Buy these 20 deeply undervalued stocks expected to surge in 2021 – including one that could skyrocket 64%, Barclays says
- The pandemic brought volatility to the markets in 2020. But positive news on vaccine trials towards the end of the year means Barclays' equity analysts are predicting a return to normality in 2021.
- A new research report from Barclays outlines the bank's strategy for 2021 and highlights key analysts ratings for the year-ahead.
- Business Insider lists the 20 stocks hand-picked by Barclay equity analysts that have the largest potential positive upside for investors into 2021.
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"2020 will be remembered as a year of extremes," said Barclays equity analyst, Emmanuel Cau, in a November 24 research note.
Investors experienced the worst global recession since the great depression, the quickest bear market and a subsequent record-breaking bull market, Cau said.
The pandemic brought volatility to the markets in 2020. But positive news on vaccine trials towards the end-of-year means that Barclays' equity analysts are predicting a return to normality in 2021.
"We believe high-efficacy vaccines will bring the COVID-19 pandemic under control, allowing a gradual return to normality and a strong cyclical upswing," Cau said. "Central banks and governments have ammunition left to help sustain the recovery, financial conditions are favorable, and there is pent-up demand given resilient disposable income, high savings and recovering profits"
The new research report outlines the bank's equity strategy for 2021 and highlights key analyst ratings for the year-ahead.
European equities have lagged behind their US counterparts this year, as investors piled into growth stocks and moved away from value. The Stoxx 600 index of European blue chips has fallen by around 5.5% this year, compared with a 12.7% gain in the S&P 500. Cau and his team are expecting a return to value.
"Rotation to Value driven by mildly higher yields and easy earnings comps," Cau said. "If the macro backdrop normalises and tail risks abate, extreme polarization will reduce."
This return to value will benefit the Europe stock market. Cau expects a 13% upside in the Stoxx 600 driven by earnings per share growth.
"Europe has more catch-up potential, should be a prime beneficiary of vaccines, rotation and cyclical upswing, but faces sticky structural profitability challenges," Cau said.
More generally, Barclays' analysts remain positive on equities into 2021 for four key reasons:
- The analysts expect the COVID-19 pandemic to be under control enabling a full re-opening of economies combined with supportive monetary and fiscal policies.
- Earnings are expected to rebound strongly.
- The analysts expect nominal growth to drive bond yields, which in turn will cap price-to-earnings ratio. If the yield goes up for the right reason, then equities should benefit, Cau said.
- Equities are cheaper and less owned than bonds. They also provide a hedge against inflation.
However, investors should remain aware that over the winter the stock market could remain volatile. Cau said investors should buy the dips.
Business Insider lists the 20 stocks hand-picked by Barclay equity analysts that have the largest potential positive upside for investors into 2021.
Potential upside (%): 63.7%
Price target: £4.00
Analyst commentary: "There is more BP can do, in our view, to help the market understand the potential it has in the low carbon business, but this is likely to come with delivery. We continue to see BP as meaningfully undervalued, both on an absolute and relative basis. We rate the stock Overweight with a 400p/sh price target."
2. ABN AMRO Bank
Potential upside (%): 50.6%
Price target: €13.5
Analyst commentary: "The new CEO has delivered what we have wanted, namely a wind-down of the loss-making Global Sectors loan book in CIB. We therefore see significant optionality on the stock. Our blue-sky scenario implies 104% upside potential for the shares on a capital-accretive execution. Even if we were to assume no excess capital from this exercise, we still see 47% upside potential as the core retail bank operates in arguably the best Eurozone banking market, makes returns in excess of the sector, and trades at 0.46x TNAV."
3. BT Group
Potential upside (%): 47.2%
Price target: £1.80
Analyst commentary: "Moreover, as we discuss in new era of price inflation ahead (30 September 2020), we view recent price moves and statements from management as supportive of a period of steady price inflation in the UK over the coming years, in both fixed and mobile. As such, sources of potential upside include better trends for the consumer segment, but also cost-cutting (including BT's £2bn cost transformation plan)."
4. TOTAL SE
Potential upside (%): 44.9%
Price target: €50
Analyst commentary:"The European-based companies are leading the way on this and Total remains our Top Pick in the space. In our view, Total has the knowledge, the technology and the financial strength to build its low-carbon offering and can do all this whilst paying a dividend, which currently implies a ~8% yield. With carbon emissions an ever-growing focus for investors, we incorporate Total's 2025 ambition but also deduct a cost associated with scope 3 emissions to ensure that our valuation is aligned with the Paris accord. We continue to believe that financial markets will reward low-carbon activities, and we rate the stock OW with a EUR50/sh price target."
5. Reckitt Benckiser Group
Potential upside (%): 43.2%
Price target: £96
Analyst commentary: "We view RB as a year or so into a multi-year turnaround. Management has made the decision to invest heavily in 2020e and 2021e, as RB rebuilds innovation, marketing, and digital capabilities. Looking further out, we see double-digit earnings growth in 2022e and 2023e as investment normalises. Currently the main debate around RB is how much of the COVID-19 benefit to brands such as Dettol and Lysol is retained post-vaccine, and how much of the resulting operational leverage drops through to the bottom line. We expect both topline and margin to surprise to the upside during 2021e, helping to drive a rerating."
6. Fresenius SE & Co
Industry: Health care equipment
Potential upside (%): 42.7%
Price target: €54
Analyst commentary: "With the stock at close to the cheapest sector relative valuation in over a decade (10x 21E PE vs. 24x), we see an attractive entry point."
7. Imperial Brands
Potential upside (%): 40.2%
Price target: £21.00
Analyst commentary: "With the arrival of new CEO Mr Stefan Bomhard, we view IMB as a compelling turnaround story, and at ~5x PE we see valuation as highly attractive. We highlight its CMD on Jan 27th 2021 as a potential catalyst."
Potential upside (%): 35.6%
Price target: €26
Analyst commentary: "The stock has materially de-rated versus peers as a result of regulatory intervention on dividends and now trades on c. 250bps discount on 2021E dividend yield, which we regard as unjustified given fundamentals. While we would expect the stock to continue to trade at a discount to 'quality' peers, we believe current market levels offer a very attractive risk-reward profile."
Potential upside (%): 35.6%
Price target: €134
Analyst commentary: "While SAP's accelerated move to cloud was not well received by the market, a lot of the issue was the lack of communication around the strategic and operational changes behind those targets. We would argue that an accelerated move to the cloud could be successful and be potentially NPV positive. While it will take time for the market to rebuild trust, we don't see the fundamental value of the business being impaired and the long-term opportunity remains attractive."
10. Cellnex Telecom
Potential upside (%): 34.4%
Price target: €70
Analyst commentary: "Cellnex is, in our view, well placed to continue benefiting from the evolving European tower market. Whilst tenancy ratio improvements drive organic EBITDA growth, the operator looks well positioned for further M&A opportunities. "
11. Anglo American
Industry: Metals & Mining
Potential upside (%): 31.3%
Price target: £28.15
Analyst commentary: "We see best-in-sector FCF and NPV growth as operations and growth projects ramp up. At the time of writing, the stock is the cheapest of the other UK large cap diversifieds we cover."
Potential upside (%): 29.6%
Price target: 395 Swiss Francs
Analyst commentary: "Whilst the pipeline has evolved since January 2019, our view of it still being the most innovative pipeline in our EU pharmaceuticals coverage has not changed and we can still identify several upcoming drugs that in our view carry blockbuster or near-blockbuster revenue-generating potential (e.g. faricimab, ipatasertib, tiragolumab, and oral PI3K inhibitor RG6114)."
Industry: Professional services
Potential upside (%): 29%
Price target: £37.50
Analyst commentary: "Attractive medium- and long-term structural growth: 1) Experian sits at the intersection of data, decisioning and analytics, with B2B growth fueled by data proliferation, digitalization and process automation across multiple end markets; 2) Consumer monetization (lead generation) is driven by consumer-permissioned data (Boost), but extends well beyond loan origination; 3) The rollout of positive data, already contributing in its early days, should underpin a multi-year recovery in Brazil that should help sustain strong growth over the long term."
Industry: Auto components
Potential upside (%): 26.6%
Price target: €50
Analyst commentary: "The reiteration of its 2022 targets (on much lower than initially anticipated GLVP forecasts) is clearly reassuring. Although Faurecia is arguably facing few SOP delays in Seating/Interiors in the short term, its profitable growth story reacceleration in 2021 is still fully valid, in our view."
15. Lloyds Banking Group
Potential upside (%): 25.6%
Price target: £0.45
Analyst commentary: "Lloyds Banking Group is our preferred UK bank, where we see the best prospects postCovid19, and attractive valuation at 7.4x 2022e EPS or 0.7x TNAV for >9% 2022e RoTE. Earnings expectations should be underpinned by a tailwind from mortgages – which while we expect to ease from current buoyant levels, should continue as supportive in 2021."
16. Zur Rose
Potential upside (%): 25.5%
Price target: 325 Swiss Francs
Analyst commentary: "We think Zur Rose, which is the leading online pharmacy in Germany by market share, is well placed to benefit. Unit economics in the category are also good – high average order value, low package size/weight, almost no returns."
17. QinetiQ Group
Industry: Aerospace & Defence
Potential upside (%): 24.1%
Price target: £3.80
Analyst commentary: "We think the stock is worthy of a premium to UK defence peers, currently trading at a 20% discount on FY22 EV/EBITDA, on our estimates."
18. Banco Santander
Potential upside (%): 24.1%
Price target: €2.90
Analyst commentary: "We think Santander offers the highest potential upside in our Spanish bank coverage universe, at c26% (as of 19/11/20). Santander trades at c.7x 2022E earnings and P/TBV 0.56 for a 8.2% 2022 RoTE."
Ticker: EPA: BN
Potential upside (%): 23.8%
Price target: €65
Analyst commentary: "2021 is likely to be a year of transformation for Danone, both organisationally and in terms of portfolio. Danone announced that CFO Cecile Cabanis will leave with an internal successor, Juergen Esser, announced. A new COO position has been created as well as two regional CEOs, one for North America and the other for the rest of the World."
Potential upside (%): 21.6%
Price target: €60
Analyst commentary: "Overall, unification would make Unilever more nimble by doing away with a 90-year legal framework not fit for purpose and allow it to consider more imaginative ways to unlock value (such as spinning/demerging assets) than the rigid NV/PLC structure allows. On the operational front, Q3 confirmed the improving execution and market share trends from Q2. If it can continue to string together more convincing quarters like Q3, it ought to be able to close the valuation discount with best-in-class FMCG peers."
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