One thing we have discussed at length during the sell-off that started the first of the year is that indiscriminate selling leads to everything being sold, even if there is absolutely no reason for it. Panic leads to margin calls, which lead to flights to safety, which usually proves to be flights to more losses. Of course, super-high flyers with zero earnings get hit. Tesla Motors is down over $110 per share from highs printed just last summer, and with good reason —it has not made any money yet.
A new report from RBC points out that the indiscriminate selling mentioned above has hammered stocks with outstanding forward expectations. The analysts ran a screen and provided a list of the 40 stocks with the greatest disparity between three-month change in forward expectations and price performance. We found three that look very compelling now.
Broadcom
The former Avago Technologies made big headlines last year with a blockbuster buyout of chip giant Broadcom, and it is down a stunning 16% since the end of last year. Broadcom Ltd. (NASDAQ: AVGO) was originally a part of Hewlett-Packard and gets a huge chunk of its business from Apple and Samsung.
The new Broadcom is a big provider in the cloud/hyperscale data center and networking sector. In fact, the company recently announced it will demonstrate its latest optical transceiver technologies for next generation data center and enterprise storage applications. As data center networks transition to 100G speeds to support higher bandwidth demands, technical challenges emerge across various levels of the network from storage endpoints to servers to top-of-rack and core switches.
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The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Additional estimates are that Broadcom has between a 13% and 17% revenue exposure to Apple in the wireless communications segment, which was guided up 10% or more quarter over quarter for the third quarter. Customer diversity and content for Samsung could be more than enough to offset slower Apple business.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand. Some also caution that the ongoing integration and financial risk of the big acquisition could weigh on the stock. The RBC team notes the stock is down 6%, but the forward expectations are at 61.8%, a difference of 67.8.
Broadcom investors are paid a 1.44% dividend. The Thomson/First Call consensus price target is set at $171.46. Shares closed most recently at $119.20.
Delta Air Lines
This company consistently has ranked high with Wall Street. Delta Air Lines Inc. (NYSE: DAL) and the regional Delta Connection carriers offer service to 334 destinations in 64 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft.
Wall Street analysts have long lauded Delta for the most extensive hedging policy among the airlines, and it owns and operates a refinery in addition to a sizable hedging book. Trading at a low 8.8 times 2016 estimated earnings, the stock is right in the metrics that look so solid. The RBC team notes that the stock is down close to 20% but forward expectations are at 21.2%, a difference of 47.
China Eastern Airlines and Delta signed an agreement last year to expand their partnership and better connect Delta’s global network with China Eastern, one of the leading airlines in China. The agreement will include a $450 million investment by Delta to acquire a 3.55% stake in China Eastern.
Delta investors are paid a 1.24% dividend. The consensus price objective is $66.15 The stock closed most recently at $43.27. Trading to that target would be a 50% gain.
Netflix
This Wall Street darling has been mauled since early December, and could offer solid upside. Netflix Inc. (NASDAQ: NFLX) is the world’s leading Internet television network, with more than 70 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments.
Netflix is available on virtually any device with an Internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on available bandwidth. Many titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they’ll love.
The RBC team notes that the forward expectations for the company are at 41.8% and the stock is down a stunning 33% since December, a huge difference of 74.8.
The consensus price target for the company is set at $125.83, and shares closed on Wednesday at $88.45. Hitting that target would be almost a 40% gain for the shares.
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The bottom line is that the selling may not be over, but the value that may be created is big. While these are not appropriate for all accounts, investors from conservative to aggressive can find something to like in these companies.
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