Credit Suisse's 11 Positive 'Out on a Limb' Stock Ideas

Looking for some out-of-the-box investment ideas? Consider Credit Suisse's contrarian stock list.

Author:
Laurie Kulikowski
Publish date:
Mar 28, 2016 11:16 AM EDT

Looking for some out-of-the-box investment ideas? Consider Credit Suisse's contrarian stock list.

Looking for some out-of-the-box investment ideas? Consider Credit Suisse's contrarian stock list.

A March 24 report by Credit Suisse identified companies for which the opinions of its equity analysts differed from the consensus view on each stock, noting "companies where our analysis reveals opportunities that the market has not yet priced in."

The report, titled "Out on a Limb: 23 Contrarian Stock Ideas," considered stocks in Credit Suisse's U.S. coverage universe. It focused on ratings and earnings projections, as well as a high "conviction level" from equity analysts. The report identified 23 stocks in total, of which analysts were more optimistic than Wall Street about 11 (all rated outperform) and more pessimistic about 12 (all rated underperform).

Here is the list of 11 stocks Credit Suisse likes more than the Street does.

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Agios Pharmaceuticals , a biopharmaceutical company, engages in the discovery and development of medicines for the treatment of cancer and rare genetic metabolic disorders in the U.S. It has a market cap of $1.4 billion.Credit Suisse has an outperform rating on the stock and a price target of $66. The analysts expect a loss of $3.15 a share for 2016 compared with a consensus estimate for a loss of $4 a share, according to Thomson Reuters.Credit Suisse analysts say that the company's investigational medicine for pyruvate kinase deficiency has more potential than Wall Street is factoring in."We view PKD as a disease area exhibiting high unmet medical need, and anticipate the market may be significantly larger than Street estimates based on the discovery of new causal mutations and currently low screening rates," Credit Suisse said. "We model AG-348/AG-519 commanding 75% peak market share in a growing diagnosed patient population with potential for $1.7 billion in peak sales."

Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. It has a market cap of $43.7 billion.Credit Suisse has an outperform rating on the stock and a price target of $72. The analysts expect a profit of $3.50 a share for 2016, compared with a consensus estimate for $3.64 a share, according to Thomson Reuters.Despite "continued pressure on end markets, CAT continues to manage towards its decremental margin target between 25-30% while dealing with headwinds from mix and maintaining [research and development] spend at record levels," Credit Suisse analysts said. "While CAT is committed to its outlook provided on the Q4'15 EPS call, if demand were to deteriorate further, there are levers to pull including incremental restructuring, R&D and capex to maintain the 25%-30% decremental. This would be in addition to the restructuring actions announced September 2015 that will take out [approximately] $1.5B in costs (half is SG&A) over the next several years.""Finally, CAT has good visibility for Solar sales in 2H'16 which should be a margin / mix tailwind. Given the additional levers CAT has left to pull we feel confident that trough earnings should hold around $3.50 and would expect to see better EPS leverage once end markets move off of their low base today," the analysts said.

United States Steel produces and sells flat-rolled and tubular steel products in North America and Europe. It has a market cap of $2.2 billion.Credit Suisse has an outperform rating on the stock and a price target of $22. The analysts expect a loss of $1.67 a share for 2016 compared with consensus estimates for a loss of $2.92 a share, according to Thomson Reuters."The Street underestimates the scope for meaningful margin recovery from ongoing improvements in industry volumes given that X has the highest leverage to the spot market and is poised to benefit from improving trends in the sheet market in the U.S. We expect X's FCF/EBITDA to surprise to upside in 2016," Credit Suisse said.

Sysco markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry. It has a market cap of $26.1 billion.Credit Suisse has an outperform rating on the stock and a price target of $50. The analysts expect a profit of $1.95 a share for 2016, compared with consensus estimates of $1.97 a share, according to Thomson Reuters."We see underappreciated opportunity in the stock as activist involvement could be the catalyst for much-needed strategic change," Credit Suisse analysts wrote. "The company, whose EBITDA has been essentially flat since 2010, recently announced an acceleration of its strategic repositioning plan in an effort to drive upside to its previous three-year operating income goals. The company now believes it can generate at least $500 million in incremental EBIT by the end of 2018. We continue to view SYY as an under-earning franchise facing a large opportunity to improve performance with a more aggressive shift in strategy."

Autodesk makes software for the manufacturing, architecture, building, construction, media and entertainment industries. It has a market cap of $12.7 billion.Credit Suisse has an outperform rating on the stock and a price target of $100. The analysts expect a loss of 61 cents a share for 2016 compared with consensus estimates for a loss of 71 cents a share, according to Thomson Reuters."We had previously expected Autodesk's business model transition to result in meaningful long-term upside to revenue (at limited incremental cost) versus consensus estimates, driving 'normalized' earnings power of at least $8.00 per share in FY2023," Credit Suisse said. "However, Autodesk's increased focus on expenses provides further operating leverage to the company's post-transition business model. As such, we now estimate post-transition earnings power of over $10.00 per share and [free cash flow] per share of nearly $11.00 in FY2023."

Box provides a cloud-based enterprise content collaboration platform that enables organizations of various sizes to access, store, share, and manage their content/information. It has a market cap of $1.5 billion.Credit Suisse has an outperform rating on the stock and a price target of $24. The analysts expect a loss of 83 cents a share for 2016 compared with consensus estimates for a loss of 84 cents a share, according to Thomson Reuters."We view Box as currently having a more appealing [file sync and share] FSS product than Microsoft , a key competitor, and believe the company has sufficient lead time to further improve its competitive position and expand its user base-mitigating some of the near- to medium-term competitive risk," Credit Suisse said. "Furthermore, we view Box's business model as scalable, with its high renewal rate and land-and-expand model leading to improvements in long-term operating margin and cash flow."

Manitowoc designs, manufactures and sells cranes and related products and foodservice equipment worldwide. It has a market cap of $604 million.Credit Suisse has an outperform rating on the stock and a price target of $5.10. The analysts expect a profit of 14 cents a share for 2016, compared with consensus estimates for 9 cents a share, according to Thomson Reuters."For 2016, MTW is forecasting flat revenues and approximately 4% margins. We think the revenue forecast is optimistic, but on the positive MTW did see some improvement in tower cranes and VPC (variable position counterweight) and declines in RT (rough terrain) and boom trucks have stabilized. Even if the top line disappoints, management is committed to hitting profitability targets. We suspect there is a lot of low hanging fruit," the Credit Suisse analysts wrote.""Longer-term management is committed to achieving double digit margins regardless of topline. Finally, recent M&A rumblings in the space driven by international acquirers should buoy the share price, and MTW now looks more attractive as a potential target post-spin," the analysts wrote.

Nationstar Mortgage Holdings provides servicing, origination and transaction based services primarily to single-family residences in the U.S. It has a market cap of $1 billion.Credit Suisse has an outperform rating on the stock and a price target of $19. The analysts expect a profit of $1.75 a share for 2016, compared with consensus estimates of $1.80 a share, according to Thomson Reuters."The shift in the servicing business towards more subservicing in 2016 will allow for better returns on capital and cash flow generation. This shift should continue and allow for the discount to book value to narrow," Credit Suisse said.

Patterson distributes dental, veterinary and rehabilitation supplies. It has a market cap of $4.3 billion.Credit Suisse has an outperform rating on the stock and a price target of $55. The analysts expect a profit of $2.45 a share for 2016, compared with consensus estimates of $2.45 a share, according to Thomson Reuters."With evidence of dental fundamentals improving, especially in the U.S., we see more investment alternatives materializing than most," Credit Suisse said."After years of underperformance, PDCO is best positioned to benefit from stronger growth trends in the U.S. market, where it is most exposed," the analysts said. "Also, it should benefit from an expected pickup in equipment sales as the largest domestic dental equipment vendor with exclusive access to DENTSPLY SIRONA's high-end technology. PDCO continues to screen favorably from a valuation standpoint relative to its largest public competitor, Henry Schein. On our CY17 estimate, PDCO currently trades at 8.6x EV/EBITDA vs Henry Schein at 12.6x. We believe this valuation gap will narrow, and PDCO will eventually recapture a multiple of 10.3x, near its 52-week high set in November 2015."

Agios Pharmaceuticals

Agios Pharmaceuticals
, a biopharmaceutical company, engages in the discovery and development of medicines for the treatment of cancer and rare genetic metabolic disorders in the U.S. It has a market cap of $1.4 billion.

Credit Suisse has an outperform rating on the stock and a price target of $66. The analysts expect a loss of $3.15 a share for 2016 compared with a consensus estimate for a loss of $4 a share, according to Thomson Reuters.

Credit Suisse analysts say that the company's investigational medicine for pyruvate kinase deficiency has more potential than Wall Street is factoring in.

"We view PKD as a disease area exhibiting high unmet medical need, and anticipate the market may be significantly larger than Street estimates based on the discovery of new causal mutations and currently low screening rates," Credit Suisse said. "We model AG-348/AG-519 commanding 75% peak market share in a growing diagnosed patient population with potential for $1.7 billion in peak sales."