Increasingly, the Wall Street firms we cover are starting to agree that while the future is still bright for the U.S. economy, the next five years may be one of stock market gains that are much lower than the norm has been over the past 11 years. When that is the case, then investing strategies often shift from indexing to a more disciplined stock-picking routine. That’s when investors need solid growth ideas.
Jefferies highlights the firm’s top growth stocks to buy each week, and this week is no exception. The Jefferies team has reviewed the outlook for second-quarter results, and they are very positive going forward on some of the biggest and most powerful technology and momentum giants. We found four that look like solid picks for more aggressive growth investors.
While all four stocks are rated Buy at Jefferies, it’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Activision Blizzard
This remains a top gaming pick on Wall Street, and the Jefferies team remains very positive on it. Activision Blizzard Inc. (NASDAQ: ATVI) develops and publishes online, personal computer (PC), video game console, handheld, mobile and tablet games worldwide.
The company develops and publishes interactive entertainment software products through retail channels or digital downloads and downloadable content to a range of gamers. Its legacy franchise Call of Duty game continues to be hugely popular.
The analysts said this when discussing the potential for the company to make an acquisition:
We were out with a note taking stock of the M&A landscape within the video games space. For ATVI, we believe investors would react favorably to an accretive deal given the company’s history of value-creating corporate actions. Given the rarity of mega M&A in the video game space, we offered a high level look at the most notable private companies. We continue to see a visible path to two straight years of earnings growth for ATVI, driven by forecasts moving higher and a ~26x EPS multiple.
Investors receive just a 0.55% dividend. The Jefferies analysts have set an $80 price objective on the shares. The Wall Street consensus target is $78.73, and Activision Blizzard stock traded early Monday at $76.00 a share.
Deckers Outdoor
This clothing manufacturer makes some of the hottest selling products, and it could be poised for a big holiday selling season. Deckers Outdoor Corp. (NYSE: DECK) designs and markets footwear and accessories for men, women and children. Deckers sells its products, including accessories such as handbags, headwear and outerwear, through domestic and international retailers, international distributors and directly to end-user consumers both domestically and internationally, through websites, and retail stores under the UGG (73% of revenue), HOKA (14%), Teva (6%), Sanuk (3%) and Koolaburra (3%) brands.
The analysts have championed this company for some time and noted this in the research report:
Deckers Outdoors is proving exceptionally resilient in navigating COVID, thanks in large part to its strong brands (UGG, HOKA) which are demonstrating robust, channel-agnostic consumer demand. While UGG is typically viewed as a fall/winter brand, UGG’s strong sell-through during COVID helped further legitimize its standing as a year-round brand. In addition, HOKA remains on a path to be a $1B+ brand, and we continue to see L-T growth opptys in hiking/training, int’l and new product categories. We raised our estimates and model F21 and F22 EPS ahead of consensus.
The Jefferies price objective is $245, but the consensus target is just $203. Deckers Outdoor stock traded early Monday at $187.30.
DraftKings
The company became a huge favorite with younger people due to the surge in popularity of fantasy football. DraftKings Inc. (NASDAQ: DKNG) operates as a digital sports entertainment and gaming company. It provides users with daily sports, sports betting and iGaming opportunities. It also is involved in the design and development of sports betting and casino gaming platform software for online and retail sportsbook and casino gaming products.
The company entered the market back in April in a time when most companies were putting off their initial public offerings. The offering was not an IPO in the truest sense because DraftKings came public through a merger with a special purpose acquisition company called Diamond Eagle, but similar rules applied.
The stock has since surged, and Jefferies said this:
We reiterated our view that sports betting should accelerate post COVID, and believe the market for sports betting in the US could reach $19 billion by 2023-25. We supported this view with our global interactive model which examines per capita spending on sports compared with other more mature countries, the U.K., Germany and Australia, which spend between $45 and $173 per capita. We expect that post-COVID, engagement with digital leisure, pent-up appetite for sports and political realities should position DraftKings to accelerate. In addition, we highlighted that vertical integration is critical to progressing at the company’s intended pace. Integration requires patience, but the ability to manage the back-end while proliferating the under-estimated U.S. in-game wagering oppty drove above consensus value in our model by 2023.
Jefferies started coverage last week with a $55 price target. The consensus target was last seen at $43.88. DraftKings stock traded down more than 5% at $31.300 early Monday.
ServiceNow
This stock had an incredible 2019 and remains a top pick. ServiceNow Inc. (NYSE: NOW) develops and sells a hosted, subscription-based suite of services designed to automate various IT department functions, such as help desk, operations management and change/release management.
The company also sells a number of applications that automate various self-service related applications outside of the IT department, such as HR onboarding, facilities requests and governance, risk and compliance.
ServiceNow has consistently posted strong quarterly results and the analysts feel good about where the company is headed for the rest of 2020. They said this in the research:
After stress-testing our model, we remain confident Service Now 2020 subscriber billings guidance is very achievable. The company guided for 2020 adjusted subscriber billings of $4,694 M. Using sub billings as a proxy for annualized contract value (ACV), we estimated achieving the 2020 guidance would require adding ~$850 million of net new ACV. The company entered 2020 with 26% more sales and marketing headcount. Recent feedback from partners and a large enterprise customer was encouraging. Some organizations are being forced to accelerate digital transformations and the product cycles for finance automation library and DevOps are still in the early stages.
The $465 Jefferies price objective towers above the $373.10 consensus target price. Service Now stock was trading at $392.45.
These four stocks offer investors strength in their specific industries, as well as the ability to generate some significant portfolio alpha. They are suitable for growth investors that have a larger degree of risk tolerance.
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