Even though the market snapped backed nicely on Wednesday, the reality remains that much of the market is overbought and valuations remain high. The incredible aspect of the ongoing rally is S&P 500 operating margins were close to all-time highs last year, with the best earnings growth rate since 2011, and growth this year is expected to surpass 2017.
A new Jefferies research report documents those incredible statistics and also screens the analyst’s top picks for 2018 looking for stocks with estimated earnings growth, and margin expansion better than the respective sectors they reside in. The main criteria all the picks share is they all can do better operationally in 2018, which is a key for investors staying in the equity markets.
We chose five from the group with accelerating cash flow and earnings growth. All are rated Buy at Jefferies.
C&J Energy Services
This smaller cap company is well liked across Wall Street desks and is another top pick for 2018 at Jefferies. C&J Energy Services (NYSE: CJ) is a completion and production services company that provides well construction, well completions and well services to the oil and gas industry.
The company also manufactures, repairs and refurbishes equipment used in the oilfield services industry. It operates in various North American onshore basins. Its Completion Services segment includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services. Its Well Support Services segment includes services, including rig services, fluid management services and other special well site services.
The stock trades a full turn below ProPetro and a half turn below the average of the pressure pumpers. Top analysts believe its coiled tubing and cementing businesses could be higher returning than fracking and continue to generate healthy free cash flow generation for the company in 2018.
The Jefferies price target for the stock recently was raised to $40, which is in line with the Wall Street consensus target of $40.46. The stock closed Wednesday’s trading at $30.62 a share.
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Expedia
This online travel leader is poised for a potentially big 2018. Expedia Inc. (NASDAQ: EXPE) is the leading internet travel pure-play with exposure to online travel in the United States, Europe and Asia. The company’s portfolio of brands includes Expedia, Orbitz, HomeAway, Travelocity, Hotels.com, Trivago, Egencia, Hotwire, Wotif, Venere and Classic Vacations.
Top analysts see it as a story of improving execution, and they also think that the company is starting to finally match Priceline’s growth metrics. The company has raised its dividend and is buying back stock, both shareholder friendly actions.
Expedia investors are paid a 0.8% dividend. Jefferies has a massive $170 target price for the stock, while the posted consensus target was last seen at $151.86. Expedia shares closed on Wednesday at $128.01 apiece.
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Signature Bank
This regional bank has a leading presence in New York City and is a Wall Street favorite. Signature Bank (NASDAQ: SBNY) is a full-service commercial bank with 29 private client offices throughout the New York metropolitan area. The bank’s growing network of private client banking teams serves the needs of privately owned businesses, their owners and senior managers.
Signature Bank also offers a wide variety of business and personal banking products and services. Its specialty finance subsidiary, Signature Financial, provides equipment finance and leasing as well as transportation and taxi medallion financing. Signature Securities Group, a wholly owned subsidiary, is a licensed broker-dealer, investment adviser and member FINRA/SIPC, offering investment, brokerage, asset management and insurance products and services.
The whopping $178 Jefferies price target compares with the posted consensus price objective of $170.95. The shares closed trading on Wednesday at $154.
Steel Dynamics
The Jefferies team also remains very positive on this top steel company. 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 Jefferies report noted this:
The company remains one of the analyst top picks in the US steel sector as a high-quality play on the gradually tightening domestic steel market and supported by bullish global trends led by Chinese supply-side reform. In the near-term, Steel Dynamics should benefit from greatly improving margins as steel prices continue to move sharply higher following several rounds of price hikes launched in October.
Shareholders of Steel Dynamics are paid a 1.33% dividend. The Jefferies price target for the shares is $54. The posted consensus target is $51.54, and the stock closed most recently at $45.40 per share.
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Texas Instruments
This old-school chip tech company was a recent addition to the Jefferies Franchise List of high-conviction stocks. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.
The Jefferies team remains bullish on the company despite quarterly results that some on Wall Street did not care for. The Jefferies report noted this:
Analyst Mark Lipacis recently added the stock to the Franchise Pick list as he believes the company is uniquely positioned to benefit from several secular drivers as the industry shifts towards the next phase of growth-the Internet of Things-and cyclical demand from industrial capex picks up. He notes that the Auto and Industrial businesses grew by 18-21% in 2017. Further, he expects the company to expand gross margins by 10% as consolidation in semis drives further pricing power.
Texas Instruments shareholders are paid a 2.26% dividend. Jefferies has set its price objective at $150, well above the consensus price target of $120.58. The share price ended the day on Wednesday at $109.67.
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These five stocks to Buy all have earnings and cash flow growth potential. Given the pricey nature of the market, these are the kinds of companies that stand a far better chance for success this year than others that may have topped out.
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