The last six months have seen a huge rotation out of traditional momentum growth stocks to cyclical and value stocks as the bull market ages. Traditionally value stocks are those trading at levels that are perceived to be below the company’s fundamentals. In addition, common characteristics of value stocks include high dividend yield, low price-to-book, and price-to-earnings ratios. Sometimes, though, stocks that are perceived as growth stocks slip into value metrics, and that can lead to some big gains for investors.
Each week the analysts at Jefferies cover the firm’s top value stocks to Buy, and when we screened the list, three companies with value metrics but momentum stock upside jumped out at us. While all three are rated Buy, it’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Amazon
This company is the absolute leader in online shopping and is the newest addition to Jefferies Franchise Picks list of top stocks to Buy. Amazon.com Inc (NASDAQ: AMZN) serves consumers through retail websites, such as amazon.com and amazon.ca, which primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.
The company serves developers and enterprises through Amazon Web Services (AWS) that provide computer storage, database, analytics, applications, and deployment services that enable virtually various businesses. AWS is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market.
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The Jefferies analyst has championed the company for years and said this in a recent research piece.
We see a fundamental outlook that is arguably better than ever given behavioral changes incited by the pandemic that have resulted in a permanent increase in e-commerce adoption. Further, we see attractive growth at AWS and advertising, which should offset any near-term slowdown in core retail. We performed a proprietary survey which supports our view that consumption has permanently shifted online as 60% of respondents are spending more online since the pandemic began. Among that 60%, 63% have continued spending more online even after restrictions were lifted in their area. Moreover, despite the strong fundamental outlook, we noted that shares trade at a ~10% discount to its historical average EV/EBITDA multiple.
Jefferies has a massive $4200 price objective for the technology giant, which compares to a higher consensus figure across Wall Street of $4238.59. The last trade Friday came in at $3486.90.
Lockheed Martin
This company is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corporation (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services.
The Company operates in five principal business segments: aeronautics, missiles and fire control, mission systems and training, space systems, and information systems and global solutions (IS&GS). It also provides a wide range of defense electronics products and IT services.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from a large number of foreign allies of the nation.
The Jefferies analysts noted this when discussing the prospects for the company.
The Biden Administration released its fiscal year 20 22 Department of Defense budget request of $715 billion, up 2% year-over-year from the $704 billion enacted in fiscal 2021. The 2% increase called for by the 2022 budget request follows a period of steady growth from fiscal 2016 to 2020 and lags inflation. Notable shifts in funding include a transition to R&D investments, with a 5% increase requested in 2022. We noted that relative multiples for the defensive primes typically bottom ahead of budget peaks, and the group Enterprise Value/EBITDA is at a 10% discount to the market. Defense names currently trade at a fiscal year P/E multiple of 16x, a 29% discount to the S&P’s multiple of 22.4x. This compares to a 19% discount over the past three years and a recent trough valuation of a 48% discount in December 2020. We highlighted that Lockheed Martin looks particularly attractive vs. its trough relative valuation.
Investors are paid an attractive 2.92% dividend. The Jefferies price objective is set at $400, and the Wall Street consensus target is higher at $429.17. Lockheed Martin shares closed Friday at $379.19.
NVIDIA
This is a top chip stock that has reported strong earnings and has been a top pick at Jefferies for years. NVIDIA Inc. is a semiconductor leader supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
Nvidia is also moving into visual computing chips for cars, mobile devices, and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
Analyst Mark Lipacis recently lifted his price target on the chip giant and said this.
We highlighted that in a recent interview, the CEOs of Nvidia and ARM Ltd. discussed the impact of Nvidia’s proposed acquisition of ARM. Our sense is that investors are skeptical the deal will clear regulatory hurdles, in part due to the lopsided reporting of the deal that has focused on more vocal anti-deal proponents. We pointed out that the opening statement in the interview by Nvidia’s CEO and multiple references to the company being a platform company is consistent with our view that NVDA will be supplying an ecosystem for the data center. We believe it ultimately will be able to monetize its ecosystem much like Apple in the smartphone market or WINTEL in PCs. Additionally, to show commitment to ARM’s UK operations, Nvidia’s CEO stated that the company’s intention is to continue investing significantly and viewed $100 million “as a starting point.” Bottom-line, we think NVDA and ARM become more visible in articulating the benefits of the deal, which we think will translate to improved sentiment and an expanded multiple for Nvidia.
Investors are paid a small 0.28% dividend. The Jefferies price target is a massive $854, and the Wall Street consensus price target is posted lower at $726.49. The shares closed Friday at $745.55.
Three quality stocks to buy that have value characteristics but also appear to have the hidden potential to have momentum stock upside. While not suitable for all investors, for value and growth stock buyers with a degree of risk tolerance there could be some big gains in the future for all three companies.
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