Bank of America Picks 10 Stocks Likely to Make Big Moves Over the Next 3 Months

Editor's pick: Originally published Jan. 4.

It's a new year and that means time for some serious stock picking. Analysts at Bank of America Merrill Lynch, the investment banking arm of Bank of America, named 10 companies that "could have the most significant market and business related catalysts over the next three months," in a note to clients on Monday.

Those "catalysts" could move the stocks up or down. The analysts created the list by picking stocks covered by Bank of America Merrill Lynch analysts that "will significantly outperform or underperform peers during the quarter."

For stocks that are predicted to outperform, only buy-rated companies were considered. Similarly, for stocks predicted to underperform, only stocks with ratings an "underperform" rating (equivalent to a "sell") were considered.

BofA plans to publish a similar list each quarter. "Ideas will generally remain on the list through the quarter unless coverage is dropped or the recommendation changes. Any security which is removed will not be replaced. If there are any changes to the list during the quarter we will publish the change in a research report. Securities are intended to stay on the list for one quarter, though some may be chosen for the next quarter's list," the note said.

Here's the list of BofA's picks for the first quarter. Note two of the stocks on the list are rated "underperform." We've paired the list with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool for another perspective. When you're done be sure to check out the best small and mid-cap stocks to buy for 2016.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014, beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

 

1. CF Industries
1. CF Industries

Industry: Materials/Fertilizers & Agricultural Chemicals
Market Cap: $9.5 billion
2015 return: -25.1%

BofA Rating/Price Objective: Buy/$65
BofA Said: CF's shares are down sharply in the last few months, in line with spot nitrogen prices, and reflecting possible market concerns whether the company will be able to complete its proposed acquisition of Netherlands-based OCI and subsequent tax inversion. We view the weakness in nitrogen prices as temporary and unsustainable, with a likely recovery in the next couple months. Also, if it were to be completed, we think the OCI acquisition could present significant operating leverage, synergy, and upside to earnings. Our $65 PO represents a 13x multiple of our pro-forma 2017 EPS estimate of $5.
Potential Catalysts: expecting near-term rebound in nitrogen fertilizer prices; SEC approval of S-4 could increase expectations of OCI merger

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate CF INDUSTRIES HOLDINGS INC (CF) as a Hold with a ratings score of C. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. Among the primary strengths of the company is its revenue growth. At the same time, however, we also find weaknesses including deteriorating net income, generally higher debt management risk and poor profit margins.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 18.1%. Since the same quarter one year prior, revenues slightly increased by 0.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • CF INDUSTRIES HOLDINGS INC's earnings per share declined by 25.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, CF INDUSTRIES HOLDINGS INC increased its bottom line by earning $5.29 versus $4.93 in the prior year. For the next year, the market is expecting a contraction of 25.8% in earnings ($3.92 versus $5.29).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Chemicals industry and the overall market on the basis of return on equity, CF INDUSTRIES HOLDINGS INC has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Chemicals industry average. The net income has significantly decreased by 30.6% when compared to the same quarter one year ago, falling from $130.90 million to $90.90 million.
  • The debt-to-equity ratio of 1.36 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with the unfavorable debt-to-equity ratio, CF maintains a poor quick ratio of 0.96, which illustrates the inability to avoid short-term cash problems.
  • You can view the full analysis from the report here: CF

2. Citizens Financial
2. Citizens Financial

Industry: Financial Services/Regional Banks
Market Cap: $13.7 billion
2015 return: 5.4%

BofA Rating/Price Objective: Buy/$30
BofA Said: CFG continues to execute on its turnaround story, in our view. An improving return profile combined with significant capital return should drive a re-rating for the stock. Improving returns should benefit from prudent expense management and above average loan growth. We forecast that these combined with a boost to its lending margin from higher short term interest rates should drive an acceleration in YoY EPS growth in 2016.
Potential Catalysts: 2016 guidance should boost investor confidence around improving profitability; expense discipline key

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate CITIZENS FINANCIAL GROUP INC (CFG) as a Hold with a ratings score of C-. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the stock itself is trading at a premium valuation.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CFG's revenue growth has slightly outpaced the industry average of 1.4%. Since the same quarter one year prior, revenues slightly increased by 5.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Compared to where it was trading a year ago, CFG's share price has not changed very much due to (a) the relatively weak year-over-year performance of the overall market, (b) the company's stagnant earnings, and (c) other mixed results.
  • When compared to other companies in the Commercial Banks industry and the overall market, CITIZENS FINANCIAL GROUP INC's return on equity is below that of both the industry average and the S&P 500.
  • The gross profit margin for CITIZENS FINANCIAL GROUP INC is currently very high, coming in at 85.38%. Regardless of CFG's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, CFG's net profit margin of 16.57% is significantly lower than the industry average.
  • You can view the full analysis from the report here: CFG

3. Communications Sales & Leasing
3. Communications Sales & Leasing

Industry: Financial Services/Real Estate Investment Trust
Market Cap: $2.8 billion
2015 return (since April 20): -37.7%

BofA Rating/Price Objective: Buy/$34
BofA Said: Communications Sales & Leasing (CSAL) currently has a dividend yield of 12.8% vs triple net REIT peers at 6.4% and trades at 7.2x '16 AFFO vs peers at 12.3x. We believe many investors are currently treating CSAL as a bond, yet the company has growth initiatives through its deal pipeline and has revenue escalators with its current contract with Windstream. We believe that as the company is able to complete new deals, diversify away from its anchor tenant, and its anchor tenant continues to de-lever, that the discount assigned to CSAL should fall, the dividend should grow, the yield would shrink and the stock should rise.
Potential Catalysts: CSAL completing its first deal; high yield bond market relief, tenant financial improvement

TheStreet Said: no rating available

4. Jack in the Box
4. Jack in the Box

Industry: Consumer Goods & Services/Restaurants
Market Cap: $2.7 billion
2015 return: -4.1%

BofA Rating/Price Objective: Buy/$95
BofA Said: JACK shares have been under pressure in recent months driven by investor concerns about difficult same store sales comparisons for the flagship Jack in the Box (JIB) brand as well as JACK's Mexican quick casual Qdoba brand. We expect JACK to comp low single digit positive at both brands in its 16-week 1Q allaying investor fears of negative comps. Brand/corporate news should pick up around JIB's extensive Super Bowl menu upgrade and continue with investor focus potentially shifting to JACK's late May investor meeting that is expected to include brand strategies, Qdoba's expansion plans and place within JACK, capital structure, G&A, and franchise mix. This is JACK's first investor meeting in four years and the first with Lenny Comma as CEO.
Potential Catalysts: we expect a reassuring 1Q earnings report in mid-February; investor focus should shift to potential news at late May meeting

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate JACK IN THE BOX INC (JACK) as a Hold with a ratings score of C+. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, weak operating cash flow and poor profit margins.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • JACK's revenue growth has slightly outpaced the industry average of 1.1%. Since the same quarter one year prior, revenues slightly increased by 2.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • JACK IN THE BOX INC has improved earnings per share by 47.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, JACK IN THE BOX INC increased its bottom line by earning $2.95 versus $2.26 in the prior year. This year, the market expects an improvement in earnings ($3.64 versus $2.95).
  • Net operating cash flow has decreased to $61.73 million or 29.12% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The debt-to-equity ratio is very high at 44.84 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with this, the company manages to maintain a quick ratio of 0.29, which clearly demonstrates the inability to cover short-term cash needs.
  • You can view the full analysis from the report here: JACK

5. Kraft Heinz
5. Kraft Heinz

Industry: Consumer Non-Discretionary/Packaged Foods
Market Cap: $89.3 billion
2015 return (since July 6): -0.27%

BofA Rating/Price Objective: Buy/$85
BofA Said: Since merging in July 2015, [Kraft Heinz]  (KHC) has revealed glimpses of the most recent iteration of the 3G operating model for the packaged food industry which in our view holds more reverence for growing revenues while reducing costs. We expect to see more of this revealed in 1Q16 which should give investors more confidence in the significant earnings potential at KHC over the next 3 years.
Potential Catalysts: impact from productivity should become more evident; revenue management, source of upside

TheStreet Said: no rating available

 

6. NXP Semiconductors
6. NXP Semiconductors

Industry: Technology/Semiconductors
Market Cap: $21.4 billion
2015 return: 10.3%

BofA Rating/Price Objective: Buy/$105
BofA Said: NXPI is trading at a significant discount to peers at just 11x PE on our $8+ pro-forma earnings power in a rapidly consolidating industry. Despite weaker near-term trends in Q4 (inventory issues), we think the expectations bar has been reset heading into the first quarter following the merger with Freescale. We think recent near-term headwinds could abate and lead to a positive earnings surprise in Q4/Q1. Additionally, a lower exposure to mobile (incl. Apple) and higher exposure to longer cycle auto/industrial should improve sentiment and trading multiples. Lastly, new product announcements at CES in Jan could solidify investor views on NXP's leadership in auto/security markets.
Potential Catalysts: first quarter post-merger close with Freescale; focus on cost synergies/balance sheet improvements and long-term forecasts

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate NXP SEMICONDUCTORS NV (NXPI) as a Buy with a ratings score of B. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • NXPI's revenue growth has slightly outpaced the industry average of 9.1%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • NXP SEMICONDUCTORS NV reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, NXP SEMICONDUCTORS NV increased its bottom line by earning $2.17 versus $1.34 in the prior year. This year, the market expects an improvement in earnings ($5.43 versus $2.17).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Semiconductors & Semiconductor Equipment industry. The net income increased by 198.3% when compared to the same quarter one year prior, rising from $121.00 million to $361.00 million.
  • The gross profit margin for NXP SEMICONDUCTORS NV is rather high; currently it is at 54.99%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 23.71% is above that of the industry average.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • You can view the full analysis from the report here: NXPI

7. Teva Pharmaceuticals
7. Teva Pharmaceuticals

Industry: Health Care/Pharmaceuticals
Market Cap: $66.2 billion
2015 return: 14.1%

BofA Rating/Price Objective: Buy/$84
BofA Said: We believe Teva is well positioned to drive further shareholder value given its best-in-class generic portfolio after the Actavis deal closes in 1Q16. We also believe Teva has a potentially underappreciated branded pipeline. With a diverse product mix that should be relatively less subject to concerns around drug pricing, solid cash flow generation profile, and commitment to an investment grade credit rating, Teva presents an attractive opportunity on one of the "cleaner" stories in Specialty Pharma, in our view.
Potential Catalysts: outlook for 2016 post-Actavis generics deal close in 1Q16, solid cash flow generation; Copaxone defense remains strong, brand pipeline story evolving/under-appreciated

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate TEVA PHARMACEUTICALS (TEVA) as a Buy with a ratings score of B. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for TEVA PHARMACEUTICALS is rather high; currently it is at 63.84%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, TEVA's net profit margin of 2.13% significantly trails the industry average.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • TEVA PHARMACEUTICALS has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TEVA PHARMACEUTICALS increased its bottom line by earning $3.56 versus $1.50 in the prior year. This year, the market expects an improvement in earnings ($5.44 versus $3.56).
  • The current debt-to-equity ratio, 0.51, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.48 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • TEVA, with its decline in revenue, slightly underperformed the industry average of 3.4%. Since the same quarter one year prior, revenues slightly dropped by 4.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • You can view the full analysis from the report here: TEVA

8. Under Armour
8. Under Armour

Industry: Consumer Goods & Services/Apparel, Accessories & Luxury Goods
Market Cap: $17.6 billion
2015 return: 18.7%

BofA Rating/Price Objective: Buy/$108
BofA Said: UA shares have pulled back on concerns over warm weather in 4Q, however, we expect a strong 2016 revenue outlook on improving visibility around footwear and International momentum. We believe footwear and international are poised to accelerate in 2016, given: (1) 4Q acceleration in sneaker sell-through business on strength of UA basketball sneakers (Steph Curry 2) likely driving a significant increase in orders, and (2) China significantly ramps-up as UA starts the roll-out of partner operated stores that are already seeing a strong response from Chinese consumers. Importantly, strong momentum in footwear and International should support UA's premium multiple as it increases visibility that UA is on track to be a global athletic apparel and footwear brand.
Potential Catalysts: positive commentary on Under Armour footwear from retailers; visibility on international growth improving

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate UNDER ARMOUR INC (UA) as a Buy with a ratings score of B-. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, increase in net income, solid stock price performance and expanding profit margins. We feel its strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 13.8%. Since the same quarter one year prior, revenues rose by 28.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • UNDER ARMOUR INC has improved earnings per share by 9.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, UNDER ARMOUR INC increased its bottom line by earning $0.95 versus $0.75 in the prior year. This year, the market expects an improvement in earnings ($1.05 versus $0.95).
  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Textiles, Apparel & Luxury Goods industry average. The net income increased by 12.8% when compared to the same quarter one year prior, going from $89.11 million to $100.48 million.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • The gross profit margin for UNDER ARMOUR INC is rather high; currently it is at 50.93%. Regardless of UA's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 8.34% trails the industry average.
  • You can view the full analysis from the report here: UA

9. Cullen/Frost Bankers
9. Cullen/Frost Bankers

Industry: Financial Services/Regional Banks
Market Cap: $3.7 billion
2015 return: -15.1%

BofA Rating/Price Objective: Underperform/$58
BofA Said: As the bank with the largest exposure to energy loans within our coverage universe and to the energy dependent markets in Texas, we expect San Antonio, Texas based CFR to come under pressure. The negative impact from the decline in oil prices to its credit quality metrics and loan growth are likely to serve as a potent source of downside risk to CFR's 2016 EPS forecast. Moreover, with the stock still trading at premium valuations at 2x current TBV vs. 1.3x median for TX peers we see downside risk to the stock from multiple contraction.
Potential Catalysts: 4Q earnings and 2016 outlook could disappoint; headline risk stemming from lower for longer oil prices

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate CULLEN/FROST BANKERS INC (CFR)  as a Buy with a ratings score of B. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, notable return on equity and expanding profit margins. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CFR's revenue growth has slightly outpaced the industry average of 1.4%. Since the same quarter one year prior, revenues slightly increased by 4.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • CULLEN/FROST BANKERS INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CULLEN/FROST BANKERS INC increased its bottom line by earning $4.29 versus $3.80 in the prior year. This year, the market expects an improvement in earnings ($4.52 versus $4.29).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Commercial Banks industry and the overall market on the basis of return on equity, CULLEN/FROST BANKERS INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • Net operating cash flow has significantly increased by 223.71% to $241.58 million when compared to the same quarter last year. Despite an increase in cash flow of 223.71%, CULLEN/FROST BANKERS INC is still growing at a significantly lower rate than the industry average of 301.28%.
  • The gross profit margin for CULLEN/FROST BANKERS INC is currently very high, coming in at 96.37%. Regardless of CFR's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 27.73% trails the industry average.
  • You can view the full analysis from the report here: CFR

10. Gap
10. Gap

Industry: Consumer Goods & Services/Apparel Retail
Market Cap: $10.1 billion
2015 return: -41.3%

BofA Rating/Price Objective: Underperform/$21
BofA Said: The Gap brand has struggled to turn, with aggressive promotions necessary to move through product. Old Navy's comps turned negative in November, and Banana Republic continues to decelerate. Negative comp and sales growth and lower gross margins should cause downward estimate revisions and multiple compression.
Potential Catalysts: holiday sales off to a rough start; [fiscal] 2016 guidance likely below consensus

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate GAP INC (GPS) as a Hold with a ratings score of C. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, weak operating cash flow and disappointing return on equity.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The debt-to-equity ratio is somewhat low, currently at 0.67, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels.
  • 41.22% is the gross profit margin for GAP INC which we consider to be strong. Regardless of GPS's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 6.42% trails the industry average.
  • Net operating cash flow has decreased to $92.00 million or 22.03% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Specialty Retail industry average. The net income has significantly decreased by 29.3% when compared to the same quarter one year ago, falling from $351.00 million to $248.00 million.
  • You can view the full analysis from the report here: GPS

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