The stock market has been all over the place this year. It crashed along with the economy as governments enacted measures to help slow the spread of COVID-19 only to rebound sharply as states lifted restrictions.
The stock market's next direction is anyone's guess. While there's reason to be concerned about the potential for rough roads ahead with COVID-19 spreading like wildfire across the sunbelt, optimism also abounds due to vaccine hopes, low interest rates, and government stimulus. Those dueling forces can make it hard for investors to know what to do.
In light of all this uncertainty, we asked some of our contributors what stock they thought stood out as a top opportunity this August. They tabbed Equity Residential (EQR 2.15%), Walt Disney (DIS 0.49%), Netflix (NFLX 2.12%), Skechers (SKX +0.00%), and Microsoft (MSFT 0.25%). Here's why.
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Rental real estate will remain in high demand
Matt DiLallo (Equity Residential): Shares of leading apartment REIT Equity Residential have lost about a third of their value this year. Two industrywide concerns have weighed on the company's stock. First, COVID-19 has had such an impact on the economy that many tenants have struggled to pay rent. Second, stay-at-home orders to slow the spread led many renters to rethink their living situation, causing a surge in home buying.
While these issues have impacted many apartment owners, they haven't had much effect on Equity Residential. The company noted that its rental collection rate over the past couple of months has only been about 3% below where it was before the pandemic. Meanwhile, occupancy remains strong at about 95%, rental rates haven't been under too much pressure, and demand has recovered to where it was before COVID-19.
One reason Equity Residential's metrics have remained strong is that it focuses on markets where housing is in scarce supply. That should keep occupancy high since renters in those areas can't buy a home as easily as those in other markets.
Meanwhile, even if Equity Residential experiences short-term headwinds, its financial strength gives it plenty of cushion. It boasts one of the best balance sheets in the REIT sector and has a conservative payout ratio on its 4.4%-yielding dividend. That gives it the financial flexibility to make acquisitions during this downturn, which could drive future cash flow and dividend growth. Add that growth to the upside in its stock price as conditions improve, and this REIT could produce market-beating total returns from here.
Don't count this Mouse out yet
Dan Caplinger (Disney): The best time to buy shares of companies that have demonstrated their long-term staying power is when many investors are questioning their future. That's never been more the case for Disney than today, and that's why now's the right time to look at the entertainment and media giant.
Coming into 2020, Disney seemed to have limitless potential. The company's movie studios continued to produce blockbuster content that brought millions of people into theaters each year. Theme parks attracted millions of visitors across the globe year in and year out. And although some were concerned about the potential impact of cable television cord cutting on the company's ESPN and ABC television networks, efforts to answer competition from streaming video by releasing its own Disney+ service seemed to offer a way forward for the House of Mouse.
Yet the COVID-19 pandemic revealed vulnerabilities within the entertainment giant's business that many shareholders didn't realize Disney had. Theme parks closed for months in an effort to halt the spread of the coronavirus, and shuttered theater complexes no longer generated revenue for new movie releases. Those closures also hit sales of retail consumer products, which rely on demand inspired by other parts of Disney's business. Major sports leagues suspended their seasons, taking away new content from ESPN and putting pressure on advertising revenue. The impact on Disney's earnings in the short-term has been painful.
Looking ahead, Disney is slated to release its latest financials early in August, and the numbers are likely to be ugly again. The quarter ended in March reflected only a short period of downtime for much of Disney's business, but the April-to-June period will include a lot more of the shutdown.
There's reason for longer-term optimism. Disney World has reopened in Florida to great acclaim, and at least so far, the protocols that the company has used to fight against the pandemic haven't resulted in any outbreaks directly attributable to the theme park. Reopenings in Shanghai have also showed that Disney can do business even with the coronavirus threat.
For its movie and media segments, the pandemic's main impact will likely be delays. Disney will push back releases until an audience will be there to watch them. That'll hurt profits now but preserve them for later growth.
Disney shares have pulled back from late-2019 highs, and the stock could drop further if the coming quarterly release is scary. I think that'd be a buying opportunity for long-term investors, because Disney has what it takes to get through this crisis and thrive over the long haul.
The video streaming king isn't giving up its crown anytime soon
Chris Neiger (Netflix): It might seem like an odd time to recommend Netflix stock, considering the company's share price has spiked about 50% since the beginning of the year. Those share price gains have pushed Netflix's valuation up and the stock is trading for about 75 times the company's forward earnings.
Netflix's stock isn't cheap, but that doesn't mean it still isn't a buy. Consider that Netflix added 10 million paid net subscribers in the second quarter, far more than the 8.26 million Wall Street expected. Those gains helped the streaming giant end its second quarter with 193 million global paid subscribers, a 27% year over year increase.
Additionally, Netflix's sales jumped 25% in the most recent quarter, to $6.15 billion. The company's management has said that the second half of 2020 may be rougher than the first half, but investors should know that Netflix is still expecting revenue to increase by 20% in the third quarter.
The company is still growing revenue and subscribers at a healthy clip, but what about rising competition from streaming competitors? The U.S. market is experiencing a surge of video streaming competitors that Netflix will have to fend off, but keep in mind that company ended 2019 with 61 million paid U.S. subscribers -- leaps and bounds ahead of its competition. Additionally, Netflix finished 2019 with 106 million paying international members, which represents just a sliver of the global streaming market. With the company already creating shows and movies specifically for international markets, Netflix still has a massive opportunity to grow its business around the globe.
With the U.S. in a recession and countries around the world fighting the coronavirus pandemic, there certainly could be some volatility ahead for Netflix (and nearly every company right now). But Netflix's long-term growth potential is still intact and investors who have a five-year investing timeline, or more, should be able to benefit from owning this streaming giant.
Azure skies ahead for Microsoft
Adam Levy (Microsoft): Shares of Microsoft fell back to earth a little bit after the company reported its fourth-quarter earnings in July. Analysts' biggest concern was slowing growth at Azure, the core of Microsoft's cloud computing business. Growth slowed to 47% year over year in the fourth quarter, the first time Microsoft ever reported growth slower than 50%.
But the long-term outlook for Microsoft remains strong. Commercial bookings growth came in above expectations at 12%. As a result, commercial remaining performance obligation increased 23% year over year. Notably, remaining performance obligations beyond 12 months are growing faster, up 25% year over year, indicating growing long-term commitments to Microsoft's cloud solutions. Microsoft's dominant share of on-premise enterprise equipment should fuel its ability to take share of the cloud computing market as it transitions those companies to Azure.
Meanwhile, Microsoft Office's transition from licensing to a subscription model continues to chug along nicely. The push to more remote work could accelerate the shift, as employees need to be able to log into their corporate Office accounts from computers at home. Microsoft's seeing a similar transition for its Dynamics software suite, with Dynamics 365 now accounting for 60% of revenue. The shift to more subscription-based revenue adds resilience and consistency to Microsoft's sales.
Microsoft's "more personal computing" segment, which includes Windows and Xbox among other businesses, holds long-term promise as well. Windows continues to grow steadily, tied closely to PC sales, which surged with the shift to remote work and learning. Xbox saw a massive boost in sales as a result of stay-at-home orders as well. The growth in Game Pass subscribers indicates many of those new gamers may stick around long term and stay with Xbox in the next generation of consoles.
The recent pullback in share price is an opportunity for investors to buy shares of the software giant as concerns over slowing Azure growth appear overblown.
A rock-solid balance sheet
Tim Green (Skechers): The pandemic is reinforcing an important investing fact: Balance sheets matter. A company's revenue, earnings, and growth rate prior to the pandemic mean absolutely nothing if that company doesn't survive.
Footwear company Skechers has been hit hard by the pandemic and the associated stay-at-home orders. In the second quarter, Skechers reported a significant net loss and a 42% revenue plunge. There were a few silver linings: Sales in China grew 11.5%, and e-commerce sales exploded by over 400%. But it was a rough quarter by any measure.
If Skechers is doing so poorly amid the pandemic, why consider investing in the stock? Because the company maintained a fortress balance sheet when times were good, and that decision is now paying dividends.
At the end of the second quarter, Skechers had a little over $1.55 billion in cash, cash equivalents, and investments. Total debt stood at roughly $763 million, largely due to the drawdown of a $490 million credit facility in response the pandemic. That leaves Skechers with a net cash position of just under $800 million.
While Skechers suffered a massive revenue decline in the second quarter, it managed to improve its gross margin and cut operating costs. The company posted a net loss of around $60 million, small relative to amount of cash it has on hand. Skechers should be able to weather this storm even if demand remains depressed for a prolonged period.
Many apparel and retail companies went into the pandemic with fragile balance sheets, and they're now struggling to survive. Skechers is an exception. Once the pandemic is over, Skechers will be well positioned to restart its growth engine.
