Grading Three Stay-at-Home Stocks
This week, I use AAII’s A+ Stock Grades to give you insights into three stay-at-home stocks that benefited greatly during the lockdown economy: Teladoc Health Inc. (TDOC), United Parcel Service Inc. (UPS) and Zoom Video Communications Inc. (ZM). Are investors moving away from these stocks and into companies that would benefit from the economy reopening?
Three Pandemic Favorites Pull Back After Positive Vaccine News
Certain companies have been clear beneficiaries of the coronavirus pandemic, as consumers’ behaviors changed and people stayed close to home. We don’t know when the market’s preferences will change, or if they are temporary, but shares of stay-at-home stocks fell sharply on Monday following the release of encouraging coronavirus vaccine news.
The coronavirus pandemic, while better understood than it was at the beginning of the year, still presents significant uncertainty in terms of how it will impact society and the economy. Despite the long-term uncertainty, positive preliminary vaccine and antibody treatment news this week from major pharmaceutical companies led investors to abandon (at least temporarily) popular stay-at-home stocks Teladoc Health, UPS and Zoom Video.
Shares of Teladoc Health traded nearly 14% lower on Monday, while Zoom Video declined over 17%. The pullbacks came after Pfizer Inc. (PFE) and BioNTech SE (BNTX) reported that their coronavirus vaccine candidate showed a 90% efficacy rate in preventing infections during a late-stage trial, and Eli Lilly and Co. (LLY) received Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration (FDA) for its investigational coronavirus antibody treatment. UPS shares weathered the news better than the other two stay-at-home stocks but are down 8.3% from their 52-week high stock price of $178.01 per share reached one month ago.
Investors loaded up on stocks such as Teladoc Health, UPS and Zoom Video this year as the pandemic persisted and kept most people from leaving their homes. So, maybe a pullback was inevitable. Despite Monday’s sharp decline, the year-to-date performance for Teladoc Health, UPS and Zoom Video has been extraordinary, with the three stocks up 112.6%, 39.4% and 507.3%, respectively.
While much of the economy has started to recover, it’s clear that the global pandemic has accelerated changes that were under way before we’d even heard of the coronavirus. Companies announced policies supporting work from home, while at the same time, consumer behavior as continued to shift toward an online retail and delivery model and increased telehealth visits.
For many of us, these changes could remain the standard for years. So, let’s evaluate Teladoc Health, UPS and Zoom Video using AAII’s A+ Stock Grades to determine how attractive the three stay-at-home stocks are based on their fundamentals today.
AAII’s A+ Stock Grades is a stock-grading system based on percentile rankings of multiple key metrics within five investment factors: value, momentum, quality, growth and earnings estimate revisions. The A to F grades on each factor give summary ratings on a company’s fundamentals.
The following table summarizes the stock grades for Teladoc Health, a provider of virtual health care services; UPS, a global package delivery company; and Zoom Video, a communications platform and content sharing tool for individuals and enterprises.
What the A+ Stock Grades Reveal
Teladoc Health provides virtual health care services in the U.S. and around the world. The company covers various clinical conditions, including non-critical, episodic care, chronic and complicated cases like cancer and congestive heart failure. It also offers telehealth solutions, expert medical services, behavioral health solutions, guidance and support and platform and program services. The company’s platform enables patients and providers to have an integrated smart user experience through mobile and web-based applications.
Teladoc Health has a strong A+ Growth Grade of B, which looks at quarterly year-over-year growth in sales, diluted earnings per share from continuing operations and operating cash, as well as annualized growth over the last five years for these three elements. The company saw operating cash increase by over 138% for its latest quarter versus one year ago.
The company has a Value Grade of F, based on its score of 97, which is considered to be in the ultra-expensive range. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio.
The A+ Quality Grade is based on having a ranking for at least four of eight quality measures — return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, management’s use of accruals, Z double prime bankruptcy risk (Z) score and F-Score. Stocks receive better grades for having higher scores for the quality sub-components.
Teladoc Health has a quality score of 24, which is weak and translates to a Quality Grade of D. The company’s return on assets is negative 4.9%, which contributes to its weak Quality Grade.
UPS is the world’s largest package delivery company. It is also a supply chain and freight transport facilitator, offering a variety of non-package services, including air and ocean freight forwarding, customs brokerage and truck freight services. In 2019, UPS served 1.6 million shipping customers and more than 9.9 million delivery customers daily.
The pandemic is accelerating long-term global growth of e-commerce, providing a substantial volume boost to UPS due to its large business-to-consumer delivery operations. The lack of demand for air travel during the pandemic is also severely restricting commercial airline cargo capacity, leading to higher prices for UPS, which handles its own air shipments. UPS is also benefiting on the cost side from this year’s drop in oil/fuel prices.
The company has a positive A+ Estimate Revisions Grade of B, which is based on the magnitude of a company’s last two earnings surprises, using the SUE (standardized unexpected earnings) score, and the percentage change in the consensus estimate for the current fiscal year over the last month and last three months.
With its stock up over 39% for the year, UPS has a Value Grade of D, based on its score of 67, which is considered expensive. The company’s Value Score ranking is based on several traditional valuation metrics. UPS has a score of 46 for the price-to-sales ratio, 77 for the price-to-free-cash-flow ratio and 96 for the price-to-book-value ratio (remember, the lower the score the better for value).
The company has a B grade when it comes to price momentum based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. UPS has a strong A+ Growth Grade of B, which looks at growth in sales, diluted earnings per share from continuing operations and operating cash.
Zoom Video connects people through video, voice and chat, as well as content sharing. It enables face-to-face video experiences for thousands of people in a single meeting across different devices and locations.
The company has benefited from the coronavirus pandemic. Analysts note that the enterprise adoption of video conferencing software that was expected to take place over the course of several years occurred in just a few weeks. As reflected in Monday’s sharp share price decline, one of the biggest risks facing the company is the eventual release of a coronavirus vaccine, which could slow down its aggressive virtual meeting subscriber growth.
Zoom Video has a Value Grade of F, based on its score of 100, which is considered to be at the top of the ultra-expensive range. The Value Grade is the percentile rank of the average of the percentile ranks of several traditional valuation ratios.
The company has a very strong A+ Growth Grade of A, which looks at several components that consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. The company saw sales increase by over 147% for its latest quarter versus one year ago.
The company has an A grade when it comes to price momentum, based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. It is considered to be an anomaly in the analysis of stock returns because stocks with high relative levels of momentum tend to continue to outperform, while stocks with low relative levels of momentum tend to continue underperforming.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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