Why These 3 Stocks Should Be On Your QE3 Shopping List
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Historically, investors have achieved better returns by focusing on stocks with a track record of outperformance during previous Fed QE programs, rather than simply “longing the market." Goldman Sachs Equity Research recently identified thirty companies that have outperformed the market post-QE; out of which I have selected three with the strongest fundamentals and growth potential.
Topping the list is the online giant eBay (NASDAQ: EBAY), which in the space of ten years has made a round trip from being the darling of Wall Street to dead money, only to become an investor favorite again on the strength of PayPal.
Contrary to popular belief, eBay's core business model has more in common with shopping malls and prestige auction houses like Christie's than it does with garage sales and discount retailers, such as Dollar Tree. While bargain hunters are a delight to brick-and-mortar discounters, they tend to be the least profitable segment of a company built around the auction house model, which depend upon a cut of final sale.
As households deleverage, the number of bidders tends to decrease, putting downward pressure on prices. This development usually coincides with a sudden spike in the number of item returns. The result is a seller side imbalance, as the number of sellers getting squeezed out of existence (margin compression) begins to eclipse the number of sellers who are thriving as a result of decreasing competition. This is what happened in 2008, as the Great Recession - along with a bewildering array of policy changes - conspired to crush growth.
eBay quickly recovered. Between 2008-2012, the value of the online auction and payments giant has nearly tripled. Every major upward trend in the stock over the last four years has coincided with the Fed's announcement of another round of quantitative easing. But unlike other stocks, eBay's upward post-QE trend historically continues until the Fed discontinues the stimulus. As QE3 will be open-ended until the unemployment figures match the Fed's target rate of 5%-6%, the implications for eBay's stock going forward are tremendously bullish.
Big Picture: eBay hasn't missed analyst expectations since 2005. PayPal ended the Q2 2012 with 113.2 million active registered accounts, a 13% increase over the second quarter of 2011. (from 2006-2009.) eBay's Return On Equity (ROE) is 21.22%, only slightly lower than Wal-Mart's (NYSE: WMT). However, eBay is growing much, much faster; with revenue growth of 23.12% vs. Wal-Mart's 4.51%. The company's profit margin is currently 20.6%. Since 2010, it has peaked every fourth quarter at around 60%. Figure 2 compares eBay's total returns against the S&P 500, Amazon.com and Mastercard.
SanDisk Corp. (NASDAQ: SNDK) is an American multinational corporation that specializes in data storage solutions. The company is particularly renown for its solid-state flash memory products.
SanDisk exhibited the most consistent outperformance by% of any stock listed on the NYSE, Nasdaq or S&P 500 in response to Federal Reserve intervention, with an average outperformance of 23%.
Big Picture: SanDisk took a hit following its Q1 earnings results due to an imbalance between demand and supply, which is expected to clear up in Q3. SanDisk has established an excellent track record, clocking a 141% ROIC over the past 3 years. Analysts and investors appear to be comfortable with SanDisk's turnaround story for the second half of the year, and see increased demand for NAND flash memory in the medium term. In addition, Solid State Drives (SSDs) have completely overtaken Hard Disk Drives (HDDs) in the burgeoning tablet market.
The Home Depot (NYSE: HD) is an American big-box retailer of home improvement and construction supplies and services with stores in all 50 U.S. States, as well as in every province of Canada, China and Mexico.
Home Depot has seen 7% or higher growth over every round of bond buying by the Fed, including the first installment of Operation Twist. (HD's response to the widely disappointing extension of Operation Twist in June was more muted, at +3%.) Home Depot's growth during QE1 (11/25/08) was +14%; followed by QE1 extended (3/18/09) +11%; QE2 (11/3/2010) +7%; Operation Twist (9/21/11) +9%. Median out-performance (excluding OT ext.) was +10.25%.
Big Picture: Home Depot beat the other QE out-performers on my list due to its stronger fundamentals and strong opportunities for growth. HD has historically benefited from hurricane preparedness in disaster-prone states, which has provided a significant boost to its net income. HD has outperformed rival Lowe's since recovering in 2010; Q2 out-performance was 10%. Home Depot is also well positioned to benefit from a U.S. Housing recovery, and insiders apparently like the company's prospects enough to make major purchases of HD stock. The current annualized dividend paid by Home Depot Inc is $1.16/share.
FatalX has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend eBay and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.