Credit Suisse says buy these 15 stocks that represent its analysts' 'highest-conviction' calls and are set to outperform despite the market's doubts
- As the market rises to new heights, it’s becoming more difficult for investors to find bargains.
- Credit Suisse has put their analysts’ favorite stocks from across the market into one list.
- Not only are these great stocks, they’ve also been underestimated by the rest of Wall Street.
- See more stories on Insider’s business page.
Analyst consensus can be a valuable tool for investors.
By pooling the opinions and ideas of some of the smartest minds on Wall Street, analyst consensus allows the average investor to build a case for their own investment ideas. After all, if a large group of professional analysts likes a stock, why shouldn’t you?
But analyst consensus is a double-edged sword. When everyone sees the upside to a stock, the market may push the price too high, and your potential investment can become overvalued.
So, the trick is to find a stock that not only has strong fundamentals and catalysts that will propel its business forward, but also has been overlooked or underestimated by the rest of the market.
That’s what makes a list like the one below an incredibly powerful asset for smart investors. And in a market that continues to climb to record highs regardless of what’s thrown at it, investors could use some help finding attractive bargains.
Credit Suisse recently compiled its US research analysts’ “highest-conviction outperform ideas” from all across the stock market into one list. These are also stocks where “Credit Suisse analysts’ estimates and target prices are above consensus and consensus is not overly bullish.” To measure this, the report compares Credit Suisse analysts’ EPS estimates for the next fiscal year and their target price estimates on a 12-month rolling basis to consensus estimates.
The result is a comprehensive list of excellent investment opportunities that may just perform better than anyone expects. Below, we highlight the analysts’ investment theses, the risks to their outlooks on each stock, and how they arrived at their target prices.
Ticker: AMZN
Investment Thesis: “Our Outperform investment thesis for AMZN is based on the following: 1) ecommerce segment operating margin expansion as it grows into its larger infrastructure, 2) optionality for faster than-expected FCF growth vis-à-vis its advertising segment, and 3) upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by ongoing capital intensity in the business.”
Pushback: “We believe that current investor expectations are that those sectors that saw cyclical headwinds during 2020 (advertising and more generally travel and ride share) should accelerate during 2021, and those sectors that saw a cyclical tailwind in 2020 (e-commerce and more generally online games and food delivery) should decelerate”
Target Price: “We use the discounted cash flow (DCF) method to calculate our $4,000 target price for Amazon. Our five-year DCF uses a 3% terminal growth rate and a market-implied discount rate derived by discounting our unlevered FCF (free cash flow) estimates from 2021 through 2026 to arrive at the stock’s current trading price. We then applied this discount rate to our 2021-2026 unlevered free cash flow estimates for AMZN. Risks include: 1) Higher-than-expected capital intensity for either ecommerce or AWS and 2) extended duration of COVID-19 impact.”
Source: Credit Suisse
2. Aptiv
Ticker: APTV
Investment Thesis: “We expect APTV to avg. ~7pts of organic revenue growth over market through 2025, one of the best growth outlooks within the space. The growth is driven by product lines such as Active Safety and High Voltage Electrification, which are tied to key secular trends in the automotive industry (i.e. Autonomy, Electrification, and Connectivity). Strategic decisions that prioritize cash flow (i.e. Autonomous JV with Hyundai) and a strong balance sheet also help to support APTV’s growth. This combination of benefits should keep APTV favored by thematic and ESG investors. Moreover, we expect APTV has ample liquidity to navigate production shutdowns and a challenging industry backdrop.”
Pushback: “Valuation is rich given APTV is still an auto company exposed to the cyclical light vehicle end markets. However, we’d note that mid/high single digit organic revenue outgrowth over the market in 2018-20 despite volatile end markets provide a strong proofpoint of the company’s ability to withstand tough macro. Moreover, thematic/ESG investors may be willing to pay a premium.”
Target Price: “Our $170 target price assumes a 16.0x multiple on $3 billion of FY’22E EBITDA. We view the multiple as reasonable given APTV’s best-in-class organic revenue outgrowth, as well as optionality related to electrification and autonomous driving. Risks: end market volatility, margin headwinds from tech spend.”
Source: Credit Suisse
3. Caterpillar
Ticker: CAT
Investment Thesis: “CAT is an industrial bellwether with a long cycle reflected in its sales which are highly correlated with the ISM PMI on a 3-month lag. CAT has undertaken significant restructuring since the prior industrial recession reducing $1.8B in structural cost and 25M of square foot capacity and earnings power and cash flow generation is underappreciated in our view. CAT retail sales have remained muted with Machines slowly recovering and E&T still near trough. Commodity prices including copper, iron ore and nickel have been strengthening and the depressed mining business should begin to recover. The oil and gas business should see a cyclical bounce as oil prices improve however exposure continues to weigh on the multiple in our view. CAT substantially reduced channel inventory in 2020 ($2.9B by year end) and should benefit from operating leverage in 2021.”
Pushback: “Concerns on the macro, valuation, lack of investment thesis outside of the cycle compared to peers, commitment to traditional energy, lack of marketing its alternative energy and ESG efforts to investors.”
Target Price: “Our $264 target price for CAT is based on 18.5x our 2023 EPS estimate, discounted back. This is a historically in-line multiple at this point in the cycle. Risks: general economic risk, rising material costs or supply chain distortions, execution risk, and dealership consolidation.”
Source: Credit Suisse
4. ChampionX
Ticker: CHX
Investment Thesis: ” CHX is our preferred defensive SMID OFS name, given its production orientation, high-quality portfolio, and idiosyncratic cost-out and revenue growth opportunities. We think a defensive name such as CHX merits investor attention, given a challenged near-term Oil Services outlook. In 2021, we expect continued year-over-year contraction in oilfield activity in the United States as well as in international markets. We think the long-term outlook for US Oil Services is structurally impaired vs. pre-downturn. Against that backdrop, we like CHX’s defensiveness from a product perspective (more production, less D&C), quality (high-quality product portfolio), and idiosyncratic opportunities (on costs and revenues). We expect these attributes to drive better-than-peer performance over the next 12 months.”
Pushback: “If the cycle is turning (i.e., oil is finding a bottom & ’21 is a recovery year for OFS markets), CHX’s peers with more leverage to that upcycle will outperform. In this case, CHX is a relatively more defensive stock in a bull market. Also, CHX is already favored within the buy side community. We think the idiosyncratic opportunities on the revenue/cost sides continue to be underappreciated as CHX has traded more like a low quality OFS name.”
Target Price: ” Our $21.50 DCF-based price target (7.5% WACC, 0% terminal growth) contemplates normalized Cash Flow Return on Investment (CFROI®) of ~14% (vs. long-term OFS/equipment manufacturing median CFROI of 8%/15%). Risks to our thesis include integration and expansion risk (APY-ECL Upstream), cost synergy realization, balance sheet leverage, term structure of debt maturities, geographic and geopolitical risk, and commodity price risk.”
Source: Credit Suisse
5. Devon Energy
Ticker: DVN
Investment Thesis: “DVN differentiates itself as the first among E&Ps to introduce and implement the ‘base + variable’ dividend approach, which we estimate should support a total cash return yield of ~6.5% on 2022E assuming current strip prices, well above E&P peers’ ~2-3% and compelling vs. the S&P 500 at ~3%. Despite this attractive FCF/cash return yield, low balance sheet leverage among peers (net debt/EBITDX ~1.0x at YE21 and further down to ~0.6x at YE22 assuming strip prices), and continued track record of operational execution, shares are trading at steep discount to large-cap E&P peers on 2022-23E EV/DACF.”
Pushback: “Potential M&A.”
Target Price: “At current strip prices, DVN trades at a ~1.5x discount to peers on 2022E EV/DACF, too wide a valuation gap in our view considering its ability/commitment to accelerate cash returns to shareholders and lower financial leverage. Our $30 target price is based on a blended ~5.0x 2022E EV/DACF and ~0.8x NAV. Risks: oil prices, operational execution.”
Source: Credit Suisse
6. Edwards Lifesciences
Ticker: EW
Investment Thesis: “Impressive Low-Risk TAVR clinical trial results raised interest, awareness and adoption of TAVR in the U.S., and Q1 US TAVR growth were above expectations and driven by improved procedure volumes following a decline in COVID hospitalizations and increase in vaccinations. We have made recent changes to our model to reflect new guidance and still see further potential upside for the stock (25% potential upside to our $112 PT, 33% upside to our $119 ‘Blue Sky’ scenario).”
Pushback: “Bull: Significant growth opportunity and upside to valuation, driven by expanding indications for US TAVR, which remains significantly underpenetrated and underestimated by the Street. TAVR volumes are expected to improve throughout 2021, with DD TAVR growth. Bear: Stock’s current valuation already discounts the growth opportunity, and the market may be more penetrated than Bulls believe. Additionally, deferred TAVR procedures may take longer than expected to return with a risk to 2021 numbers given the recent COVID-19 resurgence, suggesting a potentially slightly sluggish start to the year.”
Target Price: “Our $112 target price is based on a 34.5x EV/EBITDA multiple on our projected 2022 EBITDA of $2.0 bil. Risks: Product delays, greater share losses, litigation, regulatory/quality issues, and risks related to COVID-19.”
Source: Credit Suisse
7. IBM
Ticker: IBM
Investment Thesis: “IBM + Red Hat remains an underappreciated opportunity in the rapid push toward hybrid cloud, bringing together the platform (RHT/OpenShift), incumbency (Cloud & Data Platforms/CloudPaks), and expertise (GBS) to help clients modernize and migrate the ~75% of legacy/custom applications stuck on-prem. We’ve seen signs of early momentum post the integration of Red Hat in both C&DP SW and GBS signings, despite a tough Enterprise backdrop, and believe the planned spin-off of MIS and management’s commitment to increase investment (both organic and inorganic) sharpens the hybrid focus and creates an opportunity for a return to sustained revenue driven EPS growth ahead. Separating out MIS, we forecast “core” IBM revenue will grow at a ~4% CAGR over CY20-22 (adj. for impact of RHT deferred write-downs).”
Pushback: “The pushback remains that IBM is a no-growth business with an over-reliance on low-quality drivers and legacy end markets; Red Hat’s contribution is too small to move the needle relative to the price; the MIS business faces secular headwinds post-spin; slower debt repayment prolongs a return to share repurchases; and, debate on the re-rating potential for “core” IBM post-spin.”
Target Price: “Our $165 price target is based on a 50/50 split between 12x multiple applied to our CY22E EPS and our SOTP derived share price of $172 (reflects 5.5x EV/EBITDA for MIS business and 12x for “core” IBM). Risks include execution on the integration of Red Hat, spin-off execution, IT spending growth, COVID-19, interest rates, and FX.”
Source: Credit Suisse
8. Pennymac Financial Services
Ticker: PFSI
Investment Thesis: “There is significant upside to book value from current levels as strong origination volumes (and margins) should persist into 2021 as the rate environment and continues to drive refinance activity, while industry capacity constraints keep margins attractive. Additionally, PFSI’s servicing profitability should continue to persist into 2021 given the EBO opportunity for loans in forbearance.”
Pushback: “2020 was a record year of mortgage volume and profitability, and 2021 and 2022 could see significant declines in earnings power driven by higher mortgage rates and increased price competition among originators to win business.”
Target Price: “PFSI is currently trading at a 14% discount to our YE2021 book value estimate, and 4.5x 2022E EPS. Our target price of $80 is based on 6.1x our 2022E EPS, and represents 1.2x our year-end 2021 book value estimate. The biggest risks to our estimates and target price are near-term weakness in GOS margins and weaker-than-expected origination volumes.”
Source: Credit Suisse
9. Radius Global Infrastructure
Ticker: RADI
Investment Thesis: “We maintain our constructive outlook on RADI for the following key reasons: (1) RADI has a vast TAM opportunity to consolidate land interests; (2) its proprietary database of land interests; (3) land owners increasingly look to sell their lands amid challenging economic dynamics; and (4) 5G should further bolster RADI’s business opportunity as connectivity density rises, increasing the number of TAM site and lease interests.”
Pushback: “Investors have questioned (1) why the TowerCos don’t just buy the land under sites and (2) why RADI should be valued partially on a ground cash flow (gross margin) multiple.”
Target Price: “Our $19 target price is based on the average of two methods: (1) EV/GCF multiple of 25x on our 2022E GCF of $104.5M; and (2) EV/EBITDA multiple of 25x on our 2022E adjusted EBITDA of $31.6M. Risks include high leverage, volatile FX rates, geopolitical instability, and increased site decommissions & competition.”
Source: Credit Suisse
10. Ralph Lauren
Ticker: RL
Investment Thesis: ” RL reinforced that its COVID strategy focused on driving a meaningful SG&A restructuring ($200-240m gross annualized) & deep dive quality-of-sales work to reset its primary operating work streams and marketing strategy to support multi-year structural tailwinds behind every line of the P&L as COVID challenges diminish. Our sense is that longer Europe lockdowns could add some near-term headwinds vs guidance. But we think RL’s primary medium/longer-term initiatives (digital content creation, personalized engagement, reducing excessive markdowns, accelerating customer growth, and even developing a more complete long-term US distribution strategy) are starting to work better than expected.”
Pushback: “RL has been consistently noting that it does not expect to return to preCOVID revenue levels all that quickly over the next few years. That said, the company will note that is largely due to decisions during the pandemic to exit low margin/brand dilutive business that should foster higher quality revenue growth and a clear path to its pre-COVID EBIT margin target of mid-teens (vs EBIT margin at 10.3% in FY20) as economies normalize.”
Target Price: “Our $150 target price is based on 17x our FY23 EPS. RL’s pre-COVID 3-yr average P/E was 16x. Risks: COVID-19, brand turnaround, consumer sentiment, FX.”
Source: Credit Suisse
11. Sunrun
Ticker: RUN
Investment Thesis: “Sunrun generates revenues from selling residential solar projects and electricity to end customers, which offsets carbon produced by grid electricity, and is a financing and installation leader in the US. We see upside from future growth and storage/grid-services optionality under its vertically integrated in house business.”
Pushback: “Rising interest rates impact cost of capital and valuation, California NEM 3.0 rules could be punitive.”
Target Price: “Our $81 target price is based on a discounted cash flow approach. We estimate an installation growth rate of 25% organic growth in 2021, 15% in 2022/23, 5% in 2024 and 10% thereafter. We estimate a 5% project-level discount rate and a 9% corporate development discount rate. We also assume a 75% probability of 3yr ITC extension and 25% probability of higher growth under Biden policy to achieve 8M solar roof by 2025. Our Bluesky ($130) assumes 4% discount rate and 100% growth probability. Key risks: Rising interest rates, policy changes (tax credit rules, net metering rates, import tariffs, etc), rising equipment costs, competition, and incumbent utility rates.”
Source: Credit Suisse
12. Seaworld Entertainment
Ticker: SEAS
Investment Thesis: “We think the theme park space will likely benefit from pent-up leisure demand. We model 2022 attendance +2% vs. 2019. Given season pass churn, we think the TAM of people who visit a theme park is ~3x annual attendance, making it a good place to look for pent-up demand. California theme parks are set to reopen in April, a major catalyst for SEAS, which gets ~16% of revenues from the state. Further, we also are seeing accelerating trends in Orlando, a major market for SEAS. We see upside to estimates, with 2022 attendance above 2019 levels, robust pricing growth via the new revenue management system (and confirmed in our checks), and incremental material cost cuts relative to 2019.”
Pushback: “The bear thesis is largely based on: (1) pricing may face tough comps in ’21 vs ’20, (2) long term, Epic Universe poses a threat, and (3) 10% of the business is international, which could take longer to recover.”
Target Price: “Our $68 target price is based on 11x our 2022 EBITDA estimate. Risks include: Theme park operators are sensitive to the health of the consumer, weather patterns, and competition from other operators.”
Source: Credit Suisse
13. Teck Resources
Ticker: TECK
Investment Thesis: “There are multiple reasons we like TECK – 1) Coal is at Inflect Point: We believe mid-cycle LV HCC is value near $160/tonne based on seaborne quality adj. cost curves and Chinese arbitrage. Teck is set to see significant margin gains in coal (ASP constant) as the Neptune terminal adds C$160mm, the Elkview mix shift adds C$150mm, and lower strip ratios add C$50mm; 2) Substantial Copper Volume Growth: Teck has the most copper growth pipeline relative to any other large diversified mining company in the world. Teck copper production is set to double from 301kt in 2019 to ~600kt in 2023 once QB2 is fully ramped up; and 3) Liquidity Remains Strong: TECK currently maintains C$6.8bn of liquidity, including ~C$400mm in cash. With no significant debt maturity before 2035 and no major funding needed from TECK for QB2 till 1H21, we believe the company is well positioned to weather the near term market challenges.”
Pushback: “Key investor concerns have been around QB2 capex escalation and coal cost inflation.”
Target Price: “We see TECK as the most undervalued mining stock and believe current valuation provides an optimal entry point. Teck trades at deep discount to mid-cycle NAV valuation and P/FCF. On a normalized 2023 estimates, FCF yield is ~25%. Our C$34 TP is derived using our SOTP framework. Key risks are prolonged downturn in steel production and global copper demand from current deep recession levels.”
Source: Credit Suisse
14. UPS
Ticker: UPS
Investment Thesis: “(1) Domestic pricing power has tangibly shifted toward the carriers; (2) capex is likely set to begin its descent from a multi-year high, with further and potentially significant opportunities to reduce capital intensity; and (3) the company is now being led by a change agent with a proven track record of executing on cost performance, efficiency gains, capital discipline, and improved returns. Based on what we believe to be a conservative base case for structural cost reductions, we now see a clear path for meaningful margin improvement at U.S. Domestic, and believe UPS can achieve high-teens EPS growth in 2021 and 2022.”
Pushback: “There will be cost headwinds over the next few quarters. The risk from AMZN building out a freight network cannot be ignored. “
Target Price: “Our 12-month price target for UPS is $261. We derive this using a proprietary discounted cash flow model. We start with a base year level of profit consistent with our earnings estimate of $11.91 per share in 2021. From there, we assume UPS can generate operating profit growth of about 5.8% annually over the subsequent 3-5 year period. Risks specific to UPS include the economy (both domestic and global), fuel prices (particularly jet fuel), a cyclical rotation out of the airfreight sector, impending risks of labor strikes by the pilots, competitive pricing pressures in the domestic market, and further market share losses in its ground division.”
Source: Credit Suisse
15. Viper Energy Partners
Ticker: VNOM
Investment Thesis: “VNOM is our top pick amongst the US Oil & Gas Royalty companies given its unique FANG-sponsorship which helps mitigate development timing risk. It’s top tier mineral position is concentrated in the core of the Permian basin, helping add visibility on future development. The company also boasts best-in-class cash margins which are also relatively insulated vs E&Ps given the absence of operational expense (e.g. LOE).”
Pushback: “Elevated leverage requires it to retain a portion of cash for debt reduction this year. Moderating E&P growth profiles from major operators is also seen as a headwind for the Royalty Mineral peer group as a whole as they look to deliver organic production growth.”
Target Price: “VNOM trades at a slightly better cash flow yield vs Royalty peers on 2022 cash flow, and roughly in-line with peers on P/NAV despite the differentiated activity/production visibility offered by its unique FANG-sponsorship. Our $20 target price is based on a blended average of 9% 2022E cash flow yield and 0.8x NAV. Risks to our outlook include oil prices and 3rd party development timing.”
Source: Credit Suisse
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