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BofA Securities Best Small and Midcap Picks for the Rest of 2020
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The story for investors this year has been the incredible run of the Nasdaq, which has put in all-time highs after bottoming in March with the rest of the market. Conversely, the Russell 2000, which features the index of the smallest 2,000 stocks, has struggled. After peaking in June, the index has rolled over and traded sideways to down over the past month.
The advantage of owning stocks that are smaller in market capitalization is that many of them have less European and China exposure, and best of all for investors, they are trading at levels that are far more reasonably priced than the high price-to-earnings momentum group.
A new BofA Securities report includes the firm’s best small and midcap stock picks for the rest of 2020. The report noted this when discussing methodology:
For this report, we focus on Buy-rated stocks of at least $1 billion in market cap (and liquidity no less than $20 million per day) that are less than $15 billion in market cap or fall into one of the major small/mid cap US benchmarks (plus one idea from our MLPs team), which our contributing fundamental research teams consider their best ideas within their small and midcap coverage (spanning >800 US stocks).
Some 27 stocks made the cut, so we screened the list for the five best-known companies that offer the best upside for investors to the BofA Securities price target and perhaps can move more into favor as economic and health conditions around the country improve. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Allegiant Travel
This low-cost carrier flies to many cities, but none of those destinations is in China. Allegiant Travel Co. (NASDAQ: ALGT) has a unique business strategy: flying where other airlines do not. It connects 136 city pairs and typically flies each leisure route only a few times a week, using older planes with low capital costs. An early unbundler, the company generates more fees per passenger than any U.S. airline. Its largest market is Las Vegas, followed by Orlando and Phoenix.
The company announced earlier this year the largest service expansion in its history, which includes 44 new nonstop routes, including 14 routes to three new cities: Chicago, Boston and Houston. This major addition to service is driven by Allegiant’s goal of connecting leisure travelers in underserved cities to popular destinations around the country. Most of the 44 new routes are non-competitive, with no other airline providing service between those airports.
The BofA Securities price target for the shares is $140, while the consensus target across Wall Street is just $112.78. Allegiant Travel stock was last seen trading at $101.74, down almost 8% on Thursday.
CyrusOne
This is a top pick among the data center stocks. CyrusOne Inc. (NASDAQ: CONE) designs, builds and operates facilities across the United States, Europe and Asia that give its customers the flexibility and scale to match their specific growth needs. Specializing in highly reliable enterprise-class, carrier-neutral data center properties, the company provides robust data center infrastructure to ensure the continued operation of IT equipment for a rapidly growing list of organizations that now nears 900, including nine of the Fortune 20 and more than 160 of the Fortune 1000 or equivalent-sized companies.
Many analysts feel that some of the best returns in the data center sector may be found in the smaller players in the space like CyrusOne. The company trades at numerous lower multiples than their bigger competition, and top analysts feel that the discount valuation is not warranted given the recent surge in leasing and above-average growth.
The company also has exhibited faster deployment times, rapid new market expansion and low churn among customers, all bullish reasons for buying the stock. The analyst recently raised the price target and reiterated the Buy rating.
Unitholders receive a 2.60% distribution. BofA Securities lifted its price objective to $85 from $75. The consensus target price is $78.19, and CyrusOne stock closed Thursday’s trading at $76.84.
24/7 Wall St.Darden Restaurants
With phase one opening procedures in place, the restaurant industry is close to leaving the horror of being totally shut down except for carryout and delivery. Darden Restaurants Inc. (NYSE: DRI) owns and operates full-service restaurants in the United States and Canada.
As of November 24, 2019, the company owned and operated approximately 1,799 restaurants, which included 867 under the Olive Garden, 518 under the LongHorn Steakhouse, 166 under the Cheddar’s Scratch Kitchen, 79 under the Yard House, 59 under The Capital Grille, 45 under the Seasons 52, 42 under the Bahama Breeze and 23 under the Eddie V’s Prime Seafood brands.
The company reinforced the balance sheet in May and the analyst said this at the time:
Darden completed a $460 million equity raise ($400 million common, $60 million green shoe) to strengthen its balance sheet. The raise highlights Darden’s growing cost of capital advantage to peers given years of a more conservatively run balance sheet. Despite the 6% dilution, we think Darden’s war chest will help it muscle out peers post-Covid-19.
The company has suspended its dividend for now. BofA Securities has an $85 price target, which is just below the $85.78 consensus target. Darden’s last trade Thursday hit the tape at $71.34.
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 May when the company posted strong results:
Deckers Outdoor reported fiscal fourth quarter earnings per share well ahead of our forecast. We Raise earnings per share and price objective and reiterate Buy. The company is well positioned versus peers given: (1) favorable seasonality, (2) net cash position, (3) share gaining brands (UGG & HOKA), and (4) strong e-commerce presence. 1Q-to-date revenue much better than expected for HOKA (up low-30%) and UGG (down just mid-single digit). Deckers is now a top pick.
BofA Securities has set a $215 price target. The consensus target is $206.21, and the last Darden Restaurants stock trade on Thursday came in at $190.02.
24/7 Wall St.Diamondback Energy
This top Permian Basin play for more aggressive accounts could be a takeover target. 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.
Diamondback’s activities are focused primarily on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past Diamondback Energy’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. It 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 stunning $74 BofA Securities price objective compares with the $58.59 consensus estimate. Diamondback Energy stock retreated almost 7% on Thursday to close at $37.50.
These are five top small and midcap picks for investors looking for ideas and market capitalizations that are somewhat out-of-favor. Any improvement in the overall economy and the COVID-19 situation could prove to be huge tailwinds for all five the rest of this year and into 2021.
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