Investing

Jefferies Stocks to Buy That Should Perform, Even With Higher Inflation

Lee Jackson

Published: March 14, 2017 8:40 am

Last Updated: January 12, 2020 1:59 pm

The jobs data from last week was the proverbial final nail in the coffin as it probably sealed a Federal Reserve rate increase hike this week, which should move to the 0.75% to 1.00% area. Long-time investors know this is still absurdly low, and most strategists on Wall Street feel there will be two more rate hikes behind it this year. Rates are raised to combat inflation, which for years has been nonexistent, but with wages finally slowly rising and jobs returning, companies now can raise prices, and that spells inflation.

A recent Jefferies research report fully acknowledges the damage inflation can inflict on the economy and specifically the stocks the firm covers. It did however offer up 24 stocks that should perform better despite an increase in the inflation rate. We screened the list for five that are rated Buy and that offer investors solid upside from current trading levels.

Fogo de Chao

This was a hot summer initial public offering in 2015, and the stock has been cut in half since coming public. Fogo de Chao Inc. (NASDAQ: FOGO) is a leading Brazilian steakhouse, or churrascaria, which has specialized for more than 36 years in fire-roasting high-quality meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco. Fogo delivers a distinctive and authentic Brazilian dining experience through the combination of high-quality Brazilian cuisine and a differentiated service model known as espeto corrido (Portuguese for “continuous service”) delivered by gaucho chefs.

Jefferies loves the unique concept and feels like the stock has been hammered to some degree by issues in Brazil. With the business growing, new restaurants opening and the tough comparisons over, the stock offers tremendous value at current levels.

The Jefferies price target for the stock is $17. The Wall Street consensus target is $14.50. Shares closed Monday at $13.95.

Nike

This stock has been hit hard over the past year and may be offering investors an outstanding entry point. Nike Inc. (NYSE: NKE) is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities.

Wholly owned Nike subsidiaries include Converse, which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories. With one of the most recognizable brands in the world, long-term investors may do very well adding shares here despite the big move up in the stock this year.

Nike is benefiting from consumer preferences for “athleisure.” With its extensive product line and recognizable worldwide branding, the stock continues to roll year after year. Driven by its digital business as well as inline and factory stores, Nike now anticipates achieving $16 billion in revenue by the end of fiscal year 2020.

This is a top pick at Jefferies, which noted in the report:

We reiterate Nike as our top pick for 2017 given its solid log term growth story, driven by resurgence in basketball recently and initiatives to scale women’s and international. We also see significant margin opportunity as it relates to growing direct-to-customer penetration, rising average-selling-prices, and manufacturing efficiencies. When we consider the potential impact of rising wages on our coverage universe, we prefer names that have significant pricing power, and for that reason, Nike comes to mind. With unmatched brand resonance (that is strengthening), we believe Nike is better-positioned than others in a rising wage environment.

Investors receive a 1.27% dividend. Jefferies has a $65 price target. The consensus target is $62.04. Nike closed at $56.67 on Monday.

Nucor

This top steel company could do very well if the economy sees a solid pickup this year and the administration’s infrastructure push remains in place. Nucor Corp. (NYSE: NUE) and its affiliates are manufacturers of steel products, with operating facilities primarily in the United States and Canada. The company also is North America’s largest recycler.

Nucor products produced include: carbon and alloy steel, in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh. Through the David J. Joseph Company, Nucor also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap.

While the residential construction market could slow down some in 2017 after years of a very torrid pace, top Wall Street analysts remain positive on nonresidential commercial construction. Nucor always has kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially of a huge infrastructure build-out becomes a reality.

Nucor investors receive a 2.5% dividend. The $77 Jefferies price target is well above the consensus target of $66.73 and Monday’s close at $60.71.

Owens Corning

This stock is a top value play for investors as demand for the company’s products remains solid. Owens Corning (NYSE: OC) develops, manufactures and markets insulation, roofing and fiberglass composites. It is expected to continue earnings growth as the housing market stays on a solid but slower growth path.

Global in scope and human in scale, Owens Corning’s market-leading businesses use their deep expertise in materials, manufacturing and building science to develop products and systems that save energy and improve comfort in commercial and residential buildings. Through its glass reinforcements business, the company makes thousands of products lighter, stronger and more durable.

The analyst who covers the stock said:

We continue to like Owens Corning, who should benefit from continued strength in U.S. based construction, particularly on the residential side. Given the historically low level of interest rates, any moves by the Federal Reserve should indicate that the economy is healthy supporting continued growth in construction markets. Additionally, while inflation will impact input costs, it should also aid the implementation of price increases ahead of inflation, particularly for insulation and roofing products, which have seen weakness throughout the past year.

Shareholders receive a 1.3% dividend. This top pick at Jefferies has a $65 price objective. The consensus target price is $59.95. Shares closed Monday at $61.19.

Dave and Busters

This top chain continues to be a favorite across Wall Street as millennials and Generation X love to spend time there. Dave & Buster’s Entertainment Inc. (NASDAQ: PLAY) owns and operates entertainment and dining venues for adults and families in North America. Its venues offer a menu of “Fun American New Gourmet” entrées and appetizers, as well as a selection of non-alcoholic and alcoholic beverages and an assortment of entertainment attractions centered on playing games and watching live sports, and other televised events. As of December 6, 2016, it owned and operated 88 stores in 33 states and Canada.

The analysts said the following when offered their top picks for this year:

Our favorite new unit growth story with an underappreciated, differentiated brand and business model with no real direct competitors. We expect this to work to the company’s advantage as we move later in the cycle, which along with continued focus on new, proprietary games/amusements backed by marketing, should drive growth and broad based brand awareness to support incremental SSS and margin leverage on 50%-60% flow-through. New unit growth of 10%+ has been very productive as well.

Jefferies has a $65 price target, while the consensus target is $63.67. The most recently close was $58.53.

Make no mistake, inflation is not good for stocks generally, and if gets away too fast, we could be in for major selling. With that caveat in mind, these five companies should do better in a rising price and rate environment.