Investing

SunTrust Out With Top Alpha Generating Ideas: 3 to Buy Now

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One thing Wall Street is almost always guilty of is a herd mentality. Hedge fund managers are extremely guilty of this as they often talk among themselves and then all pile into the same ideas. If they work out that’s great, if not, like Valeant Pharmaceuticals, which many hedge funds got mauled on, then the overcrowded trade can be an albatross of epic proportions.

A new SunTrust Robinson Humphrey research piece includes what the analysts call their 37 Alpha Generation Ideas. What SunTrust asked its analysts to do is to find their ideas that are most out of consensus based on ratings, models, estimates and other metrics. Of the 37 stocks identified, we highlight three here. All are rated Buy at SunTrust.

Bojangles’

This company has a well-received 2015 initial public offering. Bojangles’ Inc. (NASDAQ: BOJA) operates and franchises limited service restaurants in the United States that serve chicken items, made-from-scratch buttermilk biscuits, flavorful fixin’s and iced tea. As of December 27, 2015, the company had 662 system-wide restaurants, including 281 company-operated and 381 franchised restaurants, primarily located in the Southeastern United States.

SunTrust keeps this as a differentiated choice and a top pick, and it notes the very high 6.8% free cash flow. The company also boasts a very low enterprise value to EBITDA multiple of 9.2 times. Some on Wall Street were concerned McDonald’s was taking share as a result of its all-day breakfast roll-out, and they also point to liquidity concerns. SunTrust analyst does not agree with these issues.

The SunTrust price target for the stock is an aggressive $28. The Thomson/First Call consensus figure is much lower at $41.97. The shares closed Thursday at $17.93.


Celanese

This stock has had some huge swings over the past year. Celanese Corp. (NYSE: CE), a technology and specialty materials company, manufactures and sells value-added chemicals, thermoplastic polymers and other chemical-based products worldwide. Its Advanced Engineered Materials segment develops, produces and supplies specialty polymers for automotive and medical applications, as well as for use in industrial products and consumer electronics.

The company’s Consumer Specialties segment provides cellulose acetate flakes, films and tows for use in filtration applications, as well as food protection ingredients, such as potassium sorbate and sorbic acid, for food and beverage and pharmaceutical industries.

The Industrial Specialties segment offers vinyl acetate-based emulsions for use in paints and coatings, adhesives, construction, glass fiber, textiles and paper applications; ethylene vinyl acetate resins and compounds; and low-density polyethylene for use in flexible packaging films, lamination film products, hot melt adhesives, medical products, automotive parts and carpeting applications.

Lastly, the Acetyl Intermediates segment produces and sells acetyl products, including acetic acid, vinyl acetate monomers, acetic anhydride and acetate esters that are used as starting materials for colorants, paints, adhesives, coatings and pharmaceuticals.

SunTrust sees some headwinds from filter tow destocking, but the firm thinks the company is far better situated to see earnings growth this year than its peers. The analyst also sees catalysts in productivity gains, potential mergers and acquisitions and share buybacks.

Shareholders receive a 1.72% dividend. The $80 SunTrust price target is higher than the consensus target of $70.07. The shares closed most recently at $69.33.

Scotts Miracle-Gro

This somewhat out-of-favor company may be a very good spring and summer trade for investors. The Scotts Miracle-Gro Co. (NYSE: SMG) manufactures, markets and sells consumer lawn and garden products worldwide. The company’s Global Consumer segment offers such well-known products as Scotts, Turf Builder, EZ Seed, PatchMaster, EverGreen, Weedol, EdgeGuard, Snap, Handy Green II, OxiClean, Miracle-Gro, Earthgro, Ortho, Nature’s Care, Whitney Farms, EcoScraps, Tomcat, Roundup, and Home Defence brand names.

The Scotts Lawn Service segment offers residential and commercial lawn care, tree and shrub care, and pest control services through the periodic applications of fertilizer and control products. As of September 30, 2015, this segment had 88 company-operated locations and 94 independent franchisees operated locations. The SunTrust team note the company is selling off this business, in addition to its European business, which they see as a positive.

SunTrust feels the company can post earnings for the fiscal 2016 period that are above the Wall Street estimates.

Shareholders receive a solid 2.62% dividend. SunTrust has an $85 price target. The consensus target is lower at $76.33. The stock closed Thursday at $71.41.

These are somewhat contrarian calls on stocks that all have very solid and well-built franchises. They also are not the overcrowded trades that tend to get crushed when things go wrong. They all make sense for aggressive growth accounts.

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