These two stocks should be relatively insulated from the economic downturn just over the horizon.
This article was originally written by Maxx Chatsko of The Motley Fool
Relatively few businesses are likely to be spared the economic impact of the coronavirus pandemic. Restaurants, travel companies, and amusement parks have been obvious sources of economic activity to experience a decline, but the misery is likely to spread to not-so-obvious parts of the economy, too.
Clinical trials have been delayed. Electricity demand is expected to plunge. There’s an unprecedented amount of slack in commodity markets ranging from petroleum to lithium. The intricacies of the used car market have been thrown off kilter, which will affect major automakers and car dealerships. City and state governments are bracing for significantly reduced tax revenue.
The eventual scope of the calamity might all start to become clearer as companies begin reporting quarterly results and updating guidance in the next few weeks. Investors will need to keep their ears and eyes open, but they shouldn’t forgo buying stocks. Investors can still find relatively safe growth stocks. Here’s why American Water Works (NYSE:AWK) and Atlassian (NASDAQ:TEAM) are worth a closer look.
A water utility with distributed risks
Investors shouldn’t lazily assume utilities will see minimal disruptions during the pandemic. Utilities might supply the essentials of electricity, natural gas, and water that power everyday life, but America is going to consume much less of those essentials in 2020 than it did last year.
Instead, investors should evaluate utility stocks on a case-by-case basis. All will encounter headwinds, but some are better positioned for a prolonged period of uncertainty than others. American Water Works fits the bill of the former.
The water utility generates revenue from maintaining water distribution and water treatment infrastructure in 16 states from New York to California (well, to Hawaii, technically). It provides water to residential, commercial, and industrial customers. When the company invests in its regulated infrastructure, it can then apply for rate increases from state regulators, which remain in place for several years before rates are eligible for another review.
The highly regulated nature of water distribution provides a relatively predictable stream of revenue and earnings — and growth for each metric. In 2019, American Water generated 86% of total revenue from regulated assets, although it expects to grow that to 88% by 2024.
Along the way, the business projects it can grow earnings per share at a compound annual growth rate of 7% to 10% from 2020 to 2024. Dividends per share are expected to grow at the same rate and represent 50% to 60% of earnings.
Of course, those projections were made before the pandemic hit. In 2019, the business generated 25% of total revenue from commercial and industrial customers, which are the most likely to have curtailed operations in response to stay-at-home orders. But many of the company’s commercial customers are food and beverage manufacturers and energy suppliers, which are the least likely to have curtailed operations.
Investors won’t know the true impact of the health crisis on the company’s operations until it reports first-quarter 2020 earnings and updates its full-year 2020 outlook in the coming weeks. American Water won’t be completely immune, but a geographically diverse footprint should help to distribute risks. What’s more, if the pandemic pushes smaller water utilities to the brink, then it could create opportunities for the business to come to the rescue with acquisitions.
This relatively stable growth stock is worth a closer look during the current market uncertainty.
Collaboration software for the lockdown (and the win)
A handful of software companies might not take much of a financial hit during the pandemic. That seems to be a particularly likely outcome for Atlassian, a leader in collaboration and productivity tools.
The business develops software that allows teams to design, discuss, organize, and complete projects across digital and physical settings. Each product should become increasingly in demand with so many individuals thrust into working remotely. If the pandemic gives corporations a newfound appreciation for remote tools (or trust in their employees), then Atlassian could make any bump in customers permanent.
It hardly needs much help. In the fiscal second quarter of 2020, Atlassian grew revenue 37% from the year-ago period and generated record profits and free cash flow. The business delivered $41.8 million in operating income during the quarter, compared to an operating loss of $3.2 million in the same period of fiscal 2019.
Atlassian’s “cloud first” strategy has powered its recent financial strength. For example, subscription revenue grew 50% year over year in the most recent quarter, which outpaced total revenue growth. The collaboration-tools leader ended the fiscal second quarter of 2020 with 164,790 customers, representing a net increase of 5,003 during the period.
The pandemic shouldn’t dent the company’s operations, which were growing handsomely before the health crisis, and might even boost them. Even if Atlassian experiences brief hardship, it ended December 2019 with $1.9 billion on its balance sheet and is capable of generating operating income or at least break-even operations. This growth stock should exit 2020 stronger than it entered.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Atlassian. The Motley Fool has a disclosure policy.