Three Stocks to Watch for the Week of April 4th

Stocks fluctuated in both directions but finished the week with little changed after closing a positive month and a negative quarter.  Despite late March’s recovery rally, the major averages posted the worst quarter since Q1 of 2020.  The Dow declined 4.6%, the S&P 500 lost 4.9%, and the Nasdaq bled more than 9% in the first quarter.  Rounding the corner into Q2, investors are confronted with the task of seeking out quality investments against a more challenging economic backdrop.   

Our team has a few recommendations this week, including a short-term play that rewards big when oil supply increases and prices plunge.  Plus, a financials name poised to perform well as the bullish case for rate-sensitive stocks gains steam.   

The market was anticipating the first 25 basis point rate hike last month.  What came as a surprise was the Fed’s more hawkish approach, indicating that it plans to make comparable rate hikes at each of its next six FOMC meetings in 2022.  And it’s planning another four hikes next year for a total of 11 hikes in two years.  

While bank stocks had factored in rate hike benefits to a certain extent, more rate hikes than projected also means potential for banks to generate higher revenue in 2022.  As one of the perennially most rate-sensitive banks out there, Comerica (CMA) is one to watch as the market adapts to a more hawkish Fed.  

Until recently, Comerica’s management had only expected four 25 basis point rate hikes this year.  According to its annual filing, a 1% move higher in the federal funds rate would lead to a whopping 12% increase in net income interest over the next twelve months.  Considering the implications, the upside potential is undeniable.  

Furthermore, Comerica has high cash levels right now, which will earn a lot more yield as rates go up.  With roughly 90% of total loans in various commercial segments, many of its loans also have floating rates that will reprice higher with the federal funds rate.

With a forward 12-month P/E of 15, CMA is still attractively priced.  Its conservative 33% dividend payout ratio means the 3% dividend yield isn’t going anywhere.   

Roblox Corp (RBLX) has been hit hard recently as investors have taken a pessimistic view of the company’s growth trajectory.  But the sell-off seems overdone, considering the enormous potential in Asian markets.

As per the company’s Q4 2021 earnings presentation, bookings increased by +20% year over year to $770.1 million.  Notably, this was the slowest year-over-year growth in bookings that the company has registered in the past 11 quarters.  For the sake of comparison, RBLX bookings increased 161% in Q1, 35% in Q2, and 28% in Q3.  

The company could struggle to keep up as it laps its stellar performance from the first quarter of last year. Still, bookings growth seems likely to accelerate in the second half of 2022 as expansion in promising Asian markets is on track to offset weakness in U.S. markets.  RBLX derived 23% of its total daily active users in Q4, up from 15% in Q4 2020.  What’s more, daily active users in two key Asian markets, India and Japan, saw their respective daily active users increase by more than +100% year over year in Q4 2021.

The consensus forecasts currently call for Roblox to grow earnings by a respectable 32.5% in the first quarter of 2022 and to cut its losses in half (to $0.22 per share).  The analysts offering recommendations for the stock rate it a Buy and give it an average price target of $65, implying an increase of 41% from where the stock closed on Friday.  

U.S. crude oil slipped below $100 a barrel on Friday, marking a roughly 13% weekly fall.  One factor in oil’s decline from a recent high of around $130 was President Biden’s announcement that the U.S. would release as much as 180 million barrels of oil from a strategic reserve over the next six months.  Our last recommendation is a short-term play that will appeal to active investors bearish on oil.  

The ProShares UltraShort Bloomberg Crude Oil (SCO) offers daily short exposure to crude oil prices through futures contracts, not the spot price of oil.  It is currently short futures that expire in March 2022, June 2022, and December 2022. 

The fund is structured as a commodity pool, a private investment tool structured to combine investor contributions for trading futures and commodities markets.  The ETF seeks daily investment returns, before fees and expenses, that are two times the inverse (-2×) of the daily performance of the Bloomberg Commodity Balanced WTI Crude Oil Index. 

Leveraged ETFs can be riskier investments than non-leveraged ETFs, given that they respond to daily movements in the underlying securities that they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect them to do so on longer-term returns.  By combining inverse and leverage strategies, inverse leveraged ETFs are incredibly complex and risky instruments and should be avoided by less sophisticated investors.

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