Three Stocks to Watch for the Week of January 10th

Stocks took a turn last week after minutes from the December Federal Reserve meeting revealed a more hawkish stance.  It was indicated that the policymakers had discussed faster and more aggressive rate hikes, with the first quarter point hike coming as soon as March.  As investors process the news, the S&P 500 and the Dow drifted further from their record closes, set on Monday.  The Nasdaq led the way down, with a 4.5% loss of the week – its worst weekly performance in eleven months.  The S&P 500 slid 1.9%, and the Dow closed the week 0.3% lower. 

This week, market watchers can look forward to key consumer and producer inflation reports, along with business optimism and consumer sentiment data.  Plus earnings from some of the country’s largest banks, including JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C).

As they say, the cream rises to the top.  This week we’re highlighting three tickers that seem to stand out among the rest.  We’re revisiting one old favorite that we think has been oversold in the midst of the broader market rotation out of growth names.  Plus, one stock you might not have heard of yet, but it’s one to keep on your radar in the weeks and months to come.  

Cybersecurity is a young, quickly evolving industry.  Many companies are likely to get filtered out over time.  In this competitive industry where only the strong will survive, Palo Alto Network Inc. (PANW) is taking bold steps to ensure its place at the head of the pack.     

Palo Alto has been helping customers stay ahead of quickly evolving cybersecurity threats for more than a decade.  For nine years straight, the company has been named a market leader in network firewalls by leading research and advisory company, Gartner.  In fact, it achieved the highest position for ability to execute and the furthest position for completeness of vision in Gartner’s Magic Quadrant for Network Firewalls for 2020. Still, they haven’t been letting the recognition go to their head.  Over the past few years, Palo Alto has been aggressively expanding its portfolio with big investments and acquisitions.    

Most recently, their groundbreaking acquisition of Bridgecrew, a developer-first cloud security company, enabled Palo Alto’s Prisma Cloud to become the first cloud security platform to deliver security across the full lifecycle of an application, from the building stage to deployment to run.  This is the most recent in a string of additions to its portfolio of NGS (next-generation security) services.

In fiscal 2021, Palo Alto’s NGS services generated $1.18 billion in annual recurring revenue (ARR), representing roughly 28% of its top line and surpassing its prior ARR guidance of $1.15 billion.  That segment’s accelerating growth complemented the stable growth of its on-site appliances and services, and its total revenue increased 25% for the full year.  The company expects its revenue to rise 24%-25% in fiscal 2022, and its stock trades at about nine times that forecast. 

Of 36 analysts offering recommendations for PANW, 22 call it a Buy while 3 give the stocks a Hold rating and 1 rates it a Sell.  A median 12-month price target of $615 represents an increase of 17% from the last price.  

Essential Properties Realty Trust (EPRT) invests in single-tenant, net-lease properties across the US. At present, the REIT owns nearly 1,100 properties leased to 214 tenants spread across 16 different industries. At present, its properties are 99.6% leased and have remaining lease terms averaging a high 14.6 years.  Over 60% of the portfolio consists of e-commerce resistant businesses such as quick-service restaurants, child learning facilities, car washes, medical offices, and convenience stores.

As the old adage goes, the proof is in the pudding.  EPRT’s track record speaks for itself.  Thanks to the essential nature of its portfolio, this small but resilient REIT managed to keep its adjusted FFO flat throughout 2020, during the height of the pandemic.  Even more impressive, the trust managed to generate 6% FFO per share growth and invested nearly $360 million in 126 new properties that were 100% leased by the end of the first quarter of 2021.  

Fast forward to now, and the trust is in stellar financial shape with liquidity of about $490 million and a modest 4x ratio of net debt-to-EBITDA.  For Q3, EPRT surpassed consensus revenue expectations of $55.2 million, reporting  $59.6 million.  The company said, “Our third-quarter results were driven by our fully stabilized and performing portfolio, our long-standing relationships with high-quality and growing middle-market operators, and an attractive capital markets environment.  These positive trends, which developed earlier in the year, resulted in another quarter of robust investment activity that was conservatively capitalized. With this momentum carrying into the fourth quarter, we are establishing our 2022 AFFO per share guidance of $1.46 to $1.50, which we believe provides investors with a compelling growth opportunity.”

Essential Properties began paying dividends in 2019, a year after it came public, and hiked those payouts twice that year for a total increase of nearly 10% but has kept dividends level in 2020 and 2021. Payout is at the low end of the REIT range at 3.66%.

Of 13 analysts offering recommendations for EPRT, 11 call it a Buy while 2 call it a Hold.  There are no Sell ratings for the stock.  A median 12-month price target represents an increase of 20% from the last price.  

The third quarter wasn’t a good quarter for PayPal Holdings (PYPL) as it missed quarterly revenue expectations and guided down Q4.  Paypal cautiously revised its near-term guidance lower due to supply chain shortages but says that it expects revenue to accelerate throughout 2022.  Zooming out to a wider timeframe, the current issues seem likely to be just a blip on the radar for this essential name in fintech and the BNPL space. 

PayPal’s annual revenue grew from $9.24 billion in 2015 to $21.45 billion in 2020, as its number of active accounts rose from 179 million to 377 million.  It ended the second quarter of 2021 with 403 million active accounts, and it expects its revenue to rise about 20% to $25.75 billion for the full year.  By 2025, PayPal expects to nearly double its annual revenue to over $50 billion.  Between 2021 and 2025, it expects earnings to rise at a CAGR of 22% and for its annual free cash flow to increase to almost double to over $10 billion.   

PYPL’s share price was already suffering before the earnings call due partly to their abandonment of a prospective deal to buyout Pinterest (PINS) and a number of other influencing factors.  The stock is down nearly 40% from its February 16th record close of $304.79.  

The current consensus among 49 polled analysts is to Buy PYPL stock.  There are 42 Buy ratings, 4 Hold ratings, and 3 Sell ratings for the stock.  A median 12-month price target of $268 represents a 43% upside from the current price.  

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