Investing

Jefferies Makes Incredibly Large Changes to Its Franchise Picks List

Lee Jackson

Published: May 26, 2020 7:25 am

All the banks and brokerage firms that we follow here at 24/7 Wall St. keep a list for their institutional and retail clients of high-conviction stock picks. Generally they like these companies on a longer term basis, and their stocks usually have big upside to the assigned target price. Since the beginning of the year, many firms on Wall Street have tweaked their lists of top stocks to buy to account for continued changes in 2020, and one company has added some outstanding stocks we feel could have outsized upside.

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A recent Jefferies research report shows a huge move in reworking the firm’s Franchise Picks list. Six new companies have been added to the list, while seven were removed. We have covered the Franchise Picks list for years, and this is the largest single portfolio change we have ever seen. Remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Here are the six new additions to the Jefferies Franchise Picks list.

BioMarin Pharmaceuticals

This a Wall Street favorite and a solid biopharma play. BioMarin Pharmaceuticals Inc. (NASDAQ: BMRN) develops and commercializes innovative biopharmaceuticals for serious diseases and medical conditions. Its product portfolio comprises five approved products and multiple clinical and preclinical product candidates.

Over the past decade, BioMarin has become one of the top orphan drug companies, and it looks poised to stay there.  Roche recently has been mentioned as a company that could be looking at BioMarin. Roche is focused on oncology drugs and invests heavily in early-stage molecules.

The consensus earnings forecast for 2020 has been scaled down by a penny per share. However, the full-year 2021 estimate has been lifted to $1.20 per share from the previously forecast $1.13.

The analysts noted this in the report:

Our proprietary work leads us to believe that upcoming launches for valrox and vosoritide are likely to ramp faster than consensus expectations. We forecast a revenue compounded annual growth rate of 17% thru 2024.

The Jefferies price objective for the shares is $132. The Wall Street consensus price objective is way below that at $117.18, and BioMarin stock closed trading on Friday at $97.51.

Blackstone

Shares of this top money management company make sense for more aggressive growth and income investors. Blackstone Group L.P. (NYSE: BX) is one of the largest global alternative asset managers. Blackstone manages investments and provides services across four operating segments: Private Equity, Real Estate, Credit and Hedge Fund Solutions.

Blackstone also launches and manages private equity funds, real estate funds, funds of hedge funds and credit-focused funds for its clients. It invests in private equity, public equity, fixed income, and alternative investment markets.

Jefferies noted this when discussing the company:

Blackstone Group has been steadily building out longer-duration permanent capital vehicles, to add earnings stability and higher multiple fee-paying assets under management. Corporate management reiterated its fiscal year 2020 and 20201 free related earnings targets, and we think the current environment may be conducive to opportunistic capital deployment.

Investors receive a 3.70% distribution. Jefferies has a $56 price target, a bit above the $54.46 consensus target. Blackstone stock closed last Friday at $53.95.

Motorola Solutions

This stock rallied off the lows in March but has given back most of the gains. Motorola Solutions Inc. (NYSE: MSI) is a provider of communication infrastructure, devices, accessories, software and services. The company operates through two segments.

The Products segment has two product lines: Devices and Systems. The primary customers of the Products segment are government, public safety and first-responder agencies, municipalities and commercial and industrial customers operating private communications networks and manage a mobile workforce.

The Services segment provides a range of service offerings for government, public safety and commercial communication networks. This segment’s product lines include Integration services, Managed & Support services and Integrated Digital Enhanced Network.

The analysts noted the backup in the shares and said this:

We expect the shares to re-rate higher as the company leverages their franchise position in Public Safety via new technologies/capabilities (such as Video surveillance), tuck-in software acquisition, and an increased mix of recurring revenue – 33% currently.

Shareholders receive a 1.89% dividend. The $155 Jefferies price objective is much lower than the $175.53 consensus price target. Motorola Solutions stock was last seen trading well below both at $134.19.

This company has a diversified mix of business and its share price is down a stunning 33% this year. Raytheon Technologies Corp. (NYSE: RTX) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems. It is among the companies that make the most from the U.S. government.

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With a history of innovation spanning 97 years, Raytheon provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support for customers in more than 80 countries.

Last year, Raytheon and United Technologies agreed to merge their businesses to create a new aerospace and defense powerhouse. The two companies received unanimous approval from their respective boards and the merger is finally complete, with the new company now called Raytheon Technologies.

Jefferies noted this about the new combined company:

Given the recent merger between Raytheon and United Technologies Aero, combined with the spin off of Carrier and Otis, the market is overlooking the path for free cash flow to step up to $6.2 billion by 2022. Any recovery in air travel or improvement in sentiment would help drive the commercial Aerospace business.

Shareholders receive a 3.31% dividend. Jefferies has set its price objective at $80. The consensus target price is $75.72, and Raytheon Technologies stock closed at $60.

Rio Tinto

Shares of this mining company could explode higher if the world economy rebounds. Rio Tinto PLC (NYSE: RIO) is the world’s second-largest mining company and has operations in Australia, Africa, the Americas, Europe and Asia. It is the world’s largest producer of aluminium, the second-largest producer of iron ore and a top-five producer of alumina, uranium, mined copper, export thermal and coking coal, and diamonds.

In addition, Rio Tinto is also involved in alumina production; primary aluminum smelting; bauxite mining; alumina refining; and ilmenite, rutil, and zircon mining; as well as provision of gypsum. Jeffries had this to say about the company’s prospects:

Rio Tinto has a strong balance sheet (Ned debt/EBITDA of 0.2x), low cost iron ore assets, as well as copper and aluminum assets that offer leverage to an eventual cyclical recovery. Near-term we believe that iron ore may continue to surprise to the upside. Assuming current spot commodity prices, which are mostly well above our conservative forecasts, Rio’s free cash flow yield is 11.3%.

At least for now, the company has retained a 7.33% dividend. The Jefferies price target of $55 compares to the $48.25 consensus estimate and the last Rio Tinto stock trade on Friday at $52.12.

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TJX Companies

The Jefferies team loves this is retailer. The TJX Companies Inc. (NYSE: TJX) is the largest global off-price retailer with over 3,000 stores worldwide. It offers brand-name merchandise at a 20% to 60% discount to department and specialty store prices. Its stores are generally known for their treasure hunt experience.

The core TJX customer is a middle to upper-middle income female, between 25 and 54 years old, who is fashion and value conscious. The analysts feel that the “new normal” is positive for the shares of the discount retailer and said this:

In a post-COVID world, TJX is uniquely positioned as the beneficiary of both supply and demand benefits. While the market focuses on the risk from a consumer migration towards e-commerce, our proprietary work shows TJX’s distinctive in-store experience may be the exception to the rule.

Shareholders receive a 1.3% dividend. The Jefferies price target is set at $60. The consensus is in line at $59.96, and TJX Companies stock ended the week at $53.41.

The Jefferies analyst removed these companies from the Franchise Picks list: Capri Holdings Ltd. (NYSE: CPRI), Equitrans Midstream Corp. (NYSE: ETRN), FMC Corp. (NYSE: FMC), Golar LNG Ltd. (NASDAQ: GLNG), KeyCorp (NYSE: KEY), L3 Harris Technologies Inc. (NYSE: LHX) and LKQ Corp. (NASDAQ: LKQ).

And six new stocks have been ushered into the Franchise Picks in a massive portfolio change. This points to analysts seeing a profound shift as the COVID-19 pandemic continues to dominate the day-to-day narrative. With the potential for continued economic and political volatility, now is probably a good time for a little spring cleaning.