The market exploded to end the first quarter, and once again investors are shaking their heads. After three months with much more volatility than all of 2013, we end up just slightly higher than where we started the year on January 1. The analysts at Credit Suisse start out the second quarter with some very contrarian calls to Sell some very popular stocks. The firm actually rates the stocks Underperform and thinks flat out that Wall Street may just be wrong on these names. Investors long these stocks may want to consider the Credit Suisse rationale.
Cisco Systems Inc. (NASDAQ: CSCO) is a contrarian Underperform call that Credit Suisse is not alone on. Software defined networking (SDN) is the thorn in Cisco’s side. The onset of extensive use will compress profit dollars available to networking and could lead to the continuation of secular gross margin declines. The Credit Suisse team sees continuous building evidence of SDN deployments at marquee enterprise, web scale and service provider customers. These customers have been the lifeblood of Cisco’s business for years. Investors receive a very solid 3.4% dividend from the company. The Credit Suisse price target for the stock is $20. The Thomson/First Call estimate is at $23.71. Cisco closed Monday at $22.41.
Fiserv Inc. (NASDAQ: FISV) is another tech name on the Credit Suisse list. The analysts not only see a decline in the company’s core business, they see pricing challenged by aggressive competitors. The Credit Suisse team also does not really see how the company can generate substantial organic revenue growth, given the size and the scope of its competition. They like other payment processing companies that trade at lower valuations and have better growth prospects. The stock is rated Underperform, and Credit Suisse has a $53 target. The consensus target is much higher at $60.44. Fiserv closed Monday at $56.69.
MGIC Investment Corp. (NYSE: MTG) is a large holding for hedge fund manager John Paulson, but it is not a favorite at Credit Suisse. The thesis is essentially a numbers story, and the firm is below consensus for 2015 and 2016. Credit Suisse sees lower new insurance written growth combined with an earnings drag from the company’s reinsurance business. The Credit Suisse price target for the stock is $6, and the consensus target is $10.28. MGIC closed Monday at $8.52.
NVR Inc. (NYSE: NVR) is a homebuilder that is rated Underperform at Credit Suisse. NVR is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings under the Ryan Homes, NVHomes, Fox Ridge Homes and Heartland Homes banners. Credit Suisse believes the company is too concentrated in the Baltimore and Washington, D.C., markets, which generated more than 60% of its profit. While they admire they firm’s strategy of avoiding land risk, they see competition in NVR’s key markets taking a toll. The Credit Suisse price target for the stock is $1,020, and the consensus target is a little higher at $1045.14. NVR closed Monday at $1,147.00.
Pinnacle Entertainment Inc. (NYSE: PNK) is rated Underperform at Credit Suisse, and it was also recently downgraded to Hold at Deutsche Bank. The company is a smaller gaming stock, which Credit Suisse thinks will see heightened competition in its key markets. Plus, with weak regional casino trends for past year, no catalyst seems to be there to lift the stock. Credit Suisse has a $20 price target, and the consensus target is $24.97. Shares ended Monday at $23.70.
Potash Corp. of Saskatchewan Inc. (NYSE: POT) has been out of favor for quite some time, and the Credit Suisse team thinks it stays that way. Plain and simple, they think expectations for global volumes and price growth are way too optimistic. Investors are paid a nice 3.9% dividend. The stock is rated Underperform with a $27 price target. The consensus price objective is $33.23, and Potash closed Monday at $36.22.
Credit Suisse is not coming out and trying to make the big momentum short call. The firm is looking for basic stories where it does not agree with analysts that are positive on these stocks. That is actually very good for the stock market in the long run. Dissension often makes companies see the need to not only work harder to build profits and brand, it makes them realize that not everybody is buying the corporate line, which sometimes, can be a little stretched.