The second quarter earnings season was very good with over 80% of S&P 500 companies reporting an earnings surprise. Moreover, stock indexes performed strongly with FXCM's SPX500 up 8.25%, the NAS100 up 11.5% and the US2000 coming in at 4.3%
During the pandemic period, growth companies have outperformed their value counterparts. This is largely due to the benefit that these companies have received from the lower rate environment as central banks expanded their balance sheets at tremendous pace. However, central banks have signalled their willingness to reduce this stimulus and the market is specifically looking at the Fed to signal its tapering timetable. This is inevitable and is now a matter of "when" and not "if" and fixed income markets are likely to react and yields to strengthen. As such, we may see a rotation from the growth sector to value and a general shift in outperformance.
Below are 5 stocks to consider in Q3 given this potential change:
Our first pick perhaps reflects the potential rotation the most, given that its name is almost synonymous with growth. It's fundamentals seem to be deteriorating, whilst our cyclical picks show strong numbers.
- Amazon is an American multinational technology giant that focuses on e-commerce, streaming services and cloud computing, having ranked at No. 2 on Fortune's 2021 World's Most Admired Companies.
- At the end of July, it reported solid Q2 financial results and its Revenue exceeded the $100 billion mark for third straight quarter, with a 27% year over year rise.
- However, taking into account the Q1 44% y/y increase , there is concern regarding future sales growth.
- It also provided underwhelming Q3 guidance, expecting a 10%-16% y/y growth. Its brightest spot was Amazon Web Services (AWS) which generated $14.809 billion in Net Sales - 37% year over year rise.
- During the second quarter, AMZN held its Prime Day (June 21-22) with members shopping saving more than any other Prime Day.
- The firm has come under increasing criticism over the treatment of workers recently (we note an increase in regulatory scrutiny with other tech giants too), and we will be looking to see how this plays out.
- The stock has faced headwinds this year with a mixed performance, but did manage to clinch new record high in July.
- Ford Motor Company is an American multinational automaker based in Michigan, founded by the iconic Henry Ford in 1903.
- It surprised markets with a $561 million Net Income in the second quarter, announced on July 28th.
- Revenue came in at $26.8 billion and the company raised its 2021 guidance, seeing Earnings Before Interest & Taxes between $9 billion and $10 billion - a $3.5 billion adjustment.
- Ford has been troubled by the global semiconductor shortage that has caused productions cuts, but its CEO James Farley commented that "we are seeing signs of improvement in the flow of chips now in the third quarter..." during the last earnings call.
- The firm seems to be finding its EV mojo, having announced in late May plans to ramp up its electrification spending to $30+ billion by 2025 and expects 40% of its global vehicle volume to be all-electric by 2030.
- The Mustang Mach-E ranks No. 2 in sales among all-electric sport utility vehicles in the US, as per Mr. Farley's remarks and a few months back Ford unveiled the F-150 Lighting – the electric version of its widely popular pick-up truck.
- Its latest monthly US Sales update (for July) did not impress however, with 120,053 Total Vehicles Sold – a 31.8% decline year over year.
- The stock had an impressive start to the year, hitting multi-year high in early June, but July and August have been negative.
Coca Cola Company (KO)
- The Coca-Cola Company is an American multinational beverage corporation that has interests in the manufacturing, retailing, and marketing of non-alcoholic beverage concentrates and syrups.
- KO's delivered strong second quarter results with revenue up 42% to $10.1bn.
- This was largely driven by the cyclical recovery off the pandemic low.
- Earnings per share grew by 48% to $0.61cps and free cash flow from operations increased by $2.8bn to $5.1bn.
- The company has raised its full year guidance and expects to deliver 12%-14% organic revenue growth and to generate free cash flow of $9bn.
- The improved cash position is being discounted in KO's share price, which is comfortably above its 30-week moving average.
- As the number of global doses of vaccine continue to grow, KO is well positioned to benefit from the cyclical recovery as their customers become more mobile and emerge from lockdown conditions.
- McDonald's is an America fast food company and is the world's largest restaurant chain by revenue, serving 69 million customers daily in over 100 countries.
- MCD's Q2 global comparable revenues increased 40.5% and were up 6.9% on a 2-year basis.
- Its customers have also responded to the introduction, in February, of chicken sandwiches to the menu.
- It's noteworthy that the share price also responded to the change in menu, moving in a north-easterly direction.
- It remains above its 30-week moving average, with the moving average still tracking up.
- President and CEO Chris Kempczinski stated that "it's clear that our next chapter will be driven by our leadership in digital."
- This concentration on digital orders is likely to impact positively to the top line considering consumer ordering trends and also because these orders tend to be of a higher spend.
- Visa is an American multinational financial services corporation that facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards, debit cards and prepaid cards.
- V's Q3 revenues were 27% better than the comparable prior period at $3.1bn and its EPS were 10% higher coming in at $1.18ps.
- However, the non-GAAP EPS, which adjusts for non-operating and one-off items, is considerable better, beating the prior period by 41% at $1.49.
- The company's cash flow from operations is 11.3bn, 35% higher than the $8.3bn of the previous comparable period.
- V earns almost 30 times over what it pays on interest and generally pursues a share buyback programme.
- The company's share price is heading up and is above its 30-week moving average.
- Consumer sentiment hasn't caught up to pre-pandemic level yet.
- As such, we think that there is a lot of potential demand that is still to be realised as the cyclical recovery continues.
As such, V is well positioned to be a beneficiary of this recovery and as the sentiment improves further.
- Top 4 UK Stocks To Watch for Q3 2021
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and…
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…