With the third-quarter earnings parade in full swing, we are starting to see how the market is responding to earnings and the results are interesting. There were some hot momentum stocks that fell on good numbers, like Netflix Inc. (NASDAQ: NFLX), and some unloved companies like International Business Machines Corp. (NYSE: IBM) that had big rallies and good numbers. One thing is for sure: Looking for stocks cheaper than the S&P 500 makes sense as it trades at multiyear valuation highs.
We recently covered stocks that Jefferies analysts have Buy ratings on that are trading cheaper than the S&P 500, or as they like to say, “Value without the trap.” They have come up with four more that look like outstanding buys for accounts that have a more aggressive risk tolerance. These stocks have the characteristics the Jefferies team screens for and were cited in their report.
We started with Buy-rated stocks that are cheaper than the S&P and looked at those with flat or up consensus revisions over each of the past two earnings periods. Given that these stocks are cheaper than the S&P by an average of 3.5 P/E multiple points, we felt that even flat revisions were good enough, and we also felt that requiring two quarters of flat/up revisions would help to argue that the better revisions were sustainable.
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.
Alliance Data Systems operates through three segments.
- LoyaltyOne provides coalition and short-term loyalty programs through the company’s Canadian AIR MILES Reward Program and Brand Loyalty.
- Epsilon provides end-to-end, integrated marketing solutions.
- Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the company’s private label and co-brand retail credit card programs.
Shareholders receive a 0.88% dividend. The Jefferies price objective for the stock is $270, and the Wall Street consensus price target is $267.50. The stock closed Wednesday at $235.82 a share.
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Arris International
This stock has been a Jefferies favorite for some time and is a top small cap pick. Arris International PLC (NASDAQ: ARRS) provides media entertainment and data communications solutions in the United States and internationally. It operates through two segments.
The Customer Premises Equipment segment offers various product solutions, including set-top boxes, gateways, digital subscriber lines and cable modems, and embedded multimedia terminal adapters and voice/data modems that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
The Network & Cloud segment provides cable modem termination system, converged cable access platform, multichannel video programming distributors, programmer equipment, ad insertion technologies and equipment in the ground or on transmission poles, as well as equipment used to initiate the distribution of content-carrying signals.
While the concern over the set-top box arena has been cited around Wall Street, the company still holds a 27% to 30% market share, and many analysts feel that it will be years before demand slows. Trading at a low nine times estimated 2018 earnings, the stock is cheap at current levels, and if the company guidance stays in line with current forward estimates, the analysts feel confidence could begin to return.
Jefferies has a $34 price target, and the posted consensus target is $34.50. Shares closed Wednesday at $28.04.
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Broadcom
This company remains a top pick across Wall Street and derives 20% of its business from Apple. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.
Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the radio frequency (RF) arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
The analysts note that the stock is underowned compared to peers, and the 40% iPhone content growth, combined with the closure of the Brocade purchase, which they feel is accretive, are very positive catalysts. They also feel dividend growth is possible.
Broadcom investors receive a 1.63% dividend. The $286 Jefferies price target is the same as the consensus target. The stock closed most recently at $245.82 per share.
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Steel Dynamics
This is another company that Jefferies remains very positive on.
Steel Dynamics Inc. (NASDAQ: STLD) operates six steel mini-mills in Indiana, Virginia, Mississippi and West Virginia. Production capacity has been nearly 10 million tons, of a total 110 million U.S. capacity.
The company makes flat rolled products, special/merchant bars and structural steel products. Steel Dynamics can process about 7 million tons of ferrous scrap and has a downstream operation that processes finished steel. The analysts noted this in the research:
The company remains one of analyst Seth Rosenfeld’s top picks in the US steel sector as a high-quality play on the gradually tightening domestic steel market. In the near-term, Steel Dynamics should benefit from improving margins as scrap input costs begin to retrace heading into the fourth quarter after a period of abnormal strength, which weighed on profitability in recent months. In the medium-term the company is leveraged to rising domestic demand across diversified end markets (infrastructure, machinery, autos) and falling import penetration, which should allow them to better optimize its existing excess capacity with notable fixed cost leverage as volumes rise.
Shareholders are paid a 1.6% dividend. The Jefferies price target is $42. The consensus target is $40.14, and the stock ended Wednesday trading at $38.73 a share.
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These four top companies to buy are big Wall Street favorites, have reported solid earnings and are much cheaper than the S&P 500 as a whole. All make good sense for more aggressive growth accounts.
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