“I hear way too much optimism going forward,” commented BlackRock (NYSE:BLK) CEO Laurence Fink at the World Economic Forum in Davis, “we’re going to be in a world of much greater volatility.” Fink was referencing the global economy at large, but the pointed focus for much of BlackRock’s business is in the U.S. financial markets, where the future of the markets are, as he said, anything but certain.
Between political divisiveness, federal fiscal disorganization, and the taper, the equity market began tripping over itself with the start of the New Year. The Dow Jones Industrial Average is down more than 1 percent this year to date and the S&P 500 is up 1.22 percent. The yield on the 10-year Treasury note is way down for the year so far, falling nearly from 3 percent in January to about 2.65 percent at the end of February.
It can be hard to identify and locate investment opportunities in an environment like this, but many market watchers still believe there will be some winners this year despite all the uncertainty. Credit Suisse’s equity research team released a report in early 2014 identifying more than 50 conviction stock calls from all over the map. The report is designed to serve as an introduction to some interesting investment ideas. Here’s a closer look at five of Credit Suisse’s picks.
1. Monsanto Company (NYSE:MON)
It would be convenient if we could simply locate Monsanto at the intersection of food and science, but we can’t. The address is missing a third dimension, some identifier explaining where the business falls on the spectrum between “Big Agro” and the organic food movement championed by smaller farms. Monsanto is the poster boy for Big Agro, so keep an eye out for patent litigation and anti-GMO protests when locating this company.
That Monsanto is often vilified by healthy food and sustainable farming advocates is no secret. According to the Financial Times, CEO Hugh Grant has contended with the issue first hand, recently speaking about brand and the philosophical and moral schism over the use of GMOs and gene patenting at a conference in London hosted by the Economist. Vehement opposition has fueled political debate on the issue, which right now is tied up in the FDA Food Safety Modernization Act (FSMA.) The law expands the authority of the Food and Drug Administration as agricultural regulator, and its implementation has been a boon for Monsanto, whose biotechnology is used to satisfy the “preventative” ambition of food safety administrators.
Credit Suisse suggests that Monsanto has a “best-in-class” base seed portfolio as well as a healthy R&D pipeline, which should allow it to grow its market share across the Americas. Analyst Chris Parkinson estimates earnings of $5.31 per share in fiscal 2014, slightly more bullish than the current mean analyst estimate and representing potential growth of about 15.4 percent. Parkinson’s price target is $134, “based on 21x our FY16 normalized EPS estimate of $7.40, discounted back (implies an average annual total of ~17.5 percent EPS growth.)” This represents potential upside of nearly 30 percent.
2. Citigroup Inc. (NYSE:C)
Citigroup may have made headlines for all the wrong reasons at the end of February, but market watchers have been leaning on the bank as a good pick for 2014 for months. Even underwhelming year-end results haven’t dissuaded the bulls. If anything, Citigroup’s relatively low cost has encouraged those with faith in their thesis, like Credit Suisse analyst Moshe Orenbuch.
Orenbuch argues that there is a “disconnect” between Citigroup’s valuation at 8.9 times 2015 earnings and Bank of America (NYSE:BAC) trading at 11.4 times forward earnings. Both banks have strong earnings growth forecasts for the coming years and have similar revenue growth forecasts. Both banks have and will continue to benefit from the economic recovery, which is projected to meander along more or less healthily for the near future.
One of the reasons Orenbuch likes Citigroup in particular, though, is because of its exposure to emerging markets, arguing that, “Exposure to emerging markets which will outpace domestic growth positions.” Another catalyst is a dramatic increase in the dividend, which is expected sometime in the next few years. Citigroup stock currently has a dividend yield of just 0.1 percent, a legacy of the financial crisis, but analysts at Bloomberg project a yield of 1.16 percent in 12 months.
3. Comcast Corp. (NASDAQ:CMCSA)
Shares of Comcast have sold off more than 4 percent over the past month after the company announced its intention to pursue a merger with Time Warner Cable (NYSE:TWC). The two companies proclaimed the “strategic combination” — the corporate equivalent of a political marriage on February 13. Comcast and Time Warner executives believe the deal will be accretive to cash flow and that they can squeeze about $1.5 billion in efficiencies from the combined entity. The veracity of this claim has been questioned by skeptics of the deal, but scale is a compelling argument. The new Comcast would have a full 30 percent of the U.S. pay television market (about 30 million subscribers) under its belt, and a presence in 19 out of 20 of the nation’s largest television markets.
The upside for Comcast stock at the end of the road isn’t super clear, though. Credit Suisse analyst Michael Senno argues that Comcast is worth $54 per share, which is about where the stock was before the merger announcement. He wrote that, “We view CMCSA’s operations and product offering as best in class in cable, an advantage we believe CMCSA derives from: 1. a strong management team, 2. extensive marketing, and 3. product innovation that reduces churn, drives better HSD growth than peers, and results in higher ARPU.”
4. Google Inc. (NASDAQ:GOOG)
Over the past few years, Google stock has been on the kind of insane rally that has made everyone without a couple of shares of Google in their possession green with envy. The stock is up nearly 300 percent over the past five years, climbing nearly 100 percent in the past two years and more than 52 percent in the past 52 weeks, handily beating the performance of the over all market.
Google is an “attractive combination of growth and valuation,” according to Credit Suisse analyst Stephen Ju. “We forecast mid-to-high teens revenue growth over the next few years owing to sustained growth in core paid search, with incremental contribution from display and video.” Ju has a $1,450 price target on Google stock, representing potential upside of about 19 percent.
One of the things that makes Google appealing is that it is expanding — aggressively, one could argue — into new areas. One of those areas is Google Fiber, and gigabit Internet service which is looking to expand. Cities being considered for the expansion include Nashville, Tennessee; Portland, Oregon; San Jose, California; Phoenix, Arizona; and Atlanta, Georgia, among others. Google VP of Access Services, Milo Medin, said that these cities were chosen because they have “made high-speed broadband a pillar of their economic development plans.”
5. Chevron Corp. (NYSE:CVX)
As far as big, steady companies go, Chevron is among the biggest and steadiest. Chevron stock currently offers a dividend yield of 3.5 percent, and analysts hold a mean price target of $130 per share, representing possible upside of about 13 percent. Credit Suisse analyst Edward Westlake is more bullish than most with a $140 price target, possible upside of about 21.7 percent.
Chevron stock is down nearly 7 percent this year to date and by about 1 percent on the year, which at first glance is a warning sign. Chevron did report a fairly underwhelming fourth-quarter. Earnings fell 32 percent on the year to $4.9 billion, or $2.57 per diluted share, matching the mean analyst estimate — full-year earnings fell 18 percent to $21.4 billion, or $11.09 per diluted share, below the mean analyst estimate of $11.21 per share. Fourth-quarter sales and other operating revenues fell 3.6 percent to $54 billion — full-year revenues fell 4.5 percent to $220.16 billion, both lighter than the mean analyst estimate.
But Westlake believes that Chevron, thanks in part to its strong North American shale portfolio, could perform particular well in the near-to-mid future. Westlate argues that Chevron’s “shale portfolio will become an important addition to its conventional portfolio (Tengiz, deepwater Gulf of Mexico), driving reinvestment returns higher beyond 2017. CVX could generate $50bn of cashflow in 4 years’ time, almost as much as XOM today.”