Jefferies pinpoints 10 stocks poised to benefit the most from the strongest surge in consumer spending 'in decades' — and explains why each one is worth buying
- Growth in personal income and vaccine distributions pave the way for strong consumption growth.
- Jefferies’ chief economist expects goods and services consumption to return to trend by year-end.
- The bank highlighted 10 stocks set to benefit from a surge in consumption.
- See more stories on Insider’s business page.
The “strongest consumer stock backdrop in decades” is forming as growth in personal income and vaccine distributions unleash strong demand for consumption in the services sector, according to Jefferies’ chief economist Aneta Markowska.
Many Americans have been responding to the widespread uncertainty that COVID-19 brought to the world in part by saving up substantial cash from relief packages or paychecks.
A recent World Economic Forum article found that excess savings, or the amount by which personal savings during the pandemic exceeded those in a world without the pandemic, add up to around $1.6 trillion.
However, consumers are starting to look less worried about what lies ahead and are buying more. Data shows that January saw a 2.4% uptick in spending as displayed below.
“The surge in January retail sales created tremendous momentum for 1Q GDP and demonstrated a very strong propensity to spend stimulus payments, which has major implications for the next few months,” Markowska wrote in a note on Sunday.
One of those implications is that income can grow by more than 25% on the back of Biden’s $1.9 trillion stimulus bill that was passed by the House on Wednesday. It will provide direct checks and unemployment benefits among other things when signed into law.
Taking into consideration the amount of stimulus that can be unleashed, vaccine distribution, and the recent jump in consumer spending, Markowska upgraded her GDP forecast. More specifically, she is expecting economic growth in the second quarter of the year to exceed 8%.
She also predicts 7% growth in personal consumption expenditures this year, and 4.21% for 2022. If consumer spending were to grow as much, then for the first time since the nineties, average PCE growth would trend 4% higher for more than two consecutive years.
To find the companies that will benefit the most from consumption growth, Jefferies’ research analysts screened their coverage groups to find those names that have the greatest exposure to this investing backdrop.
Detailed below are the five stocks, along with their respective tickers and price targets, that Jefferies sees benefiting from pent-up demand. We have included commentary on each one as well.
Price Target: $210
Commentary: It is one of the stocks that’s poised to benefit the most from pent-up demand. Jefferies analyst Brent Thill “expects ABNB booking and revenue to return to pre-pandemic levels by 1H22, showcasing the resilience of the home-sharing market.”
2. Bloomin' Brands
Price Target: $28
Commentary: “While current multiples for QSR category and growth names look stretched vs historicals, Full-Service/casual dining is broadly trading within historical ranges of 5-10x fwd. EV/ EBITDA,” said analysts Andy Barish and Alex Slagle.
Andy and Alex believe investors are willing to entertain modestly more multiple expansion should the upside framework above come to fruition, and rates remain low.”
3. Caesars Entertainment
Price Target: $99
Commentary: Jefferies equity research analyst David Katz “expects that the Las Vegas recovery trajectory continues to steepen, and given its prominence within the company’s earnings stream (~40% of EBITDA), he believes this should be a meaningful driver of the shares. Second, the synergy opportunities within the regional casinos and corporate segments should be accelerating on the heels of COVID. In short, he expects estimates to continue progressing higher and consider valuation less relevant than the earnings progression.”
Price Target: $67
Commentary: Analysts Barish and Slagle see the full-service segment as “best positioned to benefit from the recovery (not to mention capacity reductions, margin improvements, pricing power, and other tailwinds), and model SSS, EBITDA, and EPS higher than the Street on average.”
5. Southwest Airlines
Price Target: $55
Commentary: If pent-up demand is a “significant driver” through the second half of the year, the airline is best positioned to benefit as domestic traveling restrictions are likely to be lifted before full international restrictions, according to Jefferies analyst Sheila Kahyaoglu.
Price Target: $75
Commentary: Analyst Brent Thill “views Lyft (LYFT, Buy, PT: $75) as one of his top reopening plays for 2021.
“With a vaccine in distribution, Brent believes LYFT is positioned for an initial recovery in 2021 (est. rev +30%; Street 31%), with EBITDA profitability expected in 4Q21. He models a return to pre-pandemic revenue levels by 4Q21 ($1.04B, or roughly flat vs 4Q19), and models full-year growth of 30% in ’21 and 52% in ’22.”
7. Planet Fitness
Price Target: $95
Commentary: Jefferies analyst Randy Konik believes that the company can continue dominating the fitness market. “Health and wellness interest is rising, new joins are growing while cancellations are subsiding, pricing architecture is unmatched and competition is folding.”
8. Six Flags
Price Target: $56
Commentary: “Pent-up leisure demand is most evident in drive-to and outdoors operators, and stands to be one of the greatest beneficiaries from a therapeutic release standpoint due to its accessibility. In addition, the business restructuring initiative that was started in late ’19 marked a shift in the business’ focus onto the domestic customer experience through CRM, pricing, and ancillary products.”
9. Molson Coors
Price Target: $53
Commentary: Analyst Kevin Grundy “sees more ways to win in ’21 than any time in recent years (e.g., on-premise recovery, strategic alliances, etc.); b) reinstitution of dividend expected in 2H21 and c) valuation is attractive at 7.5x EV/EBITDA (very low-end of consumer staples).”
10. The TJX Companies
Price Target: $82
Commentary: “Across their coverage, they would expect spending levels to accelerate most among lower-end income consumers, given an improving economy and stimulus aid,” the note said of Randy Konik, Janine Stichter, and Corey Tarlowe.
“As a result, they would focus on the value- oriented names in their coverage” that includes TJX.
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