July 18, 2022, UnitedHealth Group Incorporated (NYSE:UNH) and Costco Wholesale Corporation (NASDAQ:COST)
These two blue-chip large caps offer substantial opportunities as the best stocks to buy now.
As we embark on an uncertain earnings season, the indices closed the week in the green. However, markets will continue to see-saw and potentially price a 100 bp hike at the Fed’s July meeting. Yet, there are ways to play the turbulence. Large caps that show the propensity to withstand economic headwinds are the ways to go. That’s why UnitedHealth Group Incorporated (NYSE:UNH) and Costco Wholesale Corporation (NASDAQ:COST) could be two of the best stocks to buy now.
Following its excellent Q2 earnings beat announced on Friday (July 15, 2022), UnitedHealth is one of the best stocks to buy now. It clobbered estimates, reported strong growth in many verticals and upgraded its guidance. This has become typical for this healthcare giant, though, as Q1 earnings were largely upbeat as well. The best part is that analysts still see this as a STRONG BUY with a double-digit upside.
Costco is another of the best stocks to buy now. A wholesale-retail behemoth and one of the most lucrative companies in the U.S. today, Costco continues making news for all the right reasons. While it won’t report its next earnings for a few months, its most recent earnings were impressive. Especially relative to other big box retailers. After all, that’s why Deutsche Bank upgraded it last week and called it “One of the Most Consistent Operators.’ The fact that it refused to hike its hot dog prices from $1.50 in this red-hot inflationary environment certainly helped it win the hearts of investors as well.
This remains a challenging environment for stocks. However, markets may have priced in the worst already. During this earnings season and the year’s second half, these two firms stand out as the best stocks to buy now.
UnitedHealth Group Incorporated (NYSE:UNH)
This healthcare behemoth once again clobbered earnings and continues to surge with a double-digit upside.
UnitedHealth Group is probably an even more prominent player in the healthcare providers and services industry than you realize. It is the world’s eighth largest enterprise by revenue, the second-largest healthcare company behind CVS Health in revenue, and the largest insurance company by net premiums.
It’s one of the best stocks to buy now because it has so many things to offer investors from a fundamental and technical perspective during this difficult time. It is immensely profitable, well-run, and a long-term outperformer perfectly positioned to weather inflation and any other economic headwind.
Its Latest Earnings Only Tell a Fraction of its Growth Story
Q1 was strong enough for UNH. It beat top and bottom-line estimates and experienced extraordinary growth across many verticals.
However, the Q2 report it announced last week (July 15, 2022) turned heads, shook up the markets, and was cheered by investors of all shapes and sizes.
- Revenue surged 12.6% year-over-year to $80.3 billion and outperformed estimates by $620 million. This was driven by double-digit growth across its Optum and UnitedHealthcare verticals.
- EPS came in at $5.57 per share and beat estimates by $0.36.
- Net margin in Q2 expanded 30 basis points to 6.3%.
- Its 14.6% operating cost ratio compares favorably to 14.5% from a year ago.
UNH, as a result of this strong earnings report, upgraded its full-year guidance, with EPS coming in between $21.40 per share and $21.90 per share.
Beyond this, several bullish growth projections are in place for UNH, and consistent earnings beats like this are primarily why.
- 68% projected earnings growth in the coming year
- Net income could grow by 19.3% and average a 13.2% growth rate over the next five fiscal years
- 2% 5-year revenue CAGR
Rock Solid Balance Sheet, Strong Cash Flows, and a Mouth-Watering Dividend
We could start with UNH’s rock-solid balance sheet as a reason why this firm is one of the best stocks to buy now. It has solid margins, including a 24.0% gross margin and 25.1% ROCE. Its 8 out of 9 Piotroski Score is also outstanding and signifies the Company operates with healthy Liquid Balance Sheets, Profitability, and Operating Efficiency.
Cash flows that can sufficiently cover interest payments alongside a 4.1% free cash flow yield help its case even more.
But the dividend tells the whole story of UNH’s fundamental appeal.
UnitedHealth currently has a 1.25% dividend yield. It’s increased its dividend for 14 straight years. It could continue to do so based on its dividend payout ratio of 34.46% and projected dividend payout ratio of 26.48% next year.
Most notably, in the previous quarter, UNH returned $4 billion to investors via dividends and stock buybacks while also hiking its dividend by 14% in June.
That might explain why Finbox projects its dividend to grow 13.8% at an 18.3% 5-year CAGR.
The Charts and Technicals Tell a Strong Story Too
It doesn’t matter whether or not you are focused on the short-term or the long-term. UNH offers something for both types of investors and has consistently clobbered the markets. Look at these 5-year and year-to-date charts comparing UNH to the major indices.
To get even more detailed, UNH has also been on fire over the last month, gaining 14% and more than quadrupling what any other major index has done.
That’s why, based on technical analysis, BarChart gives UNH an 88% BUY rating based on the following indicators flashing BUY signals:
- 20 Day Moving Average
- 20 – 50 Day MACD Oscillator
- 20 – 100 Day MACD Oscillator
- 20 – 200 Day MACD Oscillator
- 50 Day Moving Average
- 50 – 150 Day MACD Oscillator
- 50 – 200 Day MACD Oscillator
- 100 Day Moving Average
- 150 Day Moving Average
- 200 Day Moving Average
- 100 – 200 Day MACD Oscillator.
Analysts Still See UNH as a STRONG BUY With a Double-Digit Upside
The day before UNH released its earnings, Morgan Stanley analyst Ricky Goldwasser reiterated a BUY rating and $570 price target.
However, UNH could have much more room to run than this.
TipRanks scores UNH as a STRONG BUY. That’s because out of 17 Wall Street analysts offering 12-month price targets for UnitedHealth in the last 3 months, 14 rated it a BUY. Only 3 rated it a HOLD, and 0 a SELL. UNH currently has a street-high target of $632.00, a low of $487.00, and an average price target of $584.07. Its average price target represents a 10.25% upside from July 15, 2022’s $529.75 close.
The company’s year-to-date low and high are $445.74 and $553.29, respectively.
Costco Wholesale Corporation (NASDAQ:COST)
Beyond its beloved hot dog prices, this enormous retailer is a STRONG BUY, outperforming competitors, receiving analyst upgrades, and staring at a considerable upside.
Costco is the world’s fifth-largest retailer, the world’s largest retailer of choice and prime beef, organic foods, rotisserie chicken, and wine, and the 10th largest U.S. enterprise by total revenue. It has 830 warehouses worldwide, including 574 in the U.S,
Yet, despite broader economic conditions, Costco runs like a well-oiled machine. It has fared much better than competitors such as Target and Walmart, as consumers opt to buy in bulk and search for bargains.
Warehouse retail demand is soaring. This alone is why Costco is one of the best stocks to buy now. However, soaring demand only scratches the surface. The fact that it refused to hike its hot dog and soda prices despite inflation, which has been in place since the 80s, certainly earned it many fans inside and outside the investment community.
Despite Falling After Its Latest Earnings, Costco Beat Estimates and is Benefitting From Soaring Membership Demand
Costco fell after its Q3 earnings, likely due to “guilt by association” after Target and Walmart tanked. But do a deeper dive, and it’s clear that not all retailers are created equally. Costco, bar none, is not one and the same as the others.
Consider the following metrics:
- EPS of $3.04 beat analyst estimates by $0.02 and came in 10.5% higher year-over-year.
- Total revenue came in at $52.60 billion, well above the consensus projection of $51.5 billion.
- Net sales rose 16.3% to $51.61 billion and beat the projected $50.45 billion.
- Membership revenues rose 9.2% to $984 million, topping consensus estimates of $971.5 million.
- Adjusted same-store sales increased 10.8% from last year, while e-commerce sales grew 7.9%.
Beyond the raw financial figures, though, more and more people are shopping at Costco. This could be a long-term growth driver for the Company. Costco reported:
- A 6.8% rise in traffic and 7.6% rise in average transactions worldwide
- Membership grew 6% to 64.4 million households and 116.6 million cardholders in the quarter.
- Executive memberships rose by 800,000 in the quarter representing over 71% of worldwide sales and 43% of its whole membership base.
- Membership renewal rates hit all-time highs of 92.3% in the U.S. and Canada.
It’s simple. Warehouse memberships are surging alongside inflation, and Costco is benefitting. It’s established 17 new warehouses in 2022 and expects to open an additional 10 warehouses by year’s end.
Perhaps that’s why the Company could see earnings grow by 9.43% in the coming year, net income grow 16.1% at an average of 10.9% over the next five fiscal years, and revenue increase at a 5-year CAGR of 10.5%.
A Deeper Dive Into the Company’s Fundamentals Depict a Well-Run Dividend-Paying Machine
Do a deeper dive into Costco’s fundamentals; they look even more appetizing than its $1.50 hot dogs.
Costco’s cash flows, first and foremost, can sufficiently cover interest payments.
Its 7 out of 9 Piotroski Score also indicates that the Company operates with healthy Liquid Balance Sheets, Profitability, and Operating Efficiency. Many of its fundamental margins add further context to this, including its
Like UNH, a top reason Costco is one of the best stocks to buy now is its dividend.
A recent research note from Deutsche Bank analyst Krisztina Katai added further context to how strong of a dividend payer Costco really is. She noted that over the last five years, management consistently returned $1.7B in cash to shareholders through repurchases. She added that COST’s cash per share balance sits at $27 compared to $11 a decade ago, placing it in a prime position to return cash to shareholders through buybacks and special dividends.
Currently, COST has a dividend yield of 0.69%. It’s increased its dividend for 19 consecutive years. It should continue to do so based on its dividend payout ratio of 28.35% and projected dividend payout ratio of 25.23% next year.
With figures like this, it’s not shocking to see dividend growth projections of 13.8% at an 11.9% 5-year CAGR.
COST’s Charts and Technicals Look Immensely Appealing
Costco has had an up and down 2022, but since touching its late-May low of $406.51, it has caught fire.
That’s why Barchart gives it a 24% BUY score based on the following technical indicators:
- 20 Day Moving Average
- 20 – 50 Day MACD Oscillator
- 50 Day Moving Average
- 100 Day Moving Average
- 150 Day Moving Average
- 200 Day Moving Average
- 100 – 200 Day MACD Oscillator
Costco Remains a STRONG BUY and is Seeing Analyst Upgrades
Costco is a stock that has generated a great deal of buzz lately as one of the best stocks to buy now. Analysts know it, too. That’s why just four days ago (July 14, 2022), Deutsche Bank analyst Krisztina Katai upgraded COST from HOLD to BUY and hiked her price target from $525.00 to $579.00.
$579.00 represents a 9.95% upside from Friday’s (July 15, 2022) close.
Why the upgrade? Here are several highlights from her note:
- “One of the most consistent operators in our group.”
- “Steady traffic gains and high membership renewal rates serve as key differentiators in an increasingly uncertain backdrop.”
- Stock could benefit “as consumers increasingly flock to warehouse clubs to consolidate trips, purchase in bulk for better pricing, and fill up their cars with lower priced gas.”
- “…pristine balance sheet which the company uses to enhance shareholder value in many ways.”
It goes far beyond Deutsche Bank, though. On July 7, 2022, Oppenheimer replaced Walmart with Costco among the firm’s Top Picks for Food Retailing/Discounters.
TipRanks, based on 19 Wall Street analysts offering 12-month price targets for Costco in the last 3 months, rates it a STRONG BUY. Of these 19 analysts, 16 rate it a BUY, compared to 3 a HOLD and 0 a SELL. COST currently has a street-high price target of $645.00, a low of $494.00, and an average of $560.21. Its average price target represents a 7.12% upside from July 15, 2022’s closing price of $522.95.
COST’s year-to-date low and high are $406.51 and $612.27, respectively.
