We had some serious economic news this month, when October’s inflation rate came in at 6.2% annualized. It was the sixth consecutive month +5% year-over-year inflation gains – and the highest inflation rate seen in the US since 1990.
Billionaire Ray Dalio, founder of Bridgewater Associates, reminds investors that the worst asset to hold in this environment is cash.
“Some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded. The ones most hurt are those who have their money in cash,” Dalio noted.
Dalio didn’t become as successful as he is by letting inflation degrade his wealth. Aside from keeping out of cash, he also targets his investments. A savvy investor can get a good handle of equities that show the strongest prospect of guarding value by following Dalio’s purchases now.
Looking into Bridgewater’s basket of stocks, we’ve chosen three of the fund’s new holdings that TipRanks reveals as “strong buys” and offer healthy upside potential. Let’s take a closer look and see what Wall Street analysts have to say.
Global Payments (GPN)
We’ll start in the online payment processing sector, with Global Payments. This company is one of the main competitors to the better-known PayPal, and handles over 50 billion transactions annually for more than 3.5 million customers in over 100 countries. Global Payments operates mainly on the seller side of the transactions, offering its services to merchants and vendors. Services include credit and debit card processing and data analytics.
Global Payments shares have been falling since the spring; the stock peaked above $200 in April, but is down 39% since then. At the same time, earnings and revenues in the Q2 and Q3 have shown sequential gains – and management reported the Q3 results as a company record. EPS came in at $2.18 per share, up 27% yoy.
However, despite the sound results, the company issued full-year 2021 revenue guidance that fell shy of analyst forecasts. Specifically, the company guided toward $7.71 billion to $7.73 billion, just under the $7.74 billion that Wall Street had expected.
During the third quarter, Global Payments completed its $500 million acquisition of SaaS company MineralTree, a move that will give GPN a foot into the B2B payment market. The MineralTree move was only one that GPN took during September to enhance its footprint. The company also completed an agreement with the UK financial service group Virgin Money to enable a connected payment offering for Virgin Money’s customers. Moreover, GPN was chosen as the official provider of commerce technology at Mercedes-Benz Stadium, the home field of the NFL’s Atlanta Falcons.
Keeping all of this in mind, we can look at Dalio’s purchase of GPN. He’s started a new position in this stock during Q3, totaling 12,021 shares that are now valued at $1.57 million.
This action will not be surprising to Cowen’s 5-star analyst George Mihalos, who highlights several reasons to back the stock.
“GPN has gone from trading at an average ~2x premium to the SPX over the past 4 years (Acquirer Dislocation Opportunity) to a 6x discount presently, despite what we deem as a very achievable long-term outlook (low double-digit organic revenue growth, high-teens to low 20% adj. EPS growth) and hardly a deceleration from pre-pandemic levels. The price action across the sector and to a much lesser extent for the networks, reflects a perception of imminent disintermediation from newer entrants and payment methods,” Mihalos opined.
To this end, Mihalos gives GPN an Outperform (i.e. Buy) rating, and his $228 price target implies room for ~76% one-year upside potential. (To watch Mihalos’ track record, click here)
Overall, it’s clear that Wall Street is in broad agreement with Mihalos’ outlook. The stock has 18 reviews, which include 15 Buys and only 3 Holds, for a Strong Buy consensus rating. Shares are priced at $129.69 and the $200.89 average target suggests ~55% upside in the next 12 months. (See GPN stock analysis)
Levi Strauss & Company (LEVI)
We’ve talked a lot about inflation in recent weeks, mostly because the country appears to be hitting a period of inflationary pain that hasn’t been felt since the Carter Administration. But some companies are proving to be mostly immune. Levi Strauss, best known for its blue jeans, is one. A look at the company’s quarterly report will provide some illumination.
Levi Strauss has reported 5 consecutive quarters of positive EPS – a strong recovering from the pandemic-induced negative result in 2Q20. The company’s 48-cent EPS result in 3Q21 was the best in over 2 years. Revenue also delivered; the company reported a top line of $1.5 billion, the best result since 1Q20. Both the revenue and earnings beat Wall Street’s expectations, revenue by a 1% squeaker of a margin, but EPS by a much wider 29%.
Management was upbeat, and justly so. The company’s performance in 3Q21 was comparable to, or slightly better than, pre-pandemic 2019 levels. The turnaround was driven in part by the reopening of schools, and a resumption of back-to-school shopping.
So we shouldn’t be surprised, given the company’s strong position, that Dalio has chosen Levis for a new position. The billionaire investor bought a total of 135,430 shares in the jeans company, stake that is now valued at $3.68 million.
Evercore analyst Omar Saad notes another important point – that Levi Strauss has achieved this performance despite the supply chain crunch that has been making unwelcome headlines.
“Fears that supply chain bottlenecks and cost inflation would cause Levi’s to miss sales and earnings expectations and lower guidance (a la NKE and BBBY) proved to be unfounded as the denim juggernaut grew sales 3% (vs. cons +1%), delivered a multi-decade high 14.8% EBIT margin, and raised guidance… Although Levi’s is not immune to broader supply chain challenges (was a 70-bp drag on sales in 3Q and could be 2-3x that in 4Q), the combination of its diversified manufacturing base and newfound pricing power is more than offsetting the inflationary drags,” Saad wrote.
In line with his positive outlook, Saad rates the stock an Outperform (i.e. Buy) and sets a $40 price target that indicates confidence in ~46% upside for the year ahead. (To watch Saad’s track record, click here)
Overall, the Strong Buy consensus rating here is unanimous, based on 5 recent positive reviews. The shares are priced at $27.42 and their $37.25 average target implies a one-year upside potential of ~36% from that level. (See LEVI stock analysis)
Lithia Motors (LAD)
We’ll wrap up with a shift in focus, to the automotive industry. The double whammy of inflation and supply chain problems have been putting strong upward pressure on automotive prices. Manufacturers are having trouble meeting demand due to shortages of semiconductor chips, dealers are having trouble filling their lots, due to lower production and delayed deliveries, and today’s used car prices are starting to look like new car sticker prices from 2015.
That’s the background to remember when we look at Lithia Motors, the third largest automotive retailer group in the US. The Oregon-based company sells both new and used vehicles through a network of locations in the US and Canada. Lithia’s network includes 264 dealerships selling 34 automotive brands. Vehicles in stock include 34,793 used vehicles and 18,485 new vehicles.
The immediate effect of inflation on Lithia has been to push up revenues. Automobile prices are up – way up. Used cars have seen a 45% increase, while new cars are averaging $42,000. This can be seen in Lithia’s Q3 revenue, which grew 70% yoy to reach $6.2 billion. EPS came in at $10.11, up 47% yoy. Counting cash and available credit, the company claimed $1.7 billion in available liquidity at the end of the quarter. Earnings and revenue beat the Wall Street estimates; EPS by 14% margin and revenue by a narrower 3%.
Ray Dalio was suitably impressed, and opened up his position on this stock with 7,537 shares. Due to the high share price, these shares are now worth $2.45 million.
Among the bulls is Guggenheim’s 5-star analyst Ali Faghri, who rates LAD a Buy along with a $542 price target. This figure implies share appreciation in the next 12 months of ~64%. (To watch Faghri’s track record, click here)
Backing his stance, Faghri noted, “LAD reported 3Q results well above expectations in a tough environment amid significant new vehicle inventory shortages. We came away even more bullish on the outlook and reiterate LAD as our Best Idea… LAD’s outperformance continues to highlight its sourcing advantages and that of its franchise dealer peers, given their access to the trade-in and off-lease channels which gives the group a structural advantage compared to standalone used car dealers which rely heavily on auction.”
Once again, we’re looking at a stock with a unanimous Strong Buy consensus, supported by 4 positive stock reviews. The average price target of $505.75 implies a one-year upside of ~53% from the current trading price of $329.63. (See LAD stock analysis)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.