Wednesday should be a big day for market watchers, with the Fed set to announce another interest rate hike, a move that will no doubt impact stock market behavior.
Rate hikes were de rigueur in 2022 and this will be the fourth instance of such an act. The effort to rein in soaring inflation has rattled markets, but ahead of the Fed’s decision, Jim Cramer, the well-known host of CNBC’s “Mad Money” program, thinks there could be more turbulence to come. Or, as Cramer puts it, “Welcome to the living hell that is a real cycle of Fed tightening.”
The new conditions therefore merit a new approach, and Cramer says it’s goodbye to growth-oriented tech stocks and it’s time to usher in a new era.
“We have to go to the new leaders of this market. Leaders like health care, leaders like oils, leaders like financiers who fire people as a matter of course,” Cramer explained. “You buy industrialists who have to travel, you buy stocks of consumer packaged goods whose cost of raw materials is falling.”
So, with that as a backdrop, let’s take a look at the details of two Cramer picks that stand to benefit from this new paradigm. It’s not just Cramer who hides behind these names. According to the TipRanks database, both are ranked as Strong Buys by analyst consensus. Let’s see why.
Constellation Brands (ZST)
Recession or not, people will always need a good drink to get the party started or get through tough times and that’s why liquor giant Constellation Brands, Cramer’s top pick we’ll be looking at, might be somewhat immune. against macro whims.
The portfolio of this large-cap company has more than 100 brands, including Robert Mondavi, Simi Winery, Ruffino (wines), Svedka Vodka, Casa Noble Tequila (spirits) and Corona, Modelo Especial and Negra Modelo on the imported beer front. In fact, in terms of sales, Constellation is the largest beer importer in the United States, while among the major beer suppliers, it also claims the third largest market share (7.4%). Constellation also invests in cannabis and health.
This kind of value proposition helped the company beat expectations in its latest quarterly statement – for the second quarter of fiscal 2023.
Buoyed by strong demand for its beer portfolio, revenue rose 12.2% year-over-year to $2.66 billion, in turn beating the street call of 150 million of dollars. There was also a beat on the bottom line; the company delivered adj. EPS of $3.17 versus analyst expectation of $2.82.
The company also impressed with the outlook, raising its FY2023 comparable EPS forecast to a range of $11.20 to $11.60 from $11.20 to $11.50 previously. The consensus estimate was just $11.06 per share.
It’s also the kind of performance that has kept the stock relatively flat against the overall market rout of 2022. Stocks could be down 3% year-to-date, but that’s a much better showing than the 19% decline in the S&P 500.
Assessing the company’s outlook, Jefferies analyst Kevin Grundy calls Constellation his “favorite large-cap growth idea.”
“STZ’s beer segment is clearly maintaining momentum in an environment where the market is understandably concerned about slowing consumer demand,” Grundy said. “FY23 guidance is conservative, and at ~15x EV/EBITDA (ex. Canopy) we see ample room to close the multiple gap against high growth peers MNST/BFB trading at ~24x/24x STZ is in a unique position as there are very few companies in global commodities with dominant market share, a long track to grow sales/OI by 7-9% per year and EBITDA margins. 43 to 44%/30% return on capital.
To that end, Grundy is pricing STZ stock long while its price target of $310 suggests the stock will rise about 28% over the one-year period. (To see Grundy’s track record, Click here)
Looking at the consensus breakdown, other analysts were also impressed. Based on 8 buys and only 2 holds (i.e. neutral), the word on the street is that STZ is a strong buy. The average target is $276.5 and represents 12-month returns of 14% from the current share price of $242. (See STZ stock analysis on TipRanks)
Eli Lilly and company (THERE IS)
Let’s move from one industry giant to another, albeit in a completely different sector. Eli Lilly, Cramer’s second largest market leader, is a pharmaceutical titan with a market capitalization of $334 billion, putting it second only to Johnson & Johnson in the global pharmaceutical industry. Founded in 1876, the company’s products are available in 120 countries while it has a total of 37,000 employees worldwide.
Such size and scope are based on an illustrious track record. For history buffs, take note: in 1923, the company launched Iletin, the first commercially sold insulin drug indicated to treat diabetes. Additionally, LLY was the first company to produce and distribute Jonas Salk’s polio vaccine globally. Among its best-known products now are the antipsychotic drug Zyprexa (1996), the clinical treatments for depression Prozac (1986) and Cymbalta (2004), and the diabetes drugs Trulicity (2014) and Humalog (1996).
The pharmaceutical giant has just released its third quarter report, showing beats in both revenue and net income. Revenue rose 2.5% from the same period a year ago to $6.94 billion, while WO. EPS climbed 12% year-over-year to $1.98. However, the company was disappointed with the outlook and 2022 revenue is now expected to be between $28.5 and $29 billion, down from $28.8 and $29.3 billion previously. Similarly, the adj. The EPS forecast was lowered from $7.90-$8.05 to between $7.70-$7.85. Analysts were expecting $28.76 billion and $7.95, respectively.
Nonetheless, spurred by strong patient demand and expanding coverage from insurers, its new diabetes drug Mounjaro recorded global sales of $187.3 million, well above the $82 million predicted by Wall Street.
The drug’s potential remains central to Morgan Stanley’s Terence Flynn thesis: “We remain optimistic about the outlook for Mounjaro (LLY’s key product cycle) coming out of Q3 given the strong demand GLPs, as well as LLY’s margin expansion opportunity. Our updated scenario analysis continues to suggest a rise in Mounjaro + Trulicity estimates for 2023 and we view LLY’s 2023 guidance call on December 13 as the next catalyst for the stock.
As a result, Flynn notes that LLY shares an overweight position (i.e. buy), while its price target is raised from $408 to $441, suggesting the stock will generate returns of around 25 % over the coming year. (To see Flynn’s track record, Click here)
All of Flynn’s colleagues agree it’s a name to own; on the basis of 11 unanimous positive opinions from analysts, the title naturally claims a consensual rating of strong buy. Equities have significantly outperformed the market this year, rising around 32%. (See LLY stock analysis on TipRanks)
To find great stock trading ideas at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all of TipRanks’ stock information.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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