UPS was a Covid beneficiary—until it wasn’t. Now, it again looks like a reopening play.
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Covid cases are falling and the economy is about to reopen—again. Playing it, however, won’t be quite as easy this time around.
The seven-day average of new Covid-19 cases in the U.S. has fallen to 357,000, down nearly 40% in the past week alone, while online searches for Covid have fallen about 75% since mid-January. In the past, when the pandemic seemed to be ending, investors piled into airline, hotel, restaurant, and casino shares. People, after being stuck inside, wanted to go out and see the world. And with their bank accounts flush from staying home and government payouts, they had the cash to do so. The Federal Reserve, meanwhile, made sure that companies could issue debt cheaply, helping them stay afloat during lockdowns, and ready to thrive when they ended.
This time is different. 22V Research strategist Dennis DeBusschere says that reopening stocks—his firm’s list includes Hilton Grand Vacations (ticker: HGV), Bally’s (BALY), and Mesa Air Group (MESA)—aren’t outperforming the way reopeners have in the past, even though optimism on Covid has increased. Uncle Sam has stopped sending out checks, and pandemic restrictions have been less onerous, meaning that the bounceback might not be as strong.
But the real blame goes to the Fed, which is expected to raise interest rates a number of times in 2022. “Until the Fed achieves its goal of containing inflation, a recovery in the groups of stocks highly influenced by Covid will be hampered by the Fed’s desire to slow economic growth,” DeBusschere says. “You have to look at which companies tend to do the best when financial conditions are tightening.”
That requires a focus on quality, says Brian Rauscher, Fundstrat’s head of global portfolio strategy. Quality usually involves stable earnings, steady returns on equity, and especially, strong cash flow. Those traits will help investors navigate a regime they haven’t experienced—a reopening trade at the start of a tightening cycle.
Here are six stocks that fit the bill:
Booking Holdings
The pandemic hasn’t dimmed consumers’ wanderlust—and that’s good news for Booking . The parent of Priceline and OpenTable is expected to earn $98.90 a share in 2022, more than double 2021’s estimated $43.57. It’s also a cash-flow machine, projected to report about $5.1 billion in free cash this calendar year. That gives the stock a free-cash-flow yield of 5.1%, higher than the S&P 500’s 4.4%. Booking trades at about 25 times 2022 earnings, but its shares have held up better than other high-valuation stocks. Through Thursday, it was up 1.6% this year, versus the S&P 500’s 6.1% loss.
Chevron
Not long ago, it was nearly impossible to find quality in the oil patch. Enter Chevron . It should generate almost $25 billion in free cash flow in 2022, putting its FCF yield at almost 10%. Its balance sheet is improving, too. Chevron has about $26 billion in net debt, down from more than $38 billion at the end of 2020. And a reopening economy should help support petro prices, which have been rising. Mizuho, citing the energy giant’s solid balance sheet and careful spending, says Chevron “offers high exposure to oil prices with lower risk”—a good way to play rising rates and higher inflation.
Intuitive Surgical
Elective surgeries should increase as Omicron wanes, benefiting Intuitive Surgical , a maker of robotic surgery systems. Its earnings are likely to grow modestly in 2022, but should accelerate as the pandemic slips further into history. Sales have grown almost 13% annually, on average, over the past 10 years, and should do so again over the next three. Operating margins, around 30%, are about 10 percentage points better than the average healthcare-equipment company’s. The stock’s 20% drop in the past month has prompted UBS analyst Matthew Taylor to upgrade it to Buy from Hold.
McDonald’s
Restaurant stocks will benefit as Omicron fades, and few are as high-quality as McDonald’s . Earnings at the golden arches have risen about 10% annually, on average, since the turn of the century, and they’re expected to climb 9.5% in 2022. Operating margins are approaching 45%, and the dividend has advanced by an average 7% a year over the past decade. With McDonald’s expected to generate $7.7 billion in free cash flow this year, that shouldn’t change. At 26 times 2022 earnings, McDonald’s is more expensive than the market. Then again, quality isn’t cheap.
Raytheon Technologies
Airlines might not be the reopening plays they used to be, but Raytheon Technologies , which makes engines and other parts for aircraft, should fly high as air traffic improves. Global traffic in December came in at 55% of 2019’s level, but should improve in 2022. That could help Raytheon boost earnings by about 12% this year and produce roughly $6 billion in free cash flow. Better still, Raytheon isn’t solely dependent on an airline recovery. More than half of its sales come from global defense contracts. That should provide ballast if another coronavirus variant causes a new economic shock.
United Parcel Service
UPS was a Covid beneficiary—until it wasn’t. Now, it again looks like a reopening play. Investors had been worrying about the delivery service’s ability to navigate higher costs. But fourth-quarter earnings, released on Tuesday, beat expectations, and UPS’ guidance exceeded Wall Street’s projections. The shares jumped 14.1% but still fetch about 18 times 2022 earnings, a discount to the S&P 500’s 20. Citigroup analyst Christian Wetherbee calls UPS a “compounder”—a company that generates consistent returns for investors, year after year. He sees “further upside from here.”
Write to Al Root at [email protected]
