Best risk/reward stocks
Analysts believe that investors will be richly rewarded for investing in these compelling, multi-faceted companies that are firing on all cylinders.
PennyMac Financial, Restaurant Brands, Fox, Petco, and McAfee are among them.
Loop Capital’s Alan Gould wrote last week that investors should not underestimate one of Wall Street’s best-positioned companies.
According to Gould, the entertainment and media behemoth has it all, beginning with a strong balance sheet and continuing to buy back an estimated $1 billion in shares per year.
“The company has a focused sports and news strategy, and should benefit from strong political advertising and engagement next year, as well as a Super Bowl and the elimination of Thursday Night Football losses,” the firm said.
Gould also claimed that Fox has superior betting assets that shareholders are undervaluing.
“Moreover, the company owns nearly $1 billion in Flutter stock and has an option to acquire 18.5 percent of Fan Duel and 50 percent of the legacy The Stars Group US operations,” he added.
The firm’s price target of $50 per share ties a Street high, reinforcing Gould’s thesis that 2022 will be a very big year for Fox.
“We continue to believe Fox shares offer the most compelling risk/reward profile in our large-cap universe,” Gould said.
The stock market finished the week up nearly 5%.
PC demand may be slowing slightly, but Morgan Stanley stated earlier this week that the software security company’s momentum will continue.
“Despite fears of a post-pandemic demand slowdown,” analyst Hamza Fodderwala said, “durable double-digit topline growth and improving profitability should drive meaningful EPS revisions over the next couple years.”
McAfee’s earnings power is, in fact, “underappreciated,” he added.
According to Fodderwala, other catalysts that could boost revenue include a “underpenetrated opportunity” in mobile as well as subscriber renewals.
Meanwhile, McAfee claims that even if PC sales fall a little further from their all-time highs during the pandemic, they won’t fall far below historical levels, which bodes well for the company.
According to Fodderwala, his thesis is also supported by the fact that McAfee has exclusive partnerships with a number of PC manufacturers, including Dell, HP, and others.
With the stock down more than 17% this month, Fodderwala believes investors should take advantage of what he calls a “very strong” buying opportunity.
“More than a pandemic puppy,” remarked Baird analyst Peter Benedict in a recent note to clients following the company’s better-than-expected second-quarter earnings report in mid-August.
Although the stock is only up 4.4 percent this month, Benedict believes Petco is on a clear upward trajectory.
“While we recognize steep near-term comparisons, the sector is thriving following last year’s surge in new pet households, and WOOF’s retooled business is delivering market share gains,” he said.
The return of in-store shopping and recurring revenue from repeat customers have boosted Petco’s same-store sales.
Benedict also praised the company for balancing the need to raise prices while dealing with inflationary cost pressures.
“Services increased by 49 percent as demand for grooming/training has returned, and WOOF continues to execute on its vet hospital network rollout,” the company wrote.
Furthermore, the stock currently has a very appealing risk/reward profile in what Benedict refers to as a “defensive growth” sector.
“While this was a very good sector prior to COVID, the recent surge in new pet households (up 6% in 2020) is expected to drive even stronger growth in the coming years,” he wrote.
Outperform rating for Restaurant Brands-Oppenheimer
“Following a thorough examination, we believe the search for an appealing risk-reward ratio over the next 18 months has shifted to QSR from YUM. We raise our price target for QSR to $80 (implying a 25% upside potential) and remove our previous $145 target for YUM. To be clear, we do not see a fundamental breakdown in the outlook for YUM’s operating model, nor do we anticipate measurable earnings misses in future quarters. Our call is based on our belief that QSR will be armed with more drivers for outperformance beginning August 26, 2021.”
Fox-Loop Capital has a Buy rating.
“We continue to believe Fox shares offer the best risk/reward ratio in our large-cap universe. The company is selling for less than 5x our EBITDA for FY2021/2022E, has a strong balance sheet, and is repurchasing shares. The company has a sports and news-focused strategy, and it should benefit from strong political advertising and engagement next year, as well as a Super Bowl and the elimination of Thursday Night Football losses… Furthermore, the company owns nearly $1 billion in Flutter stock and has the option to acquire 18.5 percent of Fan Duel and 50 percent of the legacy TSG US operations.”
Morgan Stanley-McAfee, Overweight rating
“Underappreciated earning power, excellent buying opportunity on pullback.” Despite fears of a post-pandemic demand slowdown, sustained double-digit topline growth and improving profitability should drive meaningful EPS revisions over the next few years. MCFE presents the most appealing risk-reward profile in our coverage, trading at 12X $1.75 EPS by 2023e growing >30%….,Expansion into a large, under-penetrated opportunity in the mobile & ISP (internet service provider) Channel.”
Petco- Baird has an outperform rating.
“More than a pandemic puppy.”
While we acknowledge the sector is thriving following last year’s surge in new pet households, and WOOF’s re-tooled business is delivering market share gains.
Services increased by 49 percent as demand for grooming/training increased and WOOF continued to execute on its vet hospital network rollout.
Leading player in an appealing ‘defensive growth’ sector.
While this was a very good sector prior to COVID (5% growth), the recent surge in new pet households (up 6% in 2020) is expected to drive even stronger growth in the coming years.”
Piper Sandler, PennyMac Financial, has an overweight rating.
“We believe PFSI is one of the most appealing risk-reward opportunities in our coverage, with the stock currently trading at 5.1x FY22E P/E. The market clearly underestimates the company’s ability to continue generating 15 percent or higher ROEs in the face of rising mortgage competition. In our opinion, this represents a very appealing entry point for investors willing to wait for the market to recognize PFSI’s stellar profitability and/or start to show a turn in the cycle, which we would expect to result in a rapid increase in earnings.”
Rogers is known for his patient and contrarian approach to investing and identifying mispriced companies with long-term value. According to Morningstar, the investor class shares of the Ariel Fund have gained about 27 percent this year, outperforming the S&P 500′s 18 percent return.
One of his cheapest picks is the home security stock ADT, which he believes is priced at a nearly 50% discount and could be worth around $16 per share. Rogers stated that, while the security company has been spending money to attract new customers, he is confident that investor spending will return “powerfully.” He also stated that the firm’s future is promising. Year to date, ADT is up about 3%.
Adtalem Global Education, a for-profit education company, is currently trading at around $39 per share. Rogers, on the other hand, believes the stock could double in a year. He also expressed confidence in the company’s newly appointed CEO. This year, Adtalem is up 15%.
Madison Square Garden Entertainment is one of Ariel’s most important and high-conviction positions. Rogers expressed optimism that, as the economy continues to improve, sports and music fans will return to Madison Square Garden. Rogers expressed particular enthusiasm for the company’s sphere-shaped entertainment venue in Las Vegas.
MGM Resorts, Las Vegas Sands, and Wynn Resorts all fell earlier this week as a result of regulatory concerns in Macao. Rogers, on the other hand, expressed enthusiasm for the gaming and online gambling revenue that Madison Square Garden Entertainment is expected to generate. The stock is currently trading around $79, down 24% year to date.
Streaming stocks with high potential
CuriosityStream, which focuses on documentaries and other factual content, should benefit from the booming industry, according to Pan, even if it does not try to outspend the bigger names.
The company, which has a market capitalization of $580 million, expects to generate at least $71 million in revenue this year.
According to JPMorgan, Curiosity’s factual content niche should benefit the company financially on a per-show and per-movie basis.
“Because of the emphasis on factual programming, content costs are a fraction of those for scripted content. Factual content also travels well internationally and is evergreen, which gives it an advantage over scripted content,” according to the note.