Jefferies Recommends 21 Stocks for the Next Six Months and Beyond

NEW YORK (TheStreet) -- Looking for some investment inspiration for the second half of 2015?

How about a list of 21 stocks expected to outperform the S&P -- with many of the stocks having both near (six-months) and longer term (12-to-18 months) catalysts, according to Jefferies (LUK).

The investment firm introduced the Jefferies Franchise Pick List in December 2013 to highlight its "highest conviction Buy-rated stocks" in the U.S., according to the June 12 report.

Jefferies last published performance data on the list in mid-December. At that point, the list overall had outperformed the S&P by 180 basis points.

"The stocks on the list have returned 29% since inception, 1250 basis points above the S&P 500, with the bulk of that outperformance coming in 2015," the report said. "It's been a good first half."

Since December 2014, Jefferies added eight stocks to the list since and removed two stocks.

"We may consider sector balance and factor exposure, but ultimately we're looking to highlight the stocks that our analysts believe are most compelling and where they can point to differentiated work and/or estimates," the report said. "Our stop loss is 15% or 20% relative to the S&P depending on the volatility of the stock. Stocks having 120 day volatility in the bottom quartile of S&P stocks have a 15% stop loss, and the remainder have 20% stop losses."

Below is Jefferies' list of 21 stocks. TheStreet added ratings from TheStreet Ratings for comparison.

TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, 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 equities 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.

Note: Research and ratings are as of June 7, 2015. Year-to-date returns are based on June 12, 2015 closing prices.

ABBV Chart ABBV data by YCharts

1. AbbVie Inc. (ABBV)
Market Cap: $106 billion
Sector: Health Care/Pharmaceuticals
Year-to-date return: 2.5%
Jefferies Price Target: $90

AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company's products include HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; VIEKIRA PAK, an all-oral, short-course, interferon-free therapy, with or without ribavirin, for adult patients with genotype 1 chronic hepatitis, including those with compensated cirrhosis.

Jefferies said: [Analyst Jeff Holford] has increased confidence in a delay in Humira biosimilars following his work on the patent estate and recent management commentary. He does not expect biosimilars to arrive before mid-2019 in the US and 2H 2018 outside the US. Further, he estimates that Humira operating margins are currently around 59% but can be improved in the face of biosimilars, owing to the drop-off in royalty stack and lower SG&A costs, forming a long run rate of 77% even after allowing for increased rebates.

TheStreet Rating: Hold, C
TheStreet said: "We rate ABBVIE INC (ABBV) a HOLD. 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 good cash flow from operations. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet."

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

  • ABBV's revenue growth has slightly outpaced the industry average of 1.9%. Since the same quarter one year prior, revenues rose by 10.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, ABBVIE INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • 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. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Pharmaceuticals industry average, but is greater than that of the S&P 500. The net income increased by 4.3% when compared to the same quarter one year prior, going from $980.00 million to $1,022.00 million.
  • The debt-to-equity ratio is very high at 11.09 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Even though the debt-to-equity ratio is weak, ABBV's quick ratio is somewhat strong at 1.11, demonstrating the ability to handle short-term liquidity needs.
ATVI Chart ATVI data by YCharts

2.Activision Blizzard Inc. (ATVI)
Market Cap: $18 billion
Sector: Technology/Home Entertainment Software
Year-to-date return: 26%
Jefferies Price Target: $26

Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games worldwide.

Jefferies said: [Analysts] Brian Pitz and Brian Fitzgerald like ATVI's product pipeline and believe that strong game sales increasingly lead to longer tailed, annuity - like revenue streams. Call of Duty (COD) was the #1 console game of 2014, selling - through well over $1B (~17MM unit sales) and digital licensing / season pass sales were up double digits Y/Y. Destiny now has 16MM users, up from 9.5MM in November. Engagement is impressive (3 hours/day), suggesting robust go-forward digital license purchases. New free-to-play PC game Heroes of the Storm launched June 2 to mostly positive reviews. The closed beta had 11MM users.

TheStreet Rating: Buy, A
TheStreet said: "We rate ACTIVISION BLIZZARD INC (ATVI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, increase in net income and attractive valuation levels. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

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

  • The revenue growth came in higher than the industry average of 5.0%. Since the same quarter one year prior, revenues rose by 15.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • 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. 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.
  • ACTIVISION BLIZZARD INC has improved earnings per share by 32.5% 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, ACTIVISION BLIZZARD INC increased its bottom line by earning $1.14 versus $0.95 in the prior year. This year, the market expects an improvement in earnings ($1.24 versus $1.14).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 34.5% when compared to the same quarter one year prior, rising from $293.00 million to $394.00 million.
AMAT Chart AMAT data by YCharts

3. Applied Materials Inc. (AMAT)
Market Cap: $24 billion
Sector: Technology/Semiconductor Equipment
Year-to-date return: -21.2%
Jefferies Price Target: $28

Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide.

Jefferies said: The [TE Connectivity TEL] merger termination was disappointing to [analyst] Sundeep Bajikar, as part of his thesis was on industry consolidation, but there are still multiple reasons to invest. His proprietary bottom-up analysis suggests WFE CapEx growth in CY16 is likely to be driven by 3D NAND and Foundry, and he expects Dep/Etch growth to outpace WFE growth, with AMAT to benefit. Sundeep also believes AMAT will benefit from larger, higher-res, and flexible screens, DRAM and NAND end markets are likely to be more stable customers going forward, and foundry competition is intensifying with Samsung disrupting TSMC.

TheStreet Rating: Buy, B+
TheStreet said: "We rate APPLIED MATERIALS INC (AMAT) a BUY. This is driven by some important positives, 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, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and reasonable valuation levels. 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:

  • AMAT's revenue growth has slightly outpaced the industry average of 0.6%. Since the same quarter one year prior, revenues slightly increased by 3.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • AMAT's debt-to-equity ratio is very low at 0.23 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, AMAT has a quick ratio of 1.87, which demonstrates the ability of the company to cover short-term liquidity needs.
  • APPLIED MATERIALS INC has improved earnings per share by 38.1% 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, APPLIED MATERIALS INC increased its bottom line by earning $0.87 versus $0.21 in the prior year. This year, the market expects an improvement in earnings ($1.22 versus $0.87).
  • 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 38.9% when compared to the same quarter one year prior, rising from $262.00 million to $364.00 million.


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