Over the past few weeks, AstraZeneca, Pfizer, and Moderna have given us a little bit of hope, reporting that their coronavirus vaccine candidates showed to be effective (although to different degrees) in phase 3 clinical trials. For the first time in a long time, there’s a light at the end of the pandemic’s tunnel. This time next year, the economy could be close to being back to normal.
Before the economy and struggling stocks completely recover, investors may want to consider buying shares of Merck (NYSE: MRK), JPMorgan Chase (NYSE: JPM), and American Airlines (NASDAQ: AAL), which could be performing a whole lot better a year from now. Here’s a look at how these companies have been doing this year and why it might be prudent to scoop up their shares today.
Healthcare company Merck has had a tough year, mostly because hospitals are deferring procedures and people aren’t making their usual trips to the doctor’s office. On Oct. 27, the company reported its third-quarter results for the period ending Sept. 30. Its revenue of $12.6 billion rose a modest 1% year over year. Cancer-fighting drug Keytruda continues to be a bright spot for the company’s business, generating $3.7 billion in sales in Q3 and growing at a rate of 21% from the prior-year period. Without Keytruda, the company’s operations would be in much worse shape. In its earnings release, Merck reported that the pandemic has negatively affected its pharmaceutical revenue to the tune of about $475 million during the past quarter and $2.1 billion since the start of the year.
For the full year, the New Jersey-based company is expecting revenue to come in between $47.6 billion and $48.6 billion, up at least a couple of percentage points from the $46.8 billion it recorded in 2019. Merck is also expecting its earnings per share (EPS) to fall within a range of $4.55 to $4.65, which is up from $3.84 a year ago.
Shares of Merck are down 12% this year, while the S&P 500‘s climbed more than 12%. But as the economy continues to recover and hospitals resume their normal operations, Merck’s business will get stronger and the stock should rally. Buying it before that happens could allow investors to cash in on some great returns. Merck’s stock currently trades at a relatively modest price-to-earnings (P/E) multiple of 18, which is cheap compared to the average stock on the SPDR S&P 500 ETF Trust that investors are currently paying more than 25 times earnings for.
Big banks have been hit hard by the pandemic, and have stockpiled reserves in the anticipation of heightened credit losses due to a struggling economy. JP Morgan released its third-quarter results on Oct. 13. For the period ending Sept. 30, the bank reported that its total reserves for credit losses totaled $33.8 billion across all of its segments. At the end of 2019, its reserves were only $14.3 billion. The bank decreased its reserves by $0.6 billion in Q3, a sign that it may have enough stowed away — at least for now.
Year to date, provisions for credit losses totaling $19.4 billion have taken a much larger chunk out of the New York-based company’s earnings than they did a year ago, when JPMorgan’s provisions were just $4.2 billion over the same period. The company’s net income of $17 billion so far in 2020 is down nearly 40% from last year.
Shares of JPMorgan are down 13% this year — and that’s after they’ve rallied in recent weeks on the positive vaccine news. There’s still a lot more room for the stock to rally, as an increase in business activity combined with a rosier outlook for the economy will help jump-start this and other bank stocks.
3. American Airlines
Because people are traveling less often now than pre-pandemic, many airlines have had to cut staff in order to keep costs down. On Oct. 22, the Texas-based company, American Airlines, released its latest results for the period ending Sept. 30. It confirmed that it furloughed 19,000 employees as of Oct. 1, and that more than 20,000 are either on long-term leave or chose to retire early. The airline has been finding ways to conserve cash and notes — in 2020, it’s slashed $17 billion from its operating and capital budgets.
Year to date, American’s revenue of $13.3 billion is down 61% from 2019, and it has incurred a $6.7 billion loss, which is in sharp contrast to the $1.3 billion profit it reported during the first nine months of last year. One especially important aspect for investors to keep an eye on is cash flow. American tracks average daily cash burn: As of Q3, that figure was $44 million, down from $58 million as of Jun. 30.
The airline estimates that by the end of the fourth quarter, its available liquidity will total over $13 billion. At a daily cash burn rate of $44 million, that would be enough to last nearly 300 days without any additional cash or an improvement in its burn rate. To put it simply, the company is in a good financial position, and investors shouldn’t be concerned at this point that it won’t be able to survive the pandemic.
American Airlines stock is down nearly 50% this year, and it’s trading at a P/E of only three. It could be one of the big comeback stories of next year as the economy recovers.
View this moment as a investing opportunity
These stocks are all struggling this year, and they’ve all underperformed the S&P 500 by wide margins:
But I’m optimistic that this picture could look a lot different a year from now. As people are vaccinated and the world starts to turn the corner, you can expect that these businesses’ share prices will rise in value, setting up investors who buy these stocks while they’re trading at depressed prices for some terrific returns.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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