4 Stocks to Buy for 2018 in an Overbought Stock Market

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It hasn’t become a roar yet, but it is there quietly. The soft voice of “It’s different this time.” While there is always the outside chance that is indeed the case, the market has ripped higher now for almost two years, with no noticeable pullback since early in 2016. Add in the fact that the parabolic rise in bitcoin has bubble written all over it, the signs are there. The question is, with the stock market still the only viable spot for capital, what is the plan going forward?

One great idea for 2018 is to look at value stocks, which are shares of a company with solid fundamentals that are priced below those of its peers, based on analysis of price-to-earnings ratio, yield and other factors. The analysts at Jefferies regularly have a group of value stock ideas that are rated Buy, and a recent research report highlighted four that look like solid ideas for 2018.

Peabody Energy

This out-of-favor play could be back in good graces in 2018. Peabody Energy Inc. (NYSE: BTU) is a coal company that is engaged in the mining of thermal coal for sale primarily to electric utilities and metallurgical coal for sale to industrial customers. Its mining operations are located in the United States and Australia.

Peabody’s segments are Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Australian Metallurgical Mining, Australian Thermal Mining, Trading and Brokerage, and Corporate and Other. It also markets and brokers coal from other coal producers, both as principal and agent, and trades coal and freight-related contracts through trading and business offices in Australia, China, Germany, India, Indonesia, the United Kingdom and the United States.

It’s been a long road back for the company, and the analysts noted this in the research:

The recent sale of the company’s Burton mine and its closure of a $270M million revolver has freed up $300 million in cash. We estimate the company’s free-cash-flow should average ~56% of its EBITDA over the next 5 years due to its low taxes, capex and interest expense and at current coal spot prices, we estimate their FCF yield would average 20%+ over the next 5 years. We expect management to complete its current $500 million buyback and initiate a dividend in 1Q18. While we expect seaborne coal prices to fall from current levels, we believe the large scale capital returns will drive the share price higher.

The Jefferies price target for the stock is $43, and the Wall Street consensus is $39.00. The shares ended Wednesday’s trading at $35.82 apiece.

Ciena

This company has been very up and down over the past 52 weeks, and it has frequently been the subject of takeover rumors. Ciena Corp. (NASDAQ: CIEN) is a vendor for high-capacity optical transport and Ethernet switching equipment to carriers, enterprises, cable operators and governments. It specializes in transitioning legacy communications networks to converged, next-generation architectures capable of efficiently delivering a broader mix of high bandwidth services.

The company’s Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, Optical Transport Network (OTN) switching and packet switching. Its products comprise the 6500 Packet-Optical Platform, 5430 Reconfigurable Switching System, CoreDirector Multiservice Optical Switches and OTN configuration for the 5410 Reconfigurable Switching System.

Ciena remains a top pick due to an expected multiyear ramp in 100G optical spending, which should continue to accelerate in 2018. The analysts noted this in the report:

We see multiple tailwinds helping to drive strong sales growth and the stock remains a top pick for 2018. We believe Verizon’s metro 100G buildout will be a focus for 2018 and the company could see catch-up spend from the now combined Centurylink. In addition, the new Waveserver products should likely continue to ramp as additional customers are added. We think mgmt’s guidance for 5% revenue growth in 2018 is likely conservative.

Jefferies has a $32.50 price target for the stock, while the consensus target is down at $26.96. The shares closed trading on Wednesday at $21.50.