Jefferies Has 4 Fallen Angels Stocks to Buy With Big Potential Upside

By Lee Jackson Published Oct 23, 10:15AM EDT

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One of the worst things that can happen is when a well-thought-out investment goes awry because of external factors that were never considered into the original thesis for purchasing in the first place. Experienced investors know that this happens more often than one would think, and often times, while painful for current owners, it can offer new owners incredible value.

A new research report from Jefferies highlights four solid companies that are either members of the guilt by association club or seem to have turned things around and could be headed higher in the near term. All are rated Buy at Jefferies.

Anacor Pharmaceuticals

This company has been hit hard as upheavals in the specialty pharmaceutical area have proved damaging to all. Anacor Pharmaceuticals Inc. (NASDAQ: ANAC) is a biopharmaceutical company focused on discovering, developing and commercializing novel small-molecule therapeutics derived from its boron chemistry platform.

Anacor’s first approved drug, Kerydin (tavaborole) topical solution, 5%, is an oxaborole antifungal approved by the U.S. Food and Drug Administration (FDA) in July 2014 for the topical treatment of onychomycosis of the toenails. In July 2014, Anacor entered into an exclusive agreement with Sandoz, a Novartis company, pursuant to which PharmaDerm, the branded dermatology division of Sandoz, distributes and commercializes Kerydin in the United States.

Anacor’s lead product development candidate is Crisaborole, an investigational non-steroidal topical PDE-4 inhibitor for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis. Beyond Kerydin and Crisaborole, Anacor has discovered three investigational compounds that it has out-licensed for further development.

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The Jefferies analyst remains positive on the Crisaborole prospects and they moved pricing up by 29% back in the summer as their checks reveal than branded prices for Elidel/Protopic have steadily increased.

The Jefferies price target for the stock is $171. The Thomson/First Call consensus price target is $182.25. Shares closed trading on Thursday at $92.03.

The Jefferies team feels this company reported solid numbers this week and new business is growing faster than renewals. CA Inc. (NASDAQ: CA) provides information technology (IT) management software and solutions that help organizations plan, develop, manage and secure applications and IT infrastructure in the United States and internationally.

CA recently reported a fiscal second-quarter profit of $174 million. Earnings per share were right in line with Wall Street expectations. Although revenues were slightly lower, the overall quarter was solid. Forward guidance also remained in line with forecasts.

Jefferies feels that growth is outpacing renewals, which is a requirement for revenue growth. The analyst feels that CA’s stock is not priced for growth by many on Wall Street. So they see it having little downside if it doesn’t achieve growth, but good upside if it does.

CA investors receive a very solid 3.61% dividend. The Jefferies price target is $38, and the consensus target is lower at $30.32. The stock closed most recently at $28.02.

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Callaway Golf

Callaway Golf Co. (NYSE: ELY) has evolved over time from a manufacturer of golf clubs to one of the leading manufacturers and distributors of a full line of golf equipment and accessories. It designs, manufactures and sells high quality golf clubs, golf balls, golf bags and other golf-related accessories. Callaway designs its products to be technologically advanced and invests a considerable amount in research and development each year.

Jefferies feels that Callaway is poised for a very powerful comeback, and the company posted very solid third-quarter numbers. Calloway revolutionized the oversized driver with the Big Bertha over 20 years ago, and the analysts are predicting strong market share gains and margin improvements driven by the strong product line.

Another key and somewhat hidden asset is Callaway’s minority ownership in TopGolf International, which Jefferies feels the market is severely undervaluing today. In fact, Jefferies believes the ownership stake in TopGolf could be worth as much as $3 to $5 per share on a standalone basis.

The $16 Jefferies price target is higher than the consensus target of $12.42. The stock closed Thursday at $9.71.

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VMware

This company reported very solid numbers but shares are down huge over the past week, dropping 30% since the Dell-EMC deal was announced. VMware Inc. (NYSE: VMW) is a global leader in cloud infrastructure and business mobility. Its industry-leading virtualization technology solutions deliver a brave new model of IT that is fluid, instant and more secure. Customers can innovate faster by rapidly developing, automatically delivering and more safely consuming any application. With 2014 revenues of $6 billion, VMware has more than 500,000 customers and 75,000 partners.

VMware is adding enterprise license agreements at a furious pace, and cloud management tools are now 16% penetrated into the customer base, with plenty of room to grow. The bottom line is that this company is still very strong, and the stock still is trading almost 50% below highs printed in April of 2014.

Of course the big issue is how many of the company’s shares will hit the tape as a result of the Dell deal with EMC, which has been a concern even before the deal surfaced. Jefferies feels that VMware will continue to trade at a discount to intrinsic value because of the overhang, but the firm sees big upside to the stock from current trading levels. In fact, with the big drop recently, the stock is now trading at levels the analysts assign to the value of its existing maintenance stream.

The Jefferies price target is $83. The consensus target is $77.71. Shares closed Thursday at $56.79.

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There is always a degree of risk with the fallen angels, and while not all these companies are in that category per se, they all have traded down to levels where investor upside is substantial. These stocks are only suitable for aggressive growth accounts.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.