Investing

Jefferies Top Value Buys May Be the Best Second-Half Stock Plays

Lee Jackson

Published: May 30, 2018 10:00 am

Last Updated: January 11, 2020 11:00 pm

One thing is almost a given on Wall Street, and experienced investors are well aware of it: Trends never stay in place forever. It doesn’t matter how strong or how much relative strength and earnings growth is baked in, when style changes, even it’s from an elongated degree of outperformance, it can make sense to make changes to accommodate the shift.

One of the debates that the strategists at Jefferies have been having for some time is the eventual style shift from growth to value. With the dollar strengthening, a metric that favors value, Steve DeSanctis and his team are leaning toward value stocks as a solid play for the rest of 2018. We screened the Jefferies research database looking for Buy-rated companies that match their metrics:

1. Market capitalization between $1 billion and $30 billion.
2. Rank in the top two quintiles based on free cash flow yield.
3. Stocks with less than 20% of their revenue from outside the United States.
4. Ultra-clean balance sheets with debt-to-capital below 50%.

Eighteen companies made the cut, and we screened for stocks that had among the highest free cash flow yield, pay dependable dividends and were also among the best known in the group. We found five that make good sense for investors looking to head off potential volatility at the pass.

American Eagle Outfitters

This top retail stock had been acting much better since bouncing off lows posted in early February. American Eagle Outfitters Inc. (NYSE: AEO) is a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under its American Eagle Outfitters and Aerie brands.

The company operates more than 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom, and it ships to 81 countries worldwide through its websites. American Eagle Outfitters and Aerie merchandise also is available at 119 international stores operated by licensees in 18 countries.

Top Wall Street analysts have highlighted that the company offers among the clothing sector’s best denim execution and on-trend fashion, and those positives could drive traffic upside, as well as be long-term drivers of international, Aerie, digital and omni inventory. Good execution, solid inventory control and the trend for old-school denim fashions are all positives.

American Eagle Outfitters investors are paid a solid 2.43% dividend. The Jefferies price target for the shares is $26, and the Wall Street consensus target price is $21.98. The stock traded early Wednesday at $22.70 a share.

Conagra

This is a solid stock for conservative investors looking for growth and income. Conagra Brands Inc. (NYSE: CAG) is a leading packaged food manufacturer in the United States that generated fiscal 2016 sales of $8.2 billion. Conagra’s operating segments are Consumer Foods and Commercial Foods. Key brands include Healthy Choice, Hebrew National, Chef Boyardee and Hunt’s.

The Jefferies team noted earlier this year that they felt the market is concerned by the slowdown in margin expansion but they believe guidance will wind up being conservative as it was last year and they see other drivers of margin including new products, trade productivity savings and the like. The stock trades at a solid discount to its large cap peers.

Shareholders of Conagra are paid a solid 2.28% dividend. Jefferies has a $46 price target for the shares, while the consensus target was last seen at $41.79. The stock traded at $37.50 Wednesday morning.

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Fortune Brands Home & Security

With construction and new homes booming, this is another great value play. Fortune Brands Home & Security Inc. (NYSE: FBHS) is a leading building products company, manufacturing and selling cabinets, faucets, shower heads and other plumbing products, as well as doors and residential and commercial locks and safes.

Approximately 85% of sales occurred in the United States, with another 8% in Canada and 4% in China. Residential R&R accounts for roughly 68% of the company’s end market exposure, with the remaining 32% largely attributable to residential new construction.

Shareholders are paid a 1.4% dividend. The $66 Jefferies price target is a bit lower than the $67.20 consensus target. The shares were last seen trading at $57.05.

Kohl’s

This top retailer has been on fire and posted big numbers. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.

While retail chains have suffered from internet pressure, Kohl’s has held its own as consumers see the company as a solid discount retailer. In addition, Amazon is growing its partnership with the department store chain. Last summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at 10 of its stores. Kohl’s also will be accepting Amazon.com returns at certain U.S. locations.

Kohl’s investors are paid a 3.74% dividend. Jefferies has set its price target at $85. The posted consensus target is $69.53, and the stock was trading at $66.95 a share.

Steel Dynamics

This is another company that the Jefferies team remains very positive on. Steel Dynamics Inc. (NASDAQ: STLD) operates six steel mini mills in Indiana, Virginia, Mississippi and West Virginia. Production capacity has been nearly 10 million tons of a total 110 million U.S. capacity.

The company makes flat-rolled products, special/merchant bars and structural steel products. Steel Dynamics can process about 7 million tons of ferrous scrap, and it has a downstream operation that processes finished steel.

Shareholders are paid a 1.52% dividend. The Jefferies price target is $57. The consensus target is $53.93, and the shares traded recently at $49.50.

These five top value stocks all pay dividends, have high free cash flow and are rated Buy at Jefferies. While they may not be super-exciting momentum-crowd favorites, they all look like solid plays for the rest of 2018, which could continue to be one of the most volatile years we have had in the markets in quite some time.