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Credit Suisse Has 6 Contrarian Stocks That Could Fall Bigly
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While the markets trading near all-time highs, many analysts on Wall Street tend to have a herd mentality when it comes to long ideas, and sometimes bucking the herd mentality is tough. With that in mind, doing so can be highly profitable, and sometimes takes a little more courage than the easy route, especially if everybody appears to love a stock.
A recent Credit Suisse report definitely goes outside the box to show clients some ideas in which the analysts are positioned much differently than their Wall Street peers. The report said this:
We screened our current US coverage universe to identify companies where our analysts’ views diverged from that of the Street, focusing on rating, earnings projections as well as target price. To further strengthen the list of stocks, we worked closely with the research analysts to select stories in which our conviction level is high.
Credit Suisse picked six stocks they rate at Underperform, and these could be great ideas for more aggressive accounts that do short-selling or put option buying.
Alliance Data Systems
This company has hit our insider buying screens in a big way this year, as ValueAct Holdings has purchased a substantial number of shares in Alliance Data Systems Corp. (NYSE: ADS). The company is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a range of industries.
The company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services and private label and co-brand retail credit card programs.
Credit Suisse sees increasing credit risk for the company, which in turn could be a threat to earnings forecasts. The report noted:
Alliance Data’s credit risk measures are historically elevated and we continue to see risk of higher than anticipated charge-offs in 2017 requiring higher provision expenses in 2018. Weak retail data from clients also adds incremental risks to the story, specifically L Brands and Ascena Group, which have significant mall-based exposure and make up 22% of receivables.
The Credit Suisse price target for the stock is $174. The Wall Street consensus target is much higher at $254.32. Shares closed on Friday at $251.04.
AMC Entertainment
This company always depends on quality from Hollywood, and that can be dicey. AMC Entertainment Holdings Inc. (NYSE: AMC) operates or holds an interest in 660 theaters across the United States with 8,293 screens. Roughly 52% of the U.S. population resides within 10 miles of an AMC theater. AMC also owns, operates or holds interest in 364 theaters across Europe with 2,932 screens via its acquisition of Odeon and pending acquisition of Nordic Cinema Group.
The analysts at Credit Suisse are not fans of the European acquisitions, given the level of debt the company took on to buy them. They also are only predicting flat box office growth for this year. With lower cash flow, and pressure from numerous outlets offering video-on-demand, the stock may be fully valued.
Credit Suisse has a $26 price target, and the consensus target is $37.42. Shares closed Friday at $30.35.
Boston Beer
This stock has been mauled reasonably hard already, but it could go even lower. Boston Beer Co. Inc. (NYSE: SAM) is engaged in the business of producing and selling alcohol beverages, primarily in the domestic market and in selected international markets. Its Boston Beer Company segment includes the Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling brands.
Credit Suisse feels that the stock will continue to be pressured as sales and earnings remain weak. While it keeps its Underperform rating, the firm does note the company could be a takeover candidate by private equity or a bigger beer company. The report noted:
Upcoming investor day on May 25 could be the appropriate day for the company to present a turnaround plan for the company. Important to note also the current CEO has announced his retirement this year, in time for the company to find a replacement. This could be a second catalyst for the company, but no sight of this to happen anytime soon.
Credit Suisse has its price target set at $133. The consensus target is $144.38, and shares closed Friday at $139.90.
Diplomat Pharmacy
Analysts feel this specialty pharmaceutical services stock may be vulnerable. Diplomat Pharmacy Inc. (NASDAQ: DPLO) is the largest independent specialty pharmacy services provider in the United States, engaged primarily in dispensing, delivery and reimbursement of costly biopharmaceuticals.
The analysts cite the slowing growth and competition as areas of concern, with other companies with better models set to challenge. They noted in the report:
Slowing organic revenue growth and profit degradation should weigh on the company’s shares, and while acquisitions may help it compensate for the declining growth, the invested capital base is ballooning, with no appreciable returns. A pathway to sustainable economic profit generation is not clear, based on its return on invested capital profile and what we expect will be rising capital costs.
Credit Suisse’s $11 price objective compares with the consensus target price of $15.11. Shares ended the week at $14.06.
Dollar General
The low-cost retail store had a big run and has already been hit pretty hard. Dollar General Corp. (NYSE: DG) is the largest U.S. dollar store retailer, with an estimated 28% market share and 2015 revenues of approximately $20.4 billion. The company operates over 13,000 stores, offering an assortment of everyday items, including highly consumable merchandise, seasonal and home products, and basic apparel.
The analysts feel that top-line issues, margin pressure and an increase in selling and general and administrative expenses are all metrics that could start to weigh on the outlook for the company. They said this in the report:
Consensus estimates assume a re-acceleration in earnings growth to 10% after a flat 2017, in line with the company’s long-term growth algorithm. We believe this is unlikely, as increasing competition and rising labor costs should pressure earnings for some time. We question the logic behind ramping new store openings to 1,000 stores per year when mature stores are likely comping negative, and also note that tailwinds from share repurchases are diminishing.
The $62 Credit Suisse price target compares with the consensus of $79.16. The stock closed Friday at $69.33.
IBM
This blue chip leader has had a solid rebound over the past year. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of IT hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high value solutions.
The shares have rallied big, and Credit Suisse feels that much of the excitement on the street may be unfounded as organic revenue declined last year. The report pointed this out:
While IBM guided earnings-per-share to $13.80, up 1% year-over-year, we believe that this may not be reliable metric given several factors. First, we believe it may embed a lower and possibly unsustainable low tax rate. For example in fiscal 2017 and 2018 we assume a tax rate of 11%/14% vs historical rate of 18%. Second, we assume IP revenues of $1.6 billion and $1.6 billion but see potential downside to this estimate – we believe given the nature of these sales, this may not be sustainable long term.
IBM shareholders receive a 3.24% dividend. The Credit Suisse price target is $110. The consensus target is $169.15, and shares closed Friday at $172.14.
Six stocks that Credit Suisse feels have the potential to trade lower, and in some cases, much lower. Short-selling and put buying carries special risks and is only suitable for very aggressive accounts.
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