Why Credit Suisse Sees AK Steel, Kellogg, Whole Foods and Others as Key Contrarian Stocks to Buy

[cnxvideo id=”625491″ placement=”ros”]Credit Suisse recently screened its current U.S. coverage universe in an effort to identify companies where its analysts’ views differed from that of Wall Street, focusing on ratings, earnings projections as well as target price. This resulted in a somewhat contrarian list of five companies that Credit Suisse sees as more positive than the street.

All the selected stocks are rated at Outperform at Credit Suisse, and each is generally more bullish than its street peers due to the contrarian nature of each call.

AK Steel

First on the list is AK Steel Holding Corp. (NYSE: AKS). Credit Suisse believes that the street underappreciates AK Steel’s exposure to the spot market, and also the firm is more optimistic than consensus on steel prices. The company’s key earnings drivers include meaningful leverage to higher spot prices and favorable positioning for stronger pricing resets on its 2017 automotive contracts. The previous concerns regarding liquidity have been alleviated following the recent equity offering, and the firm now expects AK Steel to be in a strong position to de-lever the balance sheet over the next several years and selectively repurchase longer dated debt at a discount to par value.

Credit Suisse has a $7 price target on the shares, which were trading at $4.70 on Tuesday. The consensus analyst price target is $4.58, and the 52-week trading range is $1.64 to $5.50.

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Kellogg

Kellogg Co. (NYSE: K) trades at a discount to peers and has almost zero support from the sell side, but Credit Suisse sees good visibility to 7% to 9% earnings per share (EPS) growth, which should help re-rate shares. The threat of industry consolidation and activist involvement has caused management to adopt a higher sense of urgency to improve its operational effectiveness. The $86 per share price target is based on a 21-times price-to-earnings (P/E) multiple against the firm’s 2017 EPS estimate, essentially in line with packaged foods peers. Credit Suisse estimates another 5% of upside to its price target if the company were to accelerate its zero-based budgeting savings by another $100 million and drop it to the bottom line.

Shares of Kellogg were last seen trading at $82.42, with a consensus price target of $77.63 and a 52-week range of $62.68 to $82.57.

Nationstar Mortgage

Investors of Nationstar Mortgage Holdings Inc. (NYSE: NSM) are skeptical of its ability to generate profitable returns on its servicing portfolio, but Credit Suisse expects the company to deliver better returns, which should help close discount to book value. With servicing profitability stabilized (and poised to increase if rates ever increase), a growing subservicing opportunity, and improving Xome returns, the company’s return on capital should increase and help close this discount to book value. The $19 price target is comprised of $15 (80% of 2016 book value estimate) for the mortgage bank and $4 for Xome (a seven-times multiple on second-quarter run rate of earnings).

Shares of Nationstar were trading down 5.7% at $10.69 Tuesday morning, with a consensus price target of $23.14 and a 52-week range of $8.29 to $18.74.

U.S. Steel

Credit Suisse believes that Wall Street fails to appreciate the immense operational leverage that United States Steel Corp. (NYSE: X) has to rising steel sheet prices, which it expects to sustain through the back half of the year. The company has the highest operating leverage to the bullish steel sheet pricing environment momentum that the brokerage firm anticipates will sustain through the back half of the year. It has also made significant cost reductions over the past several quarters as it transforms its business model to maximize profitability over volumes. Credit Suisse expects these initiatives to translate into better unit cost performance and significantly increase profitability as utilization rates inflect higher.

The firm has a $26 price target on the stock. Shares of U.S. Steel were trading down 3.5% at $17.64, with a consensus price target of $15.79 and a 52-week range of $6.15 to $21.49.

Whole Foods Market

Whole Foods Market Inc. (NASDAQ: WFM) rounds out Credit Suisse’s list. The firm believes that investors should own this controversial name when sentiment is low and as comps bottom because as comparable trends start to reverse, the stock could re-rate (much like Kroger). Credit Suisse sees a unique opportunity to own this leading specialty food retailer in the early stages of an aggressive repositioning that should reinvigorate growth. Management is cutting prices, accelerating private brand penetration, aggressively reducing costs, enhancing marketing, investing in technology and rolling out a value format in 365. Though comps have been pressured in recent quarters, strategic initiatives and easing comparisons may indicate a bottom is near. Kroger’s history suggests Whole Foods stock could rally as the company’s comp trends start to reverse.

Credit Suisse has a $40 price target. Whole Foods was last seen at $32.52, with a consensus price target of $30.24 and a 52-week range of $28.07 to $41.97.

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