The final votes are being counted, and investors are on the edge of their seats, waiting to see who the next U.S. president will be. Despite the unclear outlook, stocks were up sharply on Wednesday, with the Nasdaq leading the way at 3.85%.
Some view the race to the White House, regardless of the outcome, as a binary event, with stocks typically reacting negatively to these events. Thus, the election’s resolution could remove significant uncertainty that has been weighing on investors for the last few months.
But what would a contested election mean for the markets? According to some Street pros, even if the outcome is contested in a drawn-out process, the Federal Reserve would likely intervene, allowing stocks to climb higher. If the election isn’t contested, another stimulus package would likely come at a faster pace.
Bearing this in mind, we set out to find stocks that are poised to outperform, based on multiple metrics. The Smart Score tool from TipRanks takes eight key factors used to evaluate potential investments and collates them into a single numerical score, with 10 being the most likely to outperform in the long run.
Using TipRanks’ database, we pinpointed three stocks with a “Perfect 10” Smart Score. Here are all of the details.
Vista Outdoor (VSTO)
First up on our list of Perfect 10s we have Vista Outdoors, which designs, develops and manufactures ammunition, primers, components and related equipment products. With the election potentially serving as a positive catalyst, Wall Street is on board.
B.Riley analyst Eric Wold acknowledges that shares struggled after Walmart announced that it would be removing firearms and ammo displays from its store floors as a precautionary move ahead of potential civil unrest in some markets, but he sees the news as a non-issue.
Customers can still buy these products, they just won’t be on display. Additionally, Wold argues that firearms and ammo are unlikely to be impulse purchases, and that they are the reason customers would come to the store. Therefore, he doesn’t think demand will be impacted.
Wold added, “While we can understand the headline reaction to VSTO shares and the broader shooting sports group, we note that not only do we estimate that has Walmart already declined to less than 10% of sales for VSTO over the past year, but the company already shifted the majority of its ammo shipments away from Walmart to other distributors last year.”
Looking at the firearms and ammo market, demand has been surging, with an average monthly year-over-year gain of roughly 85% witnessed between March and September. According to Wold, this demand could climb even higher following the election.
Based on Biden’s proposals, a win for the Democrats could strengthen demand. “This has been the case with prior democratic victories as consumers move to stock up on products that potentially may become a target of post-election agendas before any such legislation can be enacted. However, we also cannot rule out the possibility that a Trump re-election victory would not begin another ‘Trump Slump,’ but instead ignite additional social unrest and calls for police disbandment that could drive another round of firearms and ammo purchases as was seen during the spring/summer,” Wold explained.
If that wasn’t enough, VSTO’s acquisition of Remington’s ammunition and accessories business could provide “an attractive boost to current expectations,” in Wold’s opinion. He also noted, “Furthermore, we would expect VSTO to take advantage of the strong brand name awareness associated with Remington to generate growth in that business in the years ahead as it is incorporated into the company’s existing ammo and shooting sports operations.”
It should come as no surprise, then, that Wold stayed with the bulls. In addition to a Buy rating, he left a $30 price target on the stock. Investors could be pocketing a gain of 46%, should this target be met in the twelve months ahead. (To watch Wold’s track record, click here)
In general, other analysts echo Wold’s sentiment. 4 Buys and 1 Hold add up to a Strong Buy consensus rating. The average price target of $30 matches Wold’s. (See VSTO stock analysis on TipRanks)
United Natural Foods (UNFI)
As a leader in the grocery space, United Natural Foods is known for being a premier wholesale food and meat distributor. According to some members of the Street, this Perfect 10 is poised to grow regardless of the macro environment.
MKM Partners analyst Bill Kirk told clients, “United Natural Foods is uniquely positioned to increase its importance with retail partners. With the most complete product assortment offering, UNFI has a significant opportunity to cross-sell its services (Conventional offerings into existing Natural/Organic customers and Natural/ Organic offerings into exiting Conventional customers.”
The company recently inked a 10-year $10 billion deal with Key Foods, allowing UNFI to build a distribution center to service the New York metro. This opens up a new market, in the analyst’s opinion. As for its relationship with Whole Foods, Kirk doesn’t think it will be terminated anytime soon, as it’s unlikely “Whole Foods can get much better terms from UNFI.”
“As such, key customer risk is overstated, the ability to win new customers understated, and the opportunity to cross-sell products underappreciated,” Kirk opined.
Independent of Whole Foods, Amazon could provide a significant opportunity for the company. “Even though Spartan Nash relationship has evolved with Amazon, UNFI is still growing with the e-commerce giant. Amazon is not obligated by the deal and Spartan does not cover all the Amazon Fresh geographies,” Kirk explained.
Additionally, Kirk believes that although promotional activity stalled during the pandemic, it is set to improve in 2021, supporting EBITDA in turn. It should also be noted that independent grocers are becoming increasingly important in communities. “Many smaller concepts have outperformed the largest concepts like Walmart. Habits are sticky, and we believe some of that traffic share stays with smaller stores more likely to be UNFI customers,” he said.
Given all of the above, Kirk sees limited downside with the stock trading at ~8x NTM PE and ~6x EV/NTM EBITDA.
As a result, Kirk sides with the bulls, reiterating a Buy rating and $26 price target. This target conveys his confidence in UNFI’s ability to climb 76% higher in the next year. (To watch Kirk’s track record, click here)
Turning to the rest of the Street, 2 Buys and 4 Holds have been assigned in the last three months. Therefore, UNFI is a Moderate Buy. At $23.50, the average price target implies 59% upside potential. (See UNFI stock analysis on TipRanks)
Tempur Sealy (TPX)
Last but not least we have Tempur Sealy, which is one of the world’s largest bedding providers, offering mattresses, adjustable bases, pillows and other sleep and relaxation products. Following its solid Q3 earnings release, Wall Street is pounding the table on this Perfect 10.
In the quarter, total sales increased 37.9% year-over-year to $1,132 million, ahead of the $1,071 million consensus estimate. 5-star analyst Bobby Griffin, of Raymond James, notes that based on his estimates, N.A. organic sales grew roughly 15%, excluding new distribution. To this end, he believes Tempur Sealy gained N.A. market share during the quarter. On top of this, adjusted EBITDA was $279 million, versus the Street’s $234 million call.
“The strong performance highlights the strength of Tempur Sealy’s portfolio of brands, its expanding omni-channel distribution model, as well as the benefit the entire category is seeing from a strong U.S. housing environment,” Griffin commented.
Although some investors have expressed concern about a pull forward in demand, Griffin argues the organic sales comparison in 2021 is reasonable on a full year basis. Expounding on this, he stated, “Yes, the election clearly creates near-term uncertainty. Nonetheless, on a long-term basis, there are a handful of positive fundamentals (expanding direct distribution, struggling competitors, further international expansion, etc.) that position Tempur Sealy well to outperform.”
Adding to the good news, TPX initiated a quarterly cash dividend beginning in 2021, with it targeting annual distribution of 15% of net income. The board of directors also increased the share repurchase authorization to $300 million, and declared a four for one stock split that will take place in November.
“All-in, the updated capital allocation, combined with Tempur Sealy’s lower leverage profile going forward should be well-received by investors and open TPX to new potential shareholders,” Griffin mentioned.
In line with his optimistic approach, Griffin reiterated a Strong Buy rating and $115 price target, indicating 26% upside potential. (To watch Griffin’s track record, click here)
Are other analysts in agreement? Most are. 7 Buys and 1 Hold have been issued in the last three months. So, the message is clear: TPX is a Strong Buy. Given the $116.88 average price target, shares could surge 28% in the next year. (See TPX stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
