In the research piece, the team at Jefferies has scoured the market for stocks that become the firm’s value calls for this week. Looking for a low price relative to valuation and peers is essential, but they are also looking for stocks with meaningful upside potential. Here are this week’s five top stocks to buy.
AT&T
This top dividend stock recently was added to the Jefferies Franchise Picks list. AT&T Inc. (NYSE: T) has to be one of the most ignored dividend plays on Wall Street. While growth has been admittedly slower over the past few years, the company continues to expand its user base, and strong product introductions from smartphone vendors have not only driven traffic, but increased device financing plans. That is an area that some on Wall Street believe could lead to some earnings weakness.
The Jefferies team thinks that closing the DirecTV deal will remove a lot of lingering questions, especially where the company’s big dividend is concerned. They also believe that the synergies created by the deal are being underestimated by Wall Street and see upside to wireless margins. The analysts also think the combined entity should be trading at a higher multiple than currently being applied on a pro forma basis.
AT&T investors are paid, and Jefferies believes will continue to be paid, an outstanding 5.45% dividend. The Jefferies price target in set at $40, and the Thomson/First Call consensus estimate is at $34.57. Shares closed Monday at $34.59.
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Energizer
This company just authorized a large 10 million share stock buyback program. Energizer Holdings Inc. (NYSE: ENR) is a consumer goods company operating globally in the broad categories of personal care and household products. Energizer’s Personal Care Division offers a diversified range of consumer products in the wet shave, skin care, feminine care and infant care categories. The company’s product portfolio includes well-established brand names such as Schick and Wilkinson Sword men’s and women’s shaving systems and disposables; Edge and Skintimate shave preparations; Playtex tampons, gloves and infant feeding products; Banana Boat and Hawaiian Tropic sun care products; and Wet Ones moist wipes. Energizer’s Household Products Division offers consumers the broadest range of portable power solutions, anchored by its universally recognized Energizer and Eveready brands.
The company will split into two independently traded companies on July 1, and the stock buyback will be carry over to the spin-off of the household division. The Jefferies team sees value in the personal care market and thinks the market does not fully appreciate the free cash flow yield potential.
Energizer investors are currently paid a 1.4% dividend. Jefferies has a $165 price target for the stock, while the consensus target is $150. The stock closed on Monday at $136.42.
Hewlett-Packard
This is an old-school tech stock that may offer investors tremendous value now. Hewlett-Packard Co. (NYSE: HPQ) does a large percentage of the company’s business overseas, and the dollar strength, combined with a slowing personal computer (PC) market, has hurt the stock over the past six months. Trading at a very cheap nine times estimated 2015 earnings, the stock truly offers a value proposition for investors interested in technology.
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The Jefferies team noted that the recent investor relations summit the company held may serve as a positive for the company as investors gain confidence that fiscal 2015 will be the low point for cash flow generation. They also think that free cash flow will bottom and push the stock higher, and that the PC concerns are long since priced in. Investors may want to own the stock prior to the corporate split in November.
Hewlett-Packard investors are paid a 2.14% dividend. The Jefferies price target is set at $42, and the consensus target is $40.47. The stock closed Monday at $32.69.
Rio Tinto
This is a combined value and contrarian play for investors to consider. Rio Tinto PLC (NYSE: RIO) is involved in the mining and production of aluminum products, including bauxite, alumina and aluminum; copper, gold, silver and molybdenum; diamonds, borates, salt and titanium dioxide feedstocks, as well as high purity iron, metal powders, zircon and rutile; thermal and coking coal, and uranium; and iron ore. The stock has been extremely weak over the past two years due to falling iron ore prices, but at current levels the Jefferies team sees a value case.
The Jefferies analysts believe that while iron ore demand may remain a problem, they expect a restocking-driven demand recovery in China and believe that their current demand estimates are ahead of the Wall Street estimates. The stock remains a top pick because of the company’s low cost operations, strong free cash flow and what they believe is a fully covered and solid dividend.
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Rio Tinto investors are paid an outstanding 5.2% dividend. The Jefferies price objective is $53, well above the $48.14 consensus target and Monday’s close at $43.25.
Virtus Investment Partners
This company is a well-known publicly owned investment manager. Virtus Investment Partners Inc. (NASDAQ: VRTS) is a distinctive partnership of boutique investment managers working with individual and institutional investors. Virtus offers access to a variety of investment styles across multiple disciplines to meet a wide array of investor needs, and it provides products and services through affiliated managers and select sub-advisers, each with a distinct investment style, autonomous investment process and individual brand. Duff and Phelps, Kayne Anderson and Zweig are just a few of the well-known affiliate managers.
With cash outflows and a potential for a pending U.S. Securities and Exchange (SEC) investigation to be negative, the stock had traded down almost 50% since last fall. Virtus had revealed in May that the SEC was investigating how the company was marketing its AlphaSector funds and that Virtus has created a loss reserve of $5 million. The Jefferies team believes that with all the bad news priced in, the stock is currently trading at nine times earnings and deserves as much as a 16 multiple.
Virtus investors are paid a 1.4% dividend. Jefferies has upgraded the stock to Buy with a $145 price target. The consensus target is set at $136.60. Shares closed Monday at $129.62.
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These are all truly good value plays. While some are more aggressive than others, they all offer investors solid upside, and in most cases a good dividend.
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