Three Stocks to Watch for the Week of August 8th

The major indices finished last week with mixed results after the release of higher-than-expected jobs numbers. The labor market added 528,000 jobs in July, far surpassing Wall Street’s expectation of a 258,000 increase. Strength in the labor market supports the Federal Reserve’s case for continued aggressiveness against inflation, which could put a damper on any hopes for a market recovery this year. For the week, the Dow lost 0.1%, the S&P 500 rose 0.4%, and the Nasdaq posted a 2.2% gain.

Earnings performance continued to improve last week and will start to cool down in the week ahead. About 87% of the S&P 500 companies have reported so far, where Wall Street now expects an increase of 6.7% from the previous year, up from last week’s projection of 5.8%. In the week ahead, we’ll hear from Disney, BioNTech, AIG, and Wynn Resorts, to name a few.  

Next week we’ll get an important update on the consumer inflation rate. The latest Consumer Price Index (CPI) is slated for release on Wednesday, followed by the Producer Price Index (PPI) on Thursday. We’ll also find out if consumer confidence is holding up this month. The preliminary August reading of the Michigan Consumer Sentiment Index (MCSI) is due for release on Friday.

In this watchlist, our team recommends three tickers, including a unique diversification tool and a tech stock from a corner of the market that’s predicted to see demand explode in the coming years.  

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REITs offer a unique risk/reward profile that doesn’t always perfectly correlate with stocks or bonds because real estate is an asset class that’s not directly tied to traditional markets. In many situations, REITs can bolster your portfolio when markets take a plunge.

REITs are also not required to pay federal taxes so long as they distribute at least 90% of their profits as dividends, often leading to sizeable payouts, which makes an investment in a quality REIT a relatively steady source of income. According to NAREIT data, equity REIT dividend yields averaged approximately 2.6% in 2021, or more than twice the 1.2% yield of the S&P 500.  

Boston-based, Information management services company Iron Mountain Inc. (IRM) provides information destruction, records management, and data backup and recovery services to more than 220,000 customers in 58 countries. The company has around 1,500 leased warehouse spaces and underground storage facilities worldwide. 

As a testament to Iron Mountain’s leadership in its core storage business, the company serves 225,000 customers, including about 95% of the Fortune 1000 companies. As for what the company stores, the wills of Princess Di and Charles Darwin are housed in their facilities, as well as the original recordings of Frank Sinatra and Bill Gates’ Corbis photographic collection.   

The need for Iron Mountain’s physical facilities will likely never disappear. Still, as digital storage becomes more widely adopted, the company should continue to grow along with its global data-center business, which contributed 8% of adjusted earnings in 2021. The fact it continues to generate over $2 billion per year in revenue from its core storage business while strategically growing its data center portfolio is an optimistic sign for steady growth in the coming years.  

IRM has maintained a $0.62 per share quarterly dividend since 2019 as it has been focused on steadily recovering its payout ratio from the pandemic. The AFFO improved by 11% in the first quarter of 2022, dropping to 68% from 76% in the first quarter of 2021. Management’s target for a low to mid 60’s % target seems to be quickly approaching, after which they see the dividend increasing from the current level of 5.26%. 

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Israel-based Nice Ltd. (NICE) is a provider of enterprise software with more than 27,000 customers (including 85% of the Fortune 100) from 150 countries. Its operating segments consist of Customer Interactions Solutions and Financial Crime & Compliance Solutions. Over the past year, the company generated $2.0 billion in revenue, and approximately $1.1 billion was cloud-based revenue. Over the past three years, the company’s revenue grew 22.3%, from $1.57 billion in 2019 to $1.92 billion in 2021.   In terms of profits, its operating profit rose 10.6% to $263.9 million from $238.7 million a year earlier.   

Building on the stellar growth, the company reiterated its ambitious targets when it unveiled its NICE3D strategic plan during its recent investor’s day event. The company outlined its updated financial goals through fiscal 2026, headlined by 30%+ operating margins and double-digit revenue growth. Nice currently trades at 6.74x sales, considerably less than its main competitor Five9  at 10.03x.

According to Research and Markets, the global network security market size reached a valuation of $4.68 billion in 2021. Experts project that by 2027, the segment will command a valuation of $16.6 billion, representing a CAGR of 23.5% from 2023 estimates.

The current consensus among 12 polled analysts is to Buy NICE. A median price target of $265 represents an increase of 20% from Friday’s closing price.  

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According to Mordor Intelligence, the application delivery controller market is expected to reach a valuation of $3.78 billion by 2026, representing a CAGR of 9.63% from 2021.  One of the companies set to benefit most from the trend is A10 Networks (ATEN). Specialists when it comes to the manufacturing of application delivery controllers, A10 leverages artificial intelligence protocols to provide automated protection against distributed denial-of-service (DDoS) attacks, which are increasing in relevance by the day.  

Widening profit margins surfaced in the most recent quarterly results as earnings expanded faster than revenues. Last week the company reported that Q2 earnings came in at $0.17 per share, indicating an increase of 31% year-over-year, surpassing analyst estimates by 6%. Revenues were also upbeat at $68 million, representing a 15% increase from the same period last year and exceeding analyst expectations of $67.4 million.

“Our targeted, strategic investments in technology are enabling us to capture market share, while our diversity of revenue and cybersecurity solutions serve as catalysts for durable growth, even amidst macroeconomic conditions,” said Dhrupad Trivedi, A10 CEO.

The drastic earnings growth indicates the business is going from strength to strength. A trend that investors hope will continue well into the future. Management reiterated its full-year top-line growth target of 10 – 12% and expanding EBITDA in the range of 26 – 28% of revenue. A10 Networks certainly ticks a few boxes and seems well worth watching.