Investing

5 Special Situations Where Analysts See Very Strong Returns

Jon C. Ogg

Each trading day brings that many more new ideas and decisions for traders and investors alike. With the Dow Jones industrials, S&P 500 and Nasdaq all having hit all-time highs in the past two or three trading sessions, it’s important to look for pockets and clusters where there are hidden values or some special situations that can drive shares much higher.

24/7 Wall St. tracks dozens of analyst research reports each day of the week to find new ideas for short-term traders and long-term investors alike. After looking through the daily list of Buy and Outperform ratings, we found five from the top analyst upgrades and downgrades that stood out as having upsized potential appreciation compared with the market in general. The Dow recently hit 28,000 and has a relatively easy path to make it to 30,000 early in 2020, but investors at this stage of the bull market usually can only hope for upside projections of 8% to 10% (including the dividend) in established companies.

We have added in some commentary and views on each call to go deeper than what was seen in the wee hours of the trading day.

Brink’s Co. (NYSE: BCO) was started with a Buy rating and assigned a $108 target price at Goldman Sachs. The firm said that its strategic initiatives are now expected to drive market share capture and efficiencies to boost its returns. The Goldman Sachs report said:

By our estimates, Brink’s has a healthy mid-to-high single digit annual organic revenue growth outlook driven by improving service quality, expanding services and the penetration of new markets. Notably, we view Brink’s strategy to develop end-to-end cash supply chain managed services targeting retail clients as capable of driving accelerating revenue growth and upward estimate revisions, with recent investments into technology infrastructure capable of supporting appealing margin expansion.

Canopy Growth Corp. (NYSE: CGC) was raised to Buy from Neutral at Merrill Lynch, and the firm kept its $19 price objective. That objective had been in place since its downgrade in September based on estimates seeming too high around management departures. Merrill’s Christopher Carey and Lisa Lewandowski said that Canopy still remains “a show-me story” that is still not perfect. That said, the team sees the worst part of it being over and believes that estimates have come down enough that they now look achievable to even beatable.

Canopy Growth closed up 7.7% at $15.32 a share the prior day, and it was indicated up 5.2% at $16.10 on Wednesday morning. In midday trading, it was up 13.5% at $17.38, so that 24% implied upside based on yesterday’s close has still seen its gap close. Canopy Growth has a 52-week trading range of $13.81 to $52.74.

ConocoPhillips (NYSE: COP) just hosted its Analyst Day, and two firms were positive after hearing the story. Goldman Sachs reiterated its Buy rating and raised its target to $67 from $66 based on its view that the company’s 10-year outlook demonstrated through-the-cycle capital discipline, with a clear focus on maximizing value and balancing growth with shareholder returns.

Several drivers are behind the Goldman Sachs call in Conoco. The company still is targeting capital spending of less than $7 billion annually over the next 10 years, while continuing to buy back shares and sustainably grow its dividend. Also shown was a plan to sell down 25% of its operated Alaskan position and to deliver on its Permian production potential.

Credit Suisse reiterated its Outperform rating and $65 target price on Conoco. The firm’s William Featherston noted that the initial 2020 outlook was as expected and that it enables robust free cash flow with asset sales and production growth. Credit Suisse also referred to it as being at an attractive relative valuation, with one of the highest free cash flow yields in the sector.

Intelsat S.A. (NYSE: I) may have become the mother of all special situations. The company’s shares were gutted this week on news that the FCC announced plans to take its spectrum for 5G, effectively without any compensation. There are multiple ways to view the news, but this stock went from $13 ahead of the move to close down at $6.09 on Tuesday. Raymond James raised its Market Perform rating to Outperform, with a new target price of $12. Even though its shares were up 19% at $7.26 on Wednesday’s midday, that still represents more than 50% in implied upside if it proves true.

Richard Prentiss of Raymond James believes that the final tally will not be as much of a capital return at the expense of Intelsat. He thinks it’s more likely to be a range of 25% to 40% that gets returned to the Treasury after the C-Band auction, which would be much less of an impact than an outright loss of the spectrum that previously had been feared.

Qualcomm Inc. (NASDAQ: QCOM) hosted its analyst day, and Canaccord Genuity’s Michael Walkley reiterated his Buy rating and $101 target price, with confidence in the company’s efforts around 5G. His report said:

We attended Qualcomm’s first Analyst Day in nearly 4 years and came away confident the company is well positioned to benefit from 5G builds, increasing dollar content per phone from RFFE design wins, and maintaining a robust licensing business despite the FTC overhang …. We maintain our positive thesis, as we believe the 9th Circuit Court stay could lead to potentially overturning key parts of Judge Koh’s FTC ruling combined with our belief Qualcomm is well positioned to benefit from the transition to 5G … further, we believe the recent Apple settlement and Samsung and LGE renegotiations protect a strong portion of Qualcomm’s long-term licensing business model.

Wednesday’s top analyst upgrades and downgrades featured on the site included Amarin, Baker Hughes, Canopy Growth, Home Depot, Intelsat, Johnson & Johnson, Replimune, Schlumberger and Transocean.