Opportunities for investors.
The S&P 500 just finished off its best year since 2013, but that doesn't mean that there are no deals left for opportunistic investors. With fourth-quarter earnings season set to kick off in mid-January and the U.S. and China on the brink of signing a phase 1 trade deal, there are still plenty of bullish catalysts ahead. Instead of cashing out 2019 gains, some analysts say now is the time for investors to be buying select stocks, even with the market trading near all-time highs. Here are the Morningstar analyst team's eight latest upgraded stocks to buy.
Mohawk Industries (ticker: MHK)
Mohawk Industries is a leading manufacturer of flooring products, including carpets, rugs and ceramic tiles. Analyst Brian Bernard says Mohawk and Berkshire Hathaway (BRK/A, BRK/B) subsidiary Shaw Industries have nearly a duopoly in the U.S. carpet industry. In recent years, Mohawk has prioritized both acquisitions and organic reinvestment. This spending spree has generated impressive earnings growth and positioned Mohawk well to benefit from a booming U.S. housing market that accounts for 60% of Mohawk's sales, according to Bernard. Morningstar has a "buy" rating and $162 fair value estimate for MHK stock.
Valero Energy Corp. (VLO)
Valero is one of the largest petroleum refiners in the U.S. Analyst Allen Good says Valero is one of the few U.S. companies that is well-positioned to succeed in nearly any economic environment. Good says Valero should benefit from discounted light crude oil pricing, but it also has the flexibility to pivot back and forth between light and heavy crude processing depending on energy market conditions. That type of flexibility insulates the company's margins in a dynamic oil market. Morningstar has a "buy" rating and $112 fair value estimate for VLO stock.
Veoneer develops and manufactures automotive safety products. Veoneer shares are down 12% in the past six months and the company cut its full-year organic sales growth guidance back in October. However, analyst Richard Hilgert says the weakness in Veoneer stock is a buying opportunity and shares are currently significantly undervalued. Veoneer is highly exposed to advanced driver assistance systems and autonomous driving. Hilgert projects Veoneer's revenue growth will exceed global light vehicle sales growth by 10% annually over the next decade. Morningstar has a "buy" rating and $26 fair value estimate for VNE stock.
Anthem is one of the largest U.S. managed care organizations. Analyst Julie Utterback upgraded Anthem after a deep dive into the U.S. health insurance industry. Anthem is one of the most recognizable brands in U.S. health care and it is the exclusive licensee of the Blue Cross Blue Shield brand in 14 states. Anthem has roughly 35% membership market share in its license states, and Utterback says local market share is the most important factor when it comes to reimbursement negotiations. Morningstar has a "buy" rating and $348 fair value estimate for ANTM stock.
Zimmer Biomet Holdings (ZBH)
Zimmer Biomet designs and produces orthopedic implants. Zimmer owns an impressive portfolio of more than 4,500 patents and applications around the world. Analyst Debbie Wang says integration issues and quality concerns raised by the U.S. Food and Drug Administration have weighed on Zimmer in recent years, but the company's new management team has addressed these problems and put the company back on the path to growth. Wang also says high switching costs will help Zimmer maintain market share over time. Morningstar has a "buy" rating and $178 fair value estimate for ZBH stock.
Sprouts Farmers Market (SFM)
Sprouts Farmers Market is a value-oriented natural and organic grocery store. Analyst Zain Akbari says Sprouts' new leadership has a reasonable long-term financial plan in place and he is forecasting mid-single-digit revenue growth over the next 10 years. Sprouts is well-positioned to capitalize on the potential long-term shift in consumer spending toward more natural ingredients and less processed foods. Akbari says Sprouts has a relatively modest nationwide footprint, but the purchase of Whole Foods by Amazon.com will likely continue to pressure Sprouts' costs and pricing. Morningstar has a "buy" rating and $21.50 fair value estimate for SFM stock.
Nektar Therapeutics (NKTR)
Nektar Therapeutics is a biopharmaceutical company focused on developing drugs to treat cancer, autoimmune disease and chronic pain. Analyst Anna Baran says Nektar's NKTR-181 mu-opioid receptor for the treatment of chronic pain is promising, but its ultimate success may hinge on whether or not the FDA grants the drug abuse-deterrent labeling. In the near term, an FDA advisory committee meeting for NKTR-181 could be a bullish catalyst in the next few months. In the longer term, Baran says Nektar is on track to reach profitability in 2021. Morningstar has a "buy" rating and $27 fair value estimate for NKTR stock.
Frank's International (FI)
Frank's provides tubular servicing for the oil and gas industries, including designing and selling pipe, connectors and casing attachments. Analyst Preston Caldwell says the company's 2020 guidance is encouraging, including potential earnings before interest, taxes, depreciation and amortization growth of around 67% next year. Recent contract wins suggest Frank's should gain market share as international activity ramps up. In addition, the company plans to implement a cost-cutting plan that should save $30 million annually by the end of 2020. Morningstar has a "buy" rating and $6.25 fair value estimate for FI stock.
Upgraded stocks to buy in January:
-- Mohawk Industries (MHK)
-- Valero Energy Corp. (VLO)
-- Veoneer (VNE)
-- Anthem (ANTM)
-- Zimmer Biomet Holdings (ZBH)
-- Sprouts Farmers Markets (SFM)
-- Nektar Therapeutics (NKTR)
-- Frank's International (FI)
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