recover, although the downgrade news was somewhat disappointing.” Countering the disappointment, he notes that Ford remains committed to maintaining its shareholder dividend, with an impressive 6.35% yield, and that the primary source of bad news – slowing car sales in the European and Asian markets – has already been baked into the share price. He puts a $13 price target on F shares, indicating an upside potential of 37%.
Ford holds a Moderate Buy from the analyst consensus, based on 4 buys and 3 holds from the last three months. Shares sell for $9.45, and the average price target of $11.58 suggests an upside of 22%.
The early adopter in the online TV content streaming space, Netflix (NFLX – Get Report) has the advantage of incumbency against the much-hyped competition from Disney (DIS – Get Report) and Apple (AAPL – Get Report) which will be starting this fall.
Netflix’s main advantage, of course, is its library of 400+ original programs to run on the streaming service. This will be less of an advantage against Disney, which brings its own famous Disney Vault to the party, but Netflix having proven winners like Stranger Things and talent like Samuel L. Jackson and Oprah Winfrey on board is a clear sign of strength in the content creation market.
Disappointing subscriber numbers from the second quarter, however, depressed Netflix’s share price, and the company's year-to-date gain is only 9%. Netflix lost 15% after reporting net subscription adds of only 2.7 million, against the forecast 5 million. Even worse, the company’s core US market saw a decline of 100,000 subscribers instead of the expected 300,000. And to keep the hits coming, Apple announced last week that its Apple TV streaming service, to be priced at just $4.99 per month, will be significantly less expensive than the $8.99 Netflix charges for its most basic service.
The analysts, however, seem to agree that the fears for Netflix are overblown, and that the company’s resources are sufficient to meet the challenges. 5-star analyst Michael Olson, of Piper Jaffray, writes: “Preliminary search index analysis suggests Q3 domestic subscriber growth of 6.4% year-over-year, and international growth in the range of 33%-35%. Further, the number of U.S. YouTube trailer views for major Netflix originals is up 10% quarter-over-quarter from Q2, signaling a more engaging content slate. Expect Netflix to continue to capture a significant portion of traditional content dollars despite an onslaught of new streaming services currently casting a cloud of concern.” Olson sets a $440 price target on NFLX, indicating confidence in a 49% upside.
Imperial Capital analyst David Miller agrees, believing that “the market is too focused on price points rather than the value for that said price point.” His $451 price target implies an even more robust 53% upside for the streaming giant.
Overall, Netflix maintains a Strong Buy from the analyst consensus, based on a whopping 25 buy ratings set in the last three months, along with only 5 holds and 1 sell. Shares are expensive, at $295, and the average price target of $411 suggests an upside potential of 39%.
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