As coronavirus fears run rampant throughout the world, investors are turning to Wall Street titans for guidance, namely Ray Dalio. Founding hedge fund Bridgewater Associates in 1975, the firm now boasts $160 billion worth of assets under management, with Dalio alone estimated to be worth $18.7 billion.
Dalio, who has looked at the impact of past pandemics and virus outbreaks on the market, called the current reaction to the coronavirus overblown, noting that the concerns “probably had a bit of an exaggerated effect on the pricing of assets because of the temporary nature of that...” He added, “It most likely will be something that in another year or two will be well beyond what everyone will be talking about.”
While the billionaire does acknowledge that it’s difficult to gauge what the full extent of the virus will be, he argues that diversifying across currencies, asset classes and geographical regions could prove to be the best strategy. Additionally, Dalio believes investors should pay attention to issues related to wealth and political gaps, the emergence of China, technology and the environment that could emerge from the public health crisis.
“What concerns me most if you did have a downturn -- we are now 11 years in expansion -- whether that’s one, two, three years forward, with the larger polarity that exists, the wealth gap and the political gap,” Dalio commented.
Looking into Bridgewater’s basket of stocks, we’ve chosen three of the fund’s new holdings that TipRanks’ Stock Screener reveals as “strong buys." Not to mention each has a top Smart Score, at least an 8 out of 10. Let’s take a closer look and see what Wall Street analysts have to say.
BlackRock Inc. (BLK)
On Wall Street, BlackRock is known as one of the largest asset managers in the world. Pulling the trigger on BLK in the fourth quarter, Bridgewater purchased over 32,000 shares for $16.1 million.
Following the company’s solid quarterly performance, several analysts also see the stock as a Buy. In Q4, BLK posted EPS of $8.34, well above the $7.66 consensus estimate. In addition, long-term inflows surpassed the Street’s $82 billion projection, landing at $99 billion or a 6.1% annualized pace. While higher opex led to an operating margin compression of 254 basis points to 43.5%, Morgan Stanley’s Michael Cyprys thinks the print was positive overall.
“4Q19 results this morning demonstrate BLK's ability to continue delivering strong organic growth,” the four-star analyst explained. On top of this, he pointed out, “Debunking ‘too big to grow fears,’ BLK delivered 7%-plus organic asset growth for the full year 2019, which is an acceleration from 2.1%-plus organic growth in 2018 and 4.3%-plus average growth rate over last five years. Importantly, strong net new money growth translated into 5% organic base fee growth in 2019, better than the 2% growth in 2018.”
Based on this report, Cyprys expects other analysts to make adjustments to their outlooks for 2020. “Higher AUM levels, better fee rate, and strong organic growth trajectory should support upward revisions to consensus EPS, despite higher core G&A expense guidance into 2020,” he noted.
With the company also hoping to receive the board’s approval for a dividend increase, the deal is sealed for Cyprys. In line with his bullish take on the financial stock, he left both his Overweight rating and $603 price target unchanged. Should the target be met, a twelve-month gain of 7% could be in the cards.
Citigroup Inc. (C)
Dalio’s second new position was in financial services giant Citigroup. In the fourth quarter, Bridgewater spent $36.1 million to acquire a stake in the company, or 452,049 shares to be exact.
Weighing in on the company for Oppenheimer, five-star analyst Chris Kotowski points to its fourth quarter results as an encouraging sign. Even though there was a $0.25 discrete tax benefit, at $1.90, core underlying EPS still exceeded both the analyst’s estimate of $1.80 and the $1.81 Street forecast. In terms of revenue, Citigroup reported a beat, with the $18.4 billion figure representing a 7.3% year-over-year gain.
It should be noted that growth and seasoning in the consumer portfolio drove a 15.2% year-over-year credit cost increase. However, Kotowski argues that this was widely expected, with the $2.2 billion total provision landing very close to his $2.1 billion prediction.
When it comes to the fact that average shares dropped 9.8% year-over-year, reflecting a loss of 29% from the peak, the analyst commented, “Skeptics often tell us that ‘the market doesn't pay you for buybacks,’ but clearly this has greatly enhanced the company's long term earnings and dividend paying capacity. While we suspect this year's $18 billion of repurchases was a peak, we see $16 billion in 2020 and $12 billion in 2021.” If these repurchases play out, by year end 2021, another 15%-plus shrinkage in the share count would be realized.
That being said, Kotowski believes that the upward trend for return on average tangible common stockholder's equity (ROTCE) is especially promising. “Excluding various gains and tax benefits in both years, we would put the "core" ROTCE at ~11.2% for the year, up from 10.5% in 2018 and 8.9% in 2017. Thus, the trend remains up and to the right, which is in our view the main thing that drives bank stocks,” he stated.
All of the above factors prompted the Oppenheimer analyst to maintain an Outperform call and $124 price target. This conveys Kotowski’s confidence in Citigroup’s ability to climb 57% higher in the next twelve months.
What do other analysts think about Citigroup’s long-term growth prospects? As it turns out, the rest of the Street is generally bullish, with its Strong Buy consensus rating breaking down into 10 Buys vs 3 Holds. Not to mention the $94.82 average price target brings the upside potential to 21%.
CarMax Inc. (KMX)
Bridgewater also snapped up shares of CarMax, the largest used car retailer in the U.S. The famous hedge fund added a position of 60,342 shares, valued at $5.3 million. Out on Wall Street, analysts are also excited about KMX.
After hosting members of the company’s management team, Morgan Stanley’s Armintas Sinkevicius remains optimistic about its long-term growth narrative. During the meeting, management said the omni-channel experience rollout has already been successful, and there has been little core business disruption. In the future, the company will continue to seek out opportunities from efficiencies at the Customer Experience Centers and strengthen customer interaction.
Based on this Sinkevicius commented, “We are constructive on the ability of Carvana and KMX to disrupt the used car dealership model, but find the profitability, free cash flow, and valuation at KMX to be significantly more attractive.” To this end, the analyst sided with the bulls, keeping the rating as Overweight. At $112, the price target implies shares could surge 13% in the next twelve months.
Meanwhile, RBC Capital analyst Scot Ciccarelli cites KMX’s recent $50 million investment in Edmunds, a research site that offers in-depth reviews of new vehicles, insights and helps shoppers progress through the entire car purchasing process, as being the source of his bullish thesis. He argues that this move is low-risk and possibly high-reward as KMX could use Edmunds’ reviews on its own website.
“Further, if Edmunds and their ‘millions of customers a month’ were to provide direct links to CarMax inventory, this should also generate a substantial number of new online sales leads – which CarMax can now accommodate because of their growing omni-channel capabilities. Third, CarMax may be able to learn what the ‘value algorithms’ are searching for in their grading scale and may be able to work towards improving their third party value rankings,” Ciccarelli added. It makes sense, then, that the five-star analyst reiterated his bulllish call and $108 price target.
Looking at the consensus breakdown, a majority of Wall Street analysts also have high hopes for the used car retailer. With 8 Buys and 2 Holds, the word on the Street is that KMX is a Strong Buy. Additionally, the $106.88 average price target indicates that a possible twelve-month gain of 8% could be in store.