Credit Suisse's 4 Contrarian Stock Ideas Poised to Underperform
Bloomberg News
Credit Suisse has updated its list of contrarian stock ideas for investors to consider -- as well as its list of contrarian stocks you might want to sell before it's too late.
Analysts from the Swiss investment bank identified "companies where our analysts stand apart from the consensus view" and "companies where our analysis reveals opportunities that the market has not yet priced in," in a July 5 report.
The report, titled "Out on a Limb: 10 Contrarian Stock Ideas," considered stocks in Credit Suisse's U.S. coverage universe. The analysis focused on ratings, earnings projections and target prices, as well as a high "conviction level" from its equity analysts. The report identified 10 stocks in total: five that analysts were more optimistic about than Wall Street (all rated outperform) and five that the analysts were more cautious about than consensus (all rated underperform).
Here are the four underperform contrarian U.S. ideas from Credit Suisse (one stock is traded on the Toronto Stock Exchange).
Credit Suisse has an underperform rating and a target price of $90 on Aon
.
The consensus estimate for Aon's 2016 earnings is $6.57 a share, according to Bloomberg. Credit Suisse forecasts Aon's full-year earnings at $6.53 a share.
"We see consensus estimates as overly optimistic on margin improvement and free cash flow development over the next few years," wrote Credit Suisse analyst Ryan Tunis. "There are several risks to the FCF (free cash flow) story: April Treasury tax guidelines signal global tax risk is on the rise, while AON shares continue to reflect a significant relative tax structural advantage to peer MMC, organic growth is dependent on the slowing global GDP growth rate, and we think the industry is at peak margins so margin improvement is difficult."
Credit Suisse has an underperform rating and a target price of $24 on Cisco Systems
.
The consensus estimate for Cisco's 2016 earnings is $2.33 a share, according to Bloomberg. Credit Suisse forecasts Cisco's full-year earnings at $2.34 a share.
"We believe that Cisco's switching business (~40% of Operating Income) remains under pressure, from market share loss as well as SDN adoption," wrote Credit Suisse analyst Kulbinder Garcha. "We believe that strong performance in other parts of the portfolio have hidden this weakness but over time SDN adoption and the move towards >10GbE switching (where Arista Networks is a strong player) will compress margins. With Opex already optimized, we see stagnant EPS and see fair valuation at $24."
Cisco is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. "I think they vastly underestimate the next phase of [Cisco CEO] Chuck Robbins' team, and they will have to upgrade their view," Cramer said in response to Credit Suisse's view.
Credit Suisse has an underperform rating and a target price of $16 on PulteGroup
.
The consensus estimate for Pulte's 2016 earnings is $1.60 a share, according to Bloomberg. Credit Suisse forecasts Pulte's full-year earnings at $1.53 a share.
"We think that consensus expectations are too high as the company's balanced capital allocation strategy is likely to produce more modest growth than peers," wrote Credit Suisse analyst Michael Dahl. "In addition, we see further gross margin pressure based on a rising mix of newer, higher cost land."
Credit Suisse has an underperform rating and a target price of $115 on Valmont Industries
.
The consensus estimate for Valmont Industries' 2016 earnings is $6.39 a share, according to Bloomberg. Credit Suisse forecasts Valmont's full-year earnings at $6.34 a share.
"We think that consensus over-estimates both the top-line recovery in the Irrigation and Utility parts of the company, as well as the margin leverage on any top-line rebound," wrote Credit Suisse analyst Julian Mitchell. "We also highlight that VMI has been a key beneficiary of falling steel prices in recent years; this tailwind now appears to be reversing, which could yield a considerable headwind to gross margins in 2017."