There’s no denying it, 2020 has been a strange year. A viral outbreak rocked the world to its core, laying waste to the global economy. At the same time, amid violent bursts of volatility, stocks revved their engines and sped forward, seemingly brushing off all of the chaos unfolding in the background. Rebounding vigorously off of March lows, the S&P 500 has crossed over into positive territory for the year so far.
Making it that much more difficult to predict the market’s trajectory, COVID-19 isn’t going away any time soon, with the virus making a reappearance in several parts of the world. As so many unknowns remain, finding compelling plays can feel like Mission Impossible.
That being said, Wall Street analysts tell investors there are still some exciting opportunities to be found. Using TipRanks’ database, we’ve locked in on two such stocks, beloved by the pros that cover them, so much so that they have been deemed top picks for the remainder of 2020. The rest of the Street also backs both tickers, with each sporting a “Strong Buy” consensus rating.
Truist Financial (TFC)
With roughly $504 billion in assets, Truist Financial is one of the largest bank holding companies in the U.S., offering a full range of consumer and commercial banking, securities brokerage, asset management, mortgage and insurance products and services. As lower LLP is expected, several members of the Street have high hopes.
Representing BMO Capital, four-star analyst Lana Chan tells clients “TFC remains our top pick among the Regionals given its PPNR strength and ACL coverage,” with it having “appropriately front-loaded the reserve build in 1H20 based on the current economic outlook.”
To support her bullish stance, Chan cites management’s guidance for Q3. The company guided for a revenue decline of 3-5% from last quarter, with core noninterest expenses also set to be down. NCOs are expected to land within the range of 45-65 basis points, compared to 39 basis points in Q2. Reported NIM should also be relatively stable, following a larger-than-expected 45-basis point decline in Q2. This is because TFC has room to lower deposit costs and has instituted floors on new loans.
“Noninterest income trends will be mixed with a partial rebound in deposit service charges and card income, but seasonally lower insurance and mortgage banking revenue and a tough comparison versus Q2’s strength in capital markets,” Chan added.
Adding to the good news, the company has placed a significant focus on achieving its net cost savings target of $1.6 billion by Q4 2022, with 40% slated to be achieved by Q4 2020 (vs. 30% previously) and 65% achieved by Q4 2021. To ramp up the cost reductions, TFC is trimming personnel, corporate real estate and third-party vendor expenses. Additionally, the company isn’t expected to incur more COVID-19-related costs.
Representing another positive, Chan stated, “TFC has a large cushion to absorb credit losses, with its ACL and unamortized loan mark totaling a peer-leading 60% of estimated DFAST losses. It was proactive with risk ratings on its commercial loan book in Q2, as reflected in its reserve build.”
It should be noted that TFC has granted forbearance on 11.2% of loans, and disclosed COVID-19 “at-risk” industries account for 9.6% of total loans. This means there’s a “risk of a large part of its Southeast footprint reclosing in a second COVID-19 wave,” in Chan’s opinion.
However, everything else that TFC has going for it keeps Chan with the bulls. To this end, she maintained an Outperform rating. She also gave the price target a boost, raising it from $42 to $47, suggesting 25% upside potential. (To watch Chan’s track record, click here)
Judging by the consensus breakdown, other analysts also like what they’re seeing. 7 Buys and 2 Holds add up to a Strong Buy consensus rating. The $44 average price target puts the upside potential at 17%. (See Truist Financial stock analysis on TipRanks)
Dollar General Corporation (DG)
Boasting more than 16,000 stores, Dollar General counts itself as one of the top discount retailers in the U.S. With some analysts arguing the market is undervaluing the company, now could be the ideal time to get in on the action.
Five-star analyst Rupesh Parikh, of Oppenheimer, is singing a different tune after reevaluating DG’s long-term growth prospects. Even though it has already posted a 22% year-to-date gain, the analyst sees even more upside on the horizon.
“Based on our work, we believe the market is still underappreciating the company’s long-term earnings power, following the recent grocery boom, traction from management initiatives, and lasting market share gains coming out of the coronavirus pandemic,” Parikh commented.
According to Parikh, in the near-term, elevated comp growth is likely. To support this claim, he cites the expected growth “in at home food consumption, management initiatives, government stimulus, and benefits from consumer trade-down in a potentially weaker economic environment to drive comps above the company’s historical LSD to MSD comp delivery.” It also doesn’t hurt that these benefits and market share gains could persist in the year ahead.
As for its long-term earnings power, Parikh is more optimistic than the rest of the Street. While the consensus estimate has FY20-21 EPS coming in at $8.84 and $8.87, respectively, the Oppenheimer analyst thinks the figures will land at $9.15 and $8.90. It should be noted that share buybacks and any adverse impacts related to Biden’s tax and wage proposals aren’t factored into these projections.
Looking more closely at the potential “blue wave” in the upcoming U.S. election, a Biden presidency would mean that the corporate tax rate would jump from 21% to 28%. This increase would negatively impact DG’s FY21 earnings by nearly 10%, based on Parikh’s estimates. He also mentioned, “In addition, an increase to the minimum wage to $15 nationally could also represent an incremental headwind, especially if implemented over a short period.”
That being said, DG’s relative P/E multiple has declined to 0.97x from a recent peak of 1.19x in March 2020, making the valuation more compelling when compared to its peers.
All of the above makes DG a “top pick” for Parikh. As a result, the analyst continues to assign an Outperform rating to the stock. Bumping up the price target from $205 to $225, a potential twelve-month gain of 18% could be in the cards. (To watch Parikh’s track record, click here)
The bulls have it on this one. Out of 18 total reviews published in the last three months, 15 analysts rated the stock a Buy while only 3 said Hold. So, DG gets a Strong Buy consensus rating. With a $209.71 average price target, shares could surge 10% in the next twelve months. (See Dollar General stock analysis on TipRanks)