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If there’s one common theme connecting the market’s experts, it’s ‘be a contrarian.’ Don’t follow the herd, focus on underlying facts, and don’t be afraid to throw out the conventional wisdom. Or, in a memorable phrase from Warren Buffett, “Be fearful when others are greedy, and greedy when others are fearful.”
Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program has always had a talent for swimming against the stream, and he has not shied away from pointing out the stocks that investors need to watch more closely.
Among Cramer’s picks are some of the market’s biggest names, companies with strongly established brands and ready household name recognition. But each of these stocks has been beaten down in recent weeks and months, for a variety of reasons, that has left these fundamentally sound equities at attractive entry points. Or, as Cramer puts it in his own inimitable style: “With each of these names, you have good news in your pocket. You have fresh information. It’s unlikely that you’re going to get any negative earnings preannouncements from any of these companies. That’s what makes these stocks buyable after an ugly [trading] day…”
So let’s take a dive into three of Cramer’s picks, to find the facts behind his contention that they’re winners. We’ve used the TipRanks database to pull up the latest data, and we can check them out in conjunction with recent commentary from the Wall Street analysts.
Morgan Stanley (MS)
The first Cramer pick we’ll look at is Morgan Stanley, one of the biggest names in the US banking industry. The company has near $1.22 trillion in total assets and a market cap above $136 billion. The company offers its customers a wide range of services, including wealth management, investment banking, and market research, and has been in business for nearly a century. Last year, the firm saw total revenues of approximately $60 billion.
In the first quarter of this year, the company saw year-over-year declines in its financial results – but with a caveat. At the top line, MS showed $14.8 billion, while EPS came in at $2.02. These numbers were down y/y, by 5.7% and 7.7% respectively. The caveat is that analysts had expected worse in Q1. Economic conditions started turning south in the first part of this year, as inflation rose and put squeeze on consumer activity. Nevertheless, Morgan Stanley beat its EPS forecast of $1.71 by an 18% margin, and the revenue total was bank’s second-highest recorded.
The firm’s investment banking segment showed a weak performance, falling 37% from the year-ago quarter, but this was partly offset due to strong performance in wealth management. That segment showed $5.9 billion in revenue, about the same as 1Q21, which include a 14% increase in asset management revenues.
Morgan Stanley also showed a commitment to returning profits to shareholders, a long-standing policy. The bank repurchased $2.9 billion worth of common shares, and paid out a quarterly dividend of 70 cents per common share. The dividend annualizes to $2.80 and gives a yield of 3.5%.
In his note for Wall Street research firm Argus, 5-star analyst Stephen Biggar takes a bullish stance on MS, and writes, "We continue to have a positive view of MS based on improvements in ROE and pretax margin. In our view, MS has made significant progress in lowering its risk profile, strengthening its capital buffers, and reducing earnings volatility. In particular, the Wealth Management segment, which has a more stable revenue and profit profile, now accounts for over 40% of revenue, and risk-weighted assets continue to decline. Results in this segment have also been helped by the company's focus on high- and ultra-high-net-worth clients, which are seeing the fastest growth.”
Putting his words into some numbers, Biggar gives MS shares a $107 price target, suggesting a one-year upside of 40% and supporting his Buy rating. (To watch Biggar’s track record, click here)
So, that’s Argus' view, what does the rest of the Street make of the latest MS developments? The outlook remains upbeat. The stock boasts 13 Buys and 5 Holds, culminating in a Moderate Buy consensus rating. The shares are trading for $76.51 and their average target of $99.59 implies gains of ~30% for the year ahead. (See MS stock forecast on TipRanks)
Walt Disney (DIS)
Next up on Cramer's radar is the House of Mouse, the Walt Disney Company. We’re all familiar with Disney’s oldest asset, its famed animation studios and library of movie and video content, but that’s only part of the story. Millions of people visit the theme parks every year, from the US and abroad, and Disney has parks internationally, too. And, the company is leveraging its movie production to generate new, high-quality content for its Disney+ streaming service.
We’re seeing the current inflationary environment – especially due to the increases in fuel and air travel prices making it more expensive for visitors to go to Disney venues – put additional pressure on the company. That pressure is expected to increase, at least in the short term, as consumers deal with reductions in discretionary income. This is the background behind the 38% year-to-date drop in Disney shares.
Even though the share price has fallen sharply, Disney reported an increase in non-GAAP diluted EPS for the recently ended second quarter of fiscal year 2022, with a 36% year-over-year gain from 79 cents to $1.08. Quarterly revenue came in at $19.2 billion, up 23% from the year-ago quarter.
The strong performance results give some indication that Disney continues to attract customers, and lends credence to the theory that the steep fall in share price marks a ‘pricing in’ of the Disney’s potential negatives. At least, that's the bottom line according to Rosenblatt analyst Barton Crockett.
Crockett notes that the stock drop has left investors ‘skittish,’ but then goes on to add, “We don't share the skittishness, because of several lifts still to come. Parks still haven't gotten the 20% of high-spending visitation back that comes from abroad, or the cruise ships. Movies are ramping really strongly for Disney, which could be a $2 billion plus increment to segment profit, based on past performance. And Disney DTC growth is at the top of streaming now. A recession would hit the parks. But with the shares down % YTD, that might already be priced in.”
Putting his money where his mouth is, Crockett gives DIS shares a Buy rating, and sets a $174 price target to indicate a robust 85% growth potential for the coming year. (To watch Crockett’s track record, click here)
Even though the shares are down, Wall Street has not given up on the Mouse. The analysts have filed 24 reviews in recent weeks, and these include 17 Buys against 7 Holds, for a Moderate Buy consensus rating. DIS stock is priced at $93.86 and the $144.61 average price target suggests a 54% upside from that level. (See DIS stock forecast on TipRanks)
We’ll wrap up in the world of coffee and cafés, with Starbucks, one of Jim Cramer’s favorite stocks. Starbucks has become one of the most recognizable names in the restaurant scene, and Starbucks coffee cups are the essential accessory for young, urban tech workers.
Starbucks depends heavily on both consumer spending and unimpeded supply chains, and so the current environment, with high inflation and supply chains that are still suffering from COVID disruptions, have been hard on the company. SBUX shares have fallen 34% so far this year.
Despite those headwinds, the company remains optimistic, and in its recent report for Q2 of fiscal 2022, Starbucks showed a quarterly record for revenues – some $7.6 billion, up 15% year-over-year. Comp store sales rose 12% in the US market and 7% globally – excluding China, where lockdowns have impacted all businesses. The company’s non-GAAP EPS came in at 59 cents, down 4 cents from the year-ago quarter, but this result was better than expected, given the situation in the China market.
The company’s income was sufficient to maintain the dividend payment, which was declared at 49 cents per common share. The next payment is scheduled for this coming August. The dividend annualizes to $1.96 and yields 2.5%. Starbucks has raised the dividend three times in the past three years, at a time when many companies cut back due to the COVID crisis.
Starbuck has been working to improve its store environments, both for workers and customers, through a series of intensive investments in recent months. These include higher wages, increased worker training, and improvements to the facilities. Overall, the money invested in these areas pushed operating margins down year-over-year, from 19.3% to 17.1%.
5-star analyst Peter Saleh, of investment firm BTIG, sees these investments as a net positive for Starbucks
“We expect the investments Starbucks is making in training, wages and technology to reduce turnover and increase same-store sales... While we expect additional margin pressure from these investments and ongoing inflation for the next couple of quarters, we believe FY23 could be an inflection year as development accelerates, turnover declines and China (hopefully) reopens,” Saleh noted.
"We believe Starbucks has a compelling return profile as its unfolding sales and economic recovery is matched by continued global unit development and stronger shareholder return targets," the analyst summed up.
Overall, Saleh is pleased with what he sees here, and rates SBUX shares a Buy, with a $110 price target to suggests a 44% one-year upside. (To watch Saleh’s track record, click here)
Wall Street is cognizant of the headwinds in restaurants and retail, but the 12 to 9 split between Buy and Hold reviews shows that the bulls have an edge in SBUX. Shares are trading for $75.29 and the $93.62 average price target implies 24% upside in the year ahead. (See Starbucks stock forecast 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.