Investing

Jefferies Top Stocks to Buy May Have Market-Moving Catalysts

Lee Jackson

Published: September 29, 2016 10:35 am

Last Updated: January 13, 2020 3:00 am

One of the things that stock investors love is when a company has a catalyst coming that can boost share price. That can range from a stock buyback program to a merger or take-out, or even a change in the top executives that run the company. Any positive catalyst is capable of ramping a stock’s price higher, especially if the company has had issues that were dampening investor enthusiasm.

A recent Jefferies research report included four companies that are Buy rated at the firm and have catalysts that could move the stocks higher. While not all are the kind that could have a huge take-over effect, they all could give the stocks some movement higher. At the minimum, they could keep investor interest focused on these companies.

Encana

This top company was absolutely mauled, but it has rallied big off the February lows. Encana Corp. (NYSE: ECA) engages in the development, exploration, production and marketing of natural gas, oil and natural gas liquids (NGLs) in Canada and the United States. It owns interests in plays such as the Montney in northern British Columbia and northwest Alberta, Duvernay in west central Alberta, Clearwater in central and southern Alberta, Deep Panuke in offshore Nova Scotia, Cadomin/Doig in northeast British Columbia, Horn River in northeast British Columbia and Granite Wash/Doig in northwest Alberta.

Jefferies is bullish on the company and earlier this year elevated the stock to its Franchise Picks portfolio, which represents the highest conviction stocks at the firm. The report noted that the company recently priced a secondary offering, and while that added 12.5% to the share count, Encana will use about half the proceeds to fund its 2017 capital program, including an expansion of production in the Permian Basin, and the other half to pay down debt.

Jefferies has a whopping $13 price target on the stock, and the Wall Street consensus target price is $10.90. The shares closed Wednesday at $9.38.

FirstCash

This company had a merger in the spring that should close soon. FirstCash Inc. (NYSE: FCFS) operates retail-based pawn and consumer finance stores in the United States and Mexico. Its pawn stores lend money on the collateral of pledged personal property, including consumer electronics, jewelry, power tools, household appliances, sporting goods and musical instruments. Those stores also retail previously owned merchandise acquired through pawn forfeitures and over-the-counter purchases from the general public.

The company also engages in melting scrap jewelry, as well as sells the gold, silver and diamonds in commodity markets. Its consumer finance stores provide small unsecured consumer loans, credit services and check cashing services. As of December 31, 2015, FirstCash owned and operated 1,005 pawn stores and 70 consumer loan stores in 14 states of the United States and 29 states of Mexico and Guatemala.

Shareholders recently approved the company’s merger with Cash America, which FirstCash purchased back in April for $994 million in stock in a deal to bring together two of the largest retail pawn shop operators in the United States. Jefferies noted in its report:

We recently met with management. The new entity (post the Cash America close) can continue to grow organically in Latin America, while returning capital more aggressively to shareholders and/or further consolidating the US market. The business is fairly defensive and offers an 8% free-cash-flow yield. Our target assumes a 6% free-cash-flow yield plus the Enova International stake.

The $60 Jefferies price target compares with the consensus target of $54.25 and the most recent close at $46.93.

PNM Resources

PNM Resources Inc. (NYSE: PNM) is primarily involved in the generation, transmission and distribution of electricity. The company generates electricity using coal, nuclear fuel, natural gas, solar, geothermal and wind energy sources. It also provides regulated transmission and distribution services. As of December 31, 2014, the company’s owned or leased facilities had a total net generation capacity of 2,397 megawatts. It serves approximately 753,000 residential, commercial and industrial customers, as well as end-users of electricity in New Mexico and Texas.

The stock had been held back as investors awaited a ruling from regulators. The company finally has received the go-ahead from the New Mexico Public Regulation Commission to increase electricity rates. However, the approved rate is lower than the 14.4% rate hike proposed by the company. The approved rate will increase PNM Resources’ annual revenues by $65.7 million and is slightly above 50% of the company’s proposed increase of $123.5 million.

In the report The Jefferies analysts also noted:

Stock offers 7-9% EPS growth and is trading at a 7% discount. The plan to add a Facebook data center could add to earnings and/or rate base and should help justify future capex needs.

Investors receive a 2.61% dividend. The Jefferies price objective is $37.50, and the consensus target is $36.75. The shares closed most recently at $33.69, but may be volatile Thursday, so investors may want to watch how it trades before stepping in.

Viacom

This company has had a ton of headline risk and may be offering patient investors an interesting entry point. Viacom Inc. (NASDAQ: VIAB) creates television programs, motion pictures, short-form video, applications, games, consumer products, social media, and other entertainment content. It operates in two segments: Media Networks and Filmed Entertainment.

The Media Networks segment provides entertainment content and related branded products through approximately 230 programmed and operated TV channels, including MTV, VH1, CMT, Logo, BET, CENTRIC, Nickelodeon, Nick Jr., TeenNick, Nicktoons, Nick at Nite, Comedy Central, TV Land, SPIKE, Channel 5, Tr3s, Paramount Channel and VIVA, as well as through online, mobile and apps.

Shari Redstone is moving to potentially undo the last big strategic move of her ailing father, Sumner Redstone. National Amusements, the Redstone family’s holding company, is poised to urge the boards of the companies it controls, Viacom and CBS, to explore a merger.

The Jefferies team said this in the report:

The company will be looking to delever and to address the public versus private market gap which plagues the stock. Company could look to unlock value from its unconsolidated assets, including potentially selling Viacom18. We do think a recombination with CBS would be 15-25% accretive, but that it’s unlikely in the near-term.

After the recent dividend cut, Viacom shareholders are now paid a 2.21% dividend. The Jefferies price target is $49, and the consensus target is $43.97. The share closed Wednesday at $36.56.

These four companies have plenty on their proverbial plates and could be poised to move higher if their near-term and longer-term catalysts play out. For the most part, these companies are more suited for accounts with a higher risk tolerance.