Investing

Jefferies Franchise List Mid-Cap Picks Have Big Upside Potential

Lee Jackson

Published: July 25, 2018 8:00 am

Last Updated: January 11, 2020 8:28 pm

All the Wall Street firms that we follow here at 24/7 Wall St. keep a list for their institutional and retail clients of high-conviction stock picks. These are generally the companies they not only like on a longer term basis, but stocks that usually have big upside to the assigned target price. With the third quarter underway, many firms on Wall Street have tweaked their lists to account for potential changes the rest of 2018, and one company has added some outstanding stocks we feel could have outsized upside.

In a recent research note, Steven DeSanctis, the top-notch equity strategist at Jefferies, makes the case that while the market overall is expensive, the stocks with a mid-range market capitalization may hold the best upside potential going forward. Mid-caps are typically defined as those companies with market caps between $2 billion and $10 billion. These stocks tend to be somewhat riskier than large-cap stocks but less risky than small-cap ones.

The analysts screened the Franchise List of top stock picks for mid-cap companies and found 17 that fit the category. We screened that list for the those that look like the best values now, and we found four top plays for investors. We focused on energy and discretionary sectors as they are the cheapest.

Diamondback Energy

This is a top Permian Basin play for more aggressive accounts. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.

Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.

Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.

The Jefferies price target on the stock is $165, and the Wall Street consensus target is $161.82. The shares closed trading on Tuesday at $133.45.

Golar LNG

This is the premier company in the world for liquefied natural gas (LNG) distribution. Golar LNG Ltd. (NASDAQ: GLNG) is one of the world’s largest independent owners and operators of LNG carriers and floating storage and regas units (FSRUs). The company has 14 vessels in its fleet, three LNG carriers slated for floating LNG platform (FLNG) conversion, 10 LNG carriers and one FSRU.

Collectively with Golar Partners and Golar Power, the fleet has 16 LNG carriers, three FLNGs/candidates and eight FSRUs. GLNG is the general partner for Golar LNG Partners. Its joint ventures, Golar Power and OneLNG, are focused on FSRU conversions and FLNG projects.

Jefferies has a price target of $35, while the consensus price objective is $36.06. The stock closed Tuesday at $26.59.

Marathon Petroleum

With a big deal in place, this company is poised to be the biggest refinery in the United States. Marathon Petroleum Corp. (NYSE: MPC) is one of the newest members of the Jefferies Franchise List, and it is at the beginning of the long process of completing a massive purchase of another refining giant. The company agreed to buy rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner.

The offer, payable in either cash or shares, values Andeavor at about $152.27 a share. That represents a 24% premium over the closing price the prior to the announcement. Following the deal, Marathon will be the largest operator of refining capacity in the United States, and most on Wall Street believe that management can achieve the $1 billion in synergies it has suggested.

Shareholders are paid a 2.56% dividend. Note that the $95 Jefferies price target is less than the posted consensus target of $97.62. The shares closed at $73.74 on Tuesday.

Under Armour

This is apparel leader has struggled mightily over the past year and may be finally turning the corner. Under Armour Inc. (NYSE: UAA) bills itself as the originator of performance footwear, apparel and equipment that has revolutionized how athletes across the world dress. Designed to make all athletes better, the brand’s innovative products are sold worldwide to athletes at all levels.

The Under Armour Connected Fitness platform powers the world’s largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal.

Jefferies remains very bullish on the company, citing the fact that it has the lowest market capitalization among the top athletic retail stocks, sales and margins are moving higher and overall better management of the business is a huge positive going forward.

Jefferies has set its price target at $29. The consensus target is a stunningly low $17.65, but the shares closed most recently at $20.61 apiece.

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Ulta Beauty

If there is any stock to own in the discretionary sector, this may be the one, and it recently made its debut on the Franchise Picks List. Ulta Salon Beauty Inc. (NASDAQ: ULTA) is a holding company for the Ulta Beauty group of companies. It is a beauty retailer that offers cosmetics, fragrance, skin care, hair care products and salon services. The company offers approximately 20,000 products from over 500 beauty brands across all categories, including its own private label. Ulta Beauty also offers a full-service salon in every store featuring hair, skin and brow services.

Ulta Beauty operates approximately 970 retail stores across over 48 states and the District of Columbia and also distributes its products through its website, which includes a collection of tips, tutorials and social content. The company offers makeup products, such as foundation, face powder, concealer, color correcting, face primer, blush, bronzer, contouring, highlighter, setting spray, shampoos, conditioners, hair styling products, hair styling tools and perfumes.

The Jefferies price target is at a stunning $300. The consensus price objective is $268.35, and the stock closed Tuesday at $249.24 a share.

These five outstanding mid-cap stock picks from the Jefferies analysts all have solid upside to the firm’s price target. While better suited for more aggressive growth accounts, they all look like good picks for the rest of 2018 and beyond.