- Reuters/Peter Nicholls
Sometimes it pays to go against the mainstream.
Betting against the investor consensus can lead to big gains – given you get the trade right.
In an attempt to capture possible market inefficiencies, Credit Suisse compiled their top 10 ideas that go against the mainstream consensus.
“We screened our current US coverage universe to identify companies where our analysts’ views diverged from that of the Street, focusing on rating, earnings projections as well as target price,” said the note from Credit Suisse. “To further strengthen the list of stocks, we worked closely with the research analysts to select stories in which our conviction level is high.”
Five of the ideas are companies that are currently undervalued, while five are firms with stocks that look too expensive.
We’ve compiled the 10 ideas along with the price at the time of Credit Suisse’s publication, their target price and an excerpt of the analysts explanations as to why they are staking their contrarian claim.
Check them out below.
Dr. Pepper Snapple Group
- By andreasivarsson on Flickr
Industry: Non-Alcoholic Beverages
Current Price: $87.49
Price Target: $108.00
Why Credit Suisse thinks they’re right: “In our view, the market is undervaluing the role of the Allied Brands as the primary driver of growth and margins going forward, contributing incrementally to an already consistent financial algorithm. Our sales and EPS estimates are 2% above consensus for FY17/18 as we see a clear opportunity to deliver incremental growth with Allied Brands.”
- REUTERS/Toru Hanai
Current Price: $71.79
Price Target: $85.00
Why Credit Suisse thinks they’re right: “With merger with LRCX formally terminated, we see the stock as attractive on standalone valuations. Our FY17 EPS of $5.34 is ~10% above Street, and we see potential for multiple expansion from here, given premium OpM and 3% dividend yield (with potential for dividend increase).”
- Peter Macdiarmid/Getty Images
Industry: Medical Equipment Wholesale
Current Price: $45.36
Price Target: $55.00
Why Credit Suisse thinks they’re right: “We believe PDCO is the best play on US dental demand trends, with its predominantly domestic focus and standing as the largest equipment vendor with exclusive access to DENTSPLY SIRONA’s industry leading CAD/CAM lines and other digital offerings. Faster growing animal health revenues now account for over 50% of its revenues, compensating for lumpiness in dental revenue trends.”
Whole Foods Market
- Business Insider/Hayley Peterson
Industry: Supermarkets and Convenience Stores
Current Price: $29.33
Price Target: $40.00
Why Credit Suisse thinks they’re right: “Comps have been negative for the past four quarters as WFM struggles to correct its poor value proposition in an increasingly competitive and deflationary industry landscape. However, we maintain the view that investors should own this name when sentiment is negative and as comps bottom, and believe an inflection is likely in coming quarters.”
United States Steel Corp.
Current Price: $17.93
Price Target: $29.00
Why Credit Suisse thinks they’re right: “Based on our conversations with investors recently, we believe the market has become way too negative on domestic flat rolled fundamentals (particularly for value-add), which overall remain strong despite various headwinds. We believe X is very undervalued and view the sharp pullback in the stock price on the widely anticipated hot rolled sheet correction as overdone.”
Alliance Data Systems Corporation
Industry: Business Support Services
Current Price: $214.05
Price Target: $161.00
Why Credit Suisse thinks they’re right: “1) We believe the market under-appreciates the risk to the credit portfolio given recent trends and how this could impact earnings over the midterm; 2) We believe the market under-values the leverage risk given the high degree of corporate-level debt that cannot be guaranteed by the bank holding company.”
Big Lots, Inc
- Wikimedia Commons
Industry: Discount Stores
Current Price: $46.88
Price Target: $40.00
Why Credit Suisse thinks they’re right: “However, we question the company’s ability to sustain comp and earnings growth as it cycles these top-line initiatives, especially now that the competitive environment looks to be intensifying and overall industry trends are slowing.”
Cisco Systems Inc.
- Thomson Reuters
Industry: Communications & Networking
Current Price: $31.48
Price Target: $25.00
Why Credit Suisse thinks they’re right: “While CSCO delivered slightly better F4Q16 results, our long-term concerns remain that the company is increasingly challenged by SDN and continues to lose share in the 10GbE & above switching market. Currently, we see Cisco at peak operational performance and see limited upside from here.”
Industry: Automobile Insurance
Current Price: $31.03
Price Target: $28.00
Why Credit Suisse thinks they’re right: “Our bottom-up analysis shows that high growth levels only accounted for around half of the 2.5-3.0 points of margin deterioration, pointing to risk to 2017 consensus estimates. Margin stabilization is likely to come at a price (significantly slower growth) given the current loss trend environment. As a result the set of profitability/growth permutations that we see as realistic may come as a disappointment given the stock’s lofty historical valuation.”
- PRNewsFoto/Valmont Industries, Inc.
Industry: Construction Supplies and Fixtures
Current Price: $131.45
Price Target: $115.00
Why Credit Suisse thinks they’re right: “We think that consensus overestimates both the top-line recovery in the Irrigation and Utility parts of the company, as well as the margin leverage on any top-line rebound.”