- The year-end "Santa Claus rally" was pushing stock markets higher. But the Omicron variant has other plans.
- Market cycles can change quickly, and investors should consider stocks that can weather all storms.
- We'll look at three stocks with great investment characteristics and Quant Grades. These stocks should benefit in either a Christmas Rally or market correction.
- The stocks featured here, Alphabet Inc., Coca-Cola, and Sanderson Farms, may help you understand why it's crucial to consider our Quant Rating System when markets rotate from irrational exuberance to alarming confusion.
'Tis the Season For Santa or Omicron?
After Friday's market nosedive driven by Omicron panic and the actions taken by countries to restrict travel, fear is in the air. It was the worst day of the year; the Dow fell 900 points, and the S&P 500 dropped 2%, a selloff causing overreaction everywhere. Adding kerosene to the fire was Monday’s hawkish remarks from Jay Powell. This display paints a picture of just how much the markets are rationally irrational.
CNN Fear & Greed Index Moving From Greed To Fear
Friday gave way to panic selling, to include stocks considered reopening darlings in sectors like travel and leisure, airlines, cruise ships, automotive, and consumer discretionary. We also saw a rotation back into the COVID darlings like Zoom (ZM) and software, with the Nasdaq climbing more than 2%. We even saw overreaction into fixed income where yields plummeted which is pretty standard as stocks sell and bonds become safe-havens. What also occurred is that market participants pushed out the projected timing of the Fed rate increases based upon Friday news, with no real substance. But alas, hope was in the air as stocks rallied and bonds fell Monday; people were buying the dip. In my opinion, it's too early to determine what will happen with the Omicron variant and its overall impact on markets as a whole. Omicron could put a damper on the Santa Claus rally this year. As we saw with the Delta variant, markets begin to overreact for a while and then disregard the news – almost desensitized. As more clarity comes to fruition about Omicron, we hope to return to a normalized environment and business as usual. In the meantime, as uncertainty prompts investors to consider their strategies, we will continue seeing a rotation back into some of the COVID Darlings and defensive stocks.
“Yes, Virginia, There is a Santa Claus”
Our motivation in the following stock selections is to be prepared for both a market correction or a year-end rally. The last pullback showed that both mega tech stocks performed well, and consumer staple stocks performed well during the correction, outperforming the S&P 500. Our expectation is if the market pulls back, these stocks will provide a degree of safety, and if the market rallies, all three of our stock picks have very strong fundamentals. We will take a look at Alphabet Inc. (NASDAQ:GOOGL) & (NASDAQ:GOOG), Coca-Cola (NYSE:KO), and Sanderson Farms, Inc. (NASDAQ:SAFM), which were selected using our Top Consumer Staples screen and a customized mega-tech screen. Santa Claus can let you have your cake and eat it too.
Alphabet Inc., aka Google, is the technology behemoth and America’s advertising leader with more than 26% US market share. As the king of the FAANG stocks, in Q3, Alphabet revenue grew 41%, with EBIT up 87.6% YoY, led by a strong advertising business. According to Alphabet CFO Ruth Porat in their Q3 Earnings Call, “Advertising revenues of $37.9 billion in the quarter were up 44% with broad-based strength across our business, led again by strong growth in retail. YouTube advertising revenues of $7.2 billion were up 43% due to strength in both direct response and brand advertising.” GOOGL is trading at a forward price to sales of 6.6X, with analysts rating the stock as a strong buy. As fellow Seeking Alpha Author High Yield Investor writes, “I currently rate the stock a BUY due in large part to improved operations along with numerous growth catalysts in 2022. The valuation, when compared to other mega-cap technology stocks, makes the looks of GOOGL shares look very intriguing.”
Despite Alphabet’s Valuation Grade of D, Alphabet is trading at a blended P/E of 25.1x and a Free Cash Flow Yield of 2.7%. The digital advertiser and search engine with multiple business segments is well-positioned regardless of what happens – rally or correction. With a market capitalization of nearly $2T, the company continues to grow at a record pace, with an estimated revenue increase at a CAGR of 14.5% from FY21 to FY25 and an EBITDA increase at a CAGR of 13.9% for the same period.
Source: Seeking Alpha Premium
As we've seen in the past, Mega-Tech software and technology companies tend to be the benefactors in situations as we saw unfold with the pandemic. If the Omicron variant continues to spike and there is a rally, this would indicate we are likely to see slower economic growth or progression, which would also dampen inflation and bode well for tech companies; the Fed would likely slow tapering (pace of buying bonds) and adjust course.
Alphabet is known for its varied business segments, products, and platforms like Google Cloud Services, Android, Chrome, and YouTube. Collectively, they are quite the money-makers as reported in the recent Q3 earnings report, which beat analyst’s top-and bottom-line expectations, resulting in 34 FY1 Up Revisions in the last 90 days; EPS Non-GAAP $27.99/share beat by $4.75; Revenue $65.12B beats by $1.83B.
Source: Seeking Alpha Premium
Due to their consistent earnings and low volatility, consumer staples stocks are considered defensive stocks. Coca-Cola is a stand-by stock during corrective phases and periods of uncertainty. Notably, Coca-Cola (KO) is a household name and consumer staple with excellent fundamentals and margins. Nicknamed the “Dividend King” by Dividend Appreciator because of its nearly 60-year track record of paying a dividend; in five years, the dividend grew from $0.35 to $0.42, an average of 3.7%, so it’s easy to see why we consider this company a rally or correction stock pick. Despite business interruptions prompted by the pandemic and a less than stellar D+ Valuation Grade, KO has been up 33% within the last five years.
Source: Seeking Alpha Premium
The strength of the Coca-Cola brand and supply chain improvements have enabled the company to mitigate disruptions. Following tremendous Q3 results, KO reported a net income increase of $2.47B or $0.57/share from the prior-year period of $1.74B or $0.40/share. From the Q3 Earnings Call, “We now expect to deliver organic revenue growth of 13% to 14%, which is at the high end of our previously provided range, and comparable EPS growth of 15% to 17% in 2021. Our updated guidance for free cash flow of approximately $10.5 billion represents significant progress,” said Coca-Cola CFO John Murphy. It’s no wonder KO has an A+ Profitability Grade and Revisions Grade to match, with 25 upward revisions in the last 90 days. Who isn’t thirsty for a company with this type of track record?
Source: Seeking Alpha Premium
Sanderson Farms, Inc.
Diversification is key, so the adage ‘Don’t put all your eggs in one basket’ is perfect for this market and Sanderson Farms Inc., our poultry pick. By using Seeking Alpha's Quant model, we like to identify stocks that are collectively strong on a variety of investment characteristics, such as value, growth, profitability, momentum, and upward earnings revisions. Sanderson Farms stands out on all of these factors. Quant Factor Grades uses an algorithm that compares dozens of underlying metrics against an overall median score for the company's sector. The grades help provide an instant characterization of the strength or weakness of a stock’s metrics and ratios compared to the sector. The grades help investors make educated choices about their stock decisions.
For Sanderson Farms, the third-largest poultry processor behind Tyson Foods and Pilgrim’s, according to a March 2021 WATT Poultry USA Survey, their Factor Grades are very appealing, as you can see by their Very Bullish rating summary below. So what other factors may impact its performance?
Sanderson Farms Earnings and Growth
Sanderson Farms has seen consistent growth over the years. SAFM’s revenue expanded from $2.82B in 2016 to $3.56B last year, and the company is moving forward with a joint venture with Cargill and Continental Grain to Acquire SAFM for $203/share in cash. In a recent company Press Release, Joe Sanderson, Chairman, and CEO announced, "We are pleased Sanderson Farms' stockholders approved this transaction and thank them for their support...we believe this transaction will benefit our various stakeholders, including employees, poultry producers, and customers, and we remain focused on continuing to deliver the highest quality poultry products and services." This year, revenue in the first three quarters is at $3.40B versus $2.62B for the same period. SAFM has benefited from the poultry shortage that allowed its price to jump from 30.8% while volume remained flat; last quarter, the price jumped even higher -- up 44.7% with volume down 1.4%.
Source: Seeking Alpha Premium
Sanderson Farms has proven to have all of the suitable characteristics to outperform the market. Based upon their Earnings and Growth, it’s no surprise that they have a current B+ Revisions Grade, with 5 Up Revisions in the last 90 days and Zero Down. As SAFM looks to the future, they should continue their solid performance into their 12/17/2021 (estimated) quarterly announcement. We will continue to monitor all of these stocks.
Conclusion: Are Google, Coca-Cola, and Sanderson Farms a buy?
Alphabet, Coca-Cola, and Sanderson Farms Inc. have solid fundamentals and excellent Profitability and Growth Grades. Whether we experience a rally or correction, it is the time of year to make a list and check it twice to determine which stocks are best suited for your portfolio. As my fellow Seeking Alpha author Lance Roberts writes, “Investing is not a competition. There are no prizes for winning, but there are severe penalties for losing...You are generally better off doing the opposite of what you “feel” you should be doing.”
Emotional investing can be challenging, so consider using tools based upon objective quantitative data. I believe these defensive stocks have great potential in either scenario – rally or correction. Notably, I used Seeking Alpha’s Quant Ratings and screens to help me quickly identify stocks that could perform in either market regime. If you are not a Seeking Alpha Premium member, to use our Screens or Quant Grades, please feel free to take the 14-day trial of Premium to help you determine which stocks work for you.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. The author is an employee of Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.