Often on Wall Street, there is a definite herd mentality where everybody tends to do what everybody else is doing. Partly that is because Wall Street money managers and the hedge fund world all talk among themselves and tend to share ideas. In the big picture there certainly is nothing wrong with that, but many times, it’s also smart to take the contrarian route.
In a new research report, Jefferies goes down the contrarian path, looking for stocks ideas not well liked across Wall Street. This is an especially good path of action now with the stock market so high in valuation and after a long, 10-year bull run.
The Jefferies report noted this:
Jefferies Equity Research highlighted 13 stocks that the Street generally does not like, based on average Street rating, trajectory of rating and short interest, but which Jefferies favors. The Street’s more negative views on these stocks are often based on end-of-cycle concerns, fears of tech disruption, or both, and better economic data could lead investors back to some of these ideas. Notably, since 2011, when quintiling stocks by Street rating, it is the second to lowest rated quintile which has performed best, perhaps because those are less crowded and more can go right.
We screened the list for ideas that also paid dividends, as in many cases the waiting time on out-of-favor ideas can be longer, so it make sense to get paid if you do wait. We found five of the stocks in the report, which are all rated Buy at Jefferies that look like solid plays now.
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BorgWarner
Shares of this leading original equipment manufacturer have solid upside potential. BorgWarner Inc. (NYSE: BWA | BWA Price Prediction) develops, manufactures and sells engineered automotive systems and components primarily for powertrain applications worldwide. The company’s Engine segment offers turbochargers, turbo actuators and timing systems, such as timing chains, variable cam timing products, crankshaft and camshaft sprockets, tensioners, guides and snubbers, HY-VO front-wheel drive transmission chains and four-wheel drive chains.
The Drivetrain segment develops and manufactures friction and mechanical products, including dual clutch modules, friction clutch modules, friction and steel plates, transmission bands, torque converter clutches, one-way clutches, and torsional vibration dampers. BorgWarner sells its products to original equipment manufacturers of light vehicles, consisting of passenger cars, sport utility vehicles, vans and light trucks, as well as commercial vehicles.
BorgWarner shareholders are paid a 1.55% dividend. The Jefferies price target for the stock is $48, and the Wall Street consensus target was last seen at $41.50. The stock closed on Monday at $43.88 a share.
Ford
This is a solid value play now, and demand could jump with a trade deal with China paving the way. Ford Motor Co. (NYSE: F) is one of the world’s largest vehicle producers, with over 6 million units manufactured and sold globally. The company has made significant progress executing on its One Ford plan and delivering best-in-class vehicles.
The company also remains committed to positioning itself well within the evolving auto industry through balanced investments across electrification, autonomy and mobility services.
Shareholders of Ford are paid an outstanding 6.43% dividend, though some fear it could be lowered this year. Jefferies has an $11 price target, and the posted consensus target is much lower at $9.32. The shares closed most recently at $9.33 apiece.
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Invesco
This remains a very attractive way for investors to invest in the financial services arena. Invesco Ltd. (NYSE: IVZ) is one of the world’s largest independent asset management groups, with over 750 investment professionals worldwide and a presence in over 20 countries. It offers a range of investment styles and products to institutions and individuals through a variety of distribution channels around the world.
Last week, Invesco reported preliminary month-end assets under management for March 2019 of $954.8 billion, an increase of 1.0% month over month. The increase was driven by favorable market returns, non-management fee earning asset under management inflows and reinvested distributions, partially offset by foreign exchange and net long-term outflows.
Invesco investors are paid a very rich 5.70% dividend. The Jefferies team has remained bullish on the stock and has a $24 price target. That compares with the consensus target of $18.70, as well as the most recent close at $21.07.
Kroger
This top grocer does almost all of its business in the United States. Kroger Co. (NYSE: KR) is the second largest U.S. food supermarket retailer and generates $120 billion in annual sales. Kroger operates roughly 2,800 supermarkets throughout 35 states and under two dozen banners. Kroger also sells fuel at 1,450 supermarket fuel centers and operates 2,268 pharmacies and 274 jewelry stores.
The stock remains very cheap as it has a market cap of under $24 billion. The shares were nailed back in March when the company reported weak fiscal fourth-quarter results. While it is slowly recovering, the sell-off gives investors a great entry point.
Kroger shareholders are paid a 2.20% dividend. Note that the $29 Jefferies price target is less than the analysts’ consensus target price of $31.22. The shares closed at $25.47 on Monday.
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Quest Diagnostics
With an aging population, this may be a safer way for investors to play health care. Quest Diagnostics Inc. (NYSE: DGX) is the largest provider of clinical diagnostic testing and related services in the United States, delivered through a national network of full-service clinical laboratories and over 2,200 patient service centers.
The company looks to be on track for at least 1% of incremental sales growth from mergers and acquisitions this year, and some on Wall Street feel there is a potential for additional acquisitions that could boost the second half outlook. Quest has indicated the first tranche of the anticipated United Healthcare share gain will happen quickly, but that a significant part of the volume build will span into 2021.
Here, investors receive a 2.33% dividend. Jeffries has set its price target at $107. The consensus target across Wall Street is $92, and the shares were last seen trading at $90.99 apiece.
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These five contrarian ideas make good sense for investors looking to stay invested but who are casting a wary eye at the bloated stock market. With earnings season now in full swing, it may make sense to buy partial positions and see how the results come in.
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