So far 2019 has been the year of the trade war. When the market has seen some signs of progress in trade negotiations the overall market has rallied, and subsequently has moved lower as news emerges that highlight just how far apart the U.S. and China are, and how difficult it will be for the two nations to reach a deal in the near future.
The fear at this time is a global recession spawned from a drawn-out trade war. Overall economic indicators in the U.S. at this time remain positive, with low unemployment fueling consumer confidence and spending. A lot of stocks that would be soaring to new highs based on fundamentals have traded sideways or lower in reaction to the overall market volatility, which does create some interesting buy opportunities for investors that are not overly concerned about a possible recession on the horizon.
Here are a few stocks that analysts believe have significant upside as the overall market regains its footing.
Social media leader Facebook (FB) is coming off a strong second-quarter report in July. The company posted adjusted earnings of $1.99 per share, easily topping the $1.87 estimate. Sales were also stronger than expected at $16.89 billion versus $16.5 billion. Facebook continues to post impressive numbers, and with the company’s active monthly users up to 2.41 billion the company should continue to shine. Earnings have risen 44% per annum over the last five years and looking ahead analysts expect profits to continue rising at an annual rate of 22.2% over the next five years. Facebook has a bright future as it grows revenue streams on Instagram and WhatsApp. The stock has trended lower over the last six weeks, but analysts continue to bet on the stock moving higher. FB stock is trading at $186.35 with an average price target of $226.94. For FB to appreciate to its price target the stock would have to gain 21.8%.
Morgan Stanley (MS)
Financial giant Morgan Stanley (MS) traded lower over the summer despite back to back earnings and sales beats. The financial sector is particularly vulnerable to the trade war as a global recession would hit the sector hard if that is the actual outcome from a long negotiation process. The Federal Reserve also recently lowered interest rates and some analysts believe additional rate cuts could be coming. Lower interest rates are a bad thing for the financial sector as they lower the spread big banks are able to charge customers on loans. There is also the negative implication of lower rates that the Federal Reserve would not need to lower rates if the overall economy was truly running smoothly. This also has a negative impact on the market’s view on the financial sector. For now, Morgan Stanley looks strong. Multiple positive reports in a row and earnings expected to rise at an annual rate of 8% over the next five years. The recent sell off has MS currently trading at just 9 times earnings, which suggests a lot of value in the stock at this time. Analysts agree that MS looks attractive at its current level. MS is currently trading at $41.38. The 10 analysts that cover the stock have an average price target of $55.00, which suggests MS is undervalued by as much as 32.9%.
Heavy machinery maker Caterpillar (CAT) has fallen to the lower end of its 52-week range as the trade war with China has played out. Caterpillar relies heavily on the farming sector, which has been the primary target of China’s tariffs on the U.S. so far. A lot of farmers are struggling to break even as China has moved its agricultural purchases to other nations, and if farmers are not making money, they are not buying new machinery. The trade war could also impact construction spending if the economy starts to slow. There are a lot of things working against CAT at this time, but with shares trading at just 9.5 times future earnings there is also a lot of value for investors that believe a trade deal will occur and that the agricultural sector will start to rebound as tariffs are removed. Whether or not China will restart buying from the U.S. or staying with new trade partners remains to be seen, but a trade deal would ease recession fears and bring strength back into CAT which could stage a strong rally considering how much negativity has been priced into the stock. The 15 analysts that cover the stock have an average price target of $145.17 on CAT stock. With shares currently trading at $118.79 the price target suggests 22.2% upside.
Discover Financial (DFS)
The credit card sector has been hot in recent years. Low unemployment and high consumer confidence has kept Americans spending, and they have been accumulating record levels of credit card debt. Discover Financial (DFS) staged a strong rally from January through the end of August before trading lower in sympathy to the overall market. The company’s most recent quarterly report at the end of July topped estimates on both the top and bottom line and earnings of $2.32 per share were up from $2.05 during the same period last year. With the gains from earlier in the year, DFS remains up 34.4% on the year, and the recent sell off has created a good buying opportunity for investors that missed some of the previous gains. There is clearly value in the stock at the current price with shares trading at just 8.2 times future earnings, which analysts expect to rise 10.3% per annum over the next five years. The credit card stock is currently trading at $79.10. The 14 analysts that cover the stock have an average price target of $91.69 which suggests the stock has 16% upside potential.