The market feels very heavy, and with big announcements coming this week, things may be poised to get a little volatile. The Federal Reserve meeting, along with numerous other central banks releasing data, combined with the Dutch elections and a huge snowstorm, are all items that traders will be keeping their eyes on. One thing is for sure: the first stocks that will be sold will be the overbought momentum companies. So it makes sense to steer clear of them for now.
The analysts at Stifel have done some outstanding work on four companies that are oversold to some degree and may be offering investors some solid contrarian value. All are rated Buy, but they are more suited for accounts with a higher degree of risk tolerance.
Dicks Sporting Goods
This stock has become one of the top retail stories over the past few years. Dicks Sporting Goods Inc. (DKS) is a full-line sporting goods retailer that offers a broad assortment of brand and private label sporting goods apparel, footwear and equipment in a big-box store format. The company also operates specialty stand-alone golf stores under the Golf Galaxy name and an Outdoor specialty store under the Field & Stream banner.
Top analysts note that sporting goods stores are a silo of hardline retail that typically survives higher interest rate moves reasonably well. An improving economy should also keep a tailwind behind what many consider to be the premier franchise in the industry.
The Stifel team feels that the Gander Mountain bankruptcy opens the door for market shares gains at the retailer, and they said this in the report:
We believe Dick’s Sporting Goods will be content to see a competitor go by the wayside and believe the auction process is unlikely to find a buyer for the chain as a whole. For vendors doing business with Gander Mountain, credit exposure appears contained though the store closures would be a headwind to future revenues.
Shareholders are paid a 1.42% dividend. The Stifel price target for the stock is $65, while the Wall Street consensus target is set at $60.44. The stock closed Tuesday at $47.83 per share.
Hutchison China Meditech
This off-the-radar biotech stock not only has upside potential, but it also has traded sideways since the 2016 initial public offering. Hutchison China Meditech Ltd. (HCM) is an oncology-focused biotech company with expertise in developing selective tyrosine kinase inhibitors for cancer treatment. In addition, the company owns a commercial platform that generates income and helps fund research and development. Partnerships with AstraZeneca and Eli Lilly validate the technology.
The company has recently posted some outstanding clinical data. Fruquintinib demonstrated efficacy for metastatic colorectal cancer in Phase 3 trials, and top analysts are looking forward to a more detailed presentation at the American Society of Clinical Oncology annual meeting in June. Savolitinib is slated to enter development in papillary renal cell cancer, and a Phase 3 decision in non-small cell lung cancer. The pending Phase 2b data is expected by summer.
Stifel raised its price target to $22 from $20, and the consensus target is $18.63. The shares closed most recently a $16.00 apiece.
This top software stock has traded sideways since last spring and looks to be putting in a nice cup and handle formation. Oracle Corp. (ORCL) develops, manufactures, markets, sells, hosts and supports database and middleware software, application software, cloud infrastructure, hardware systems and related services worldwide.
The company licenses its Oracle Database software to customers, which is designed to enable reliable and secure storage, retrieval and manipulation of various forms of data. Its Oracle Fusion Middleware software aims to build, deploy, secure, access and integrate business applications, as well as automate their business processes.
The analysts note that Oracle, through some missteps of its own, is probably not getting enough credit for its cloud business, which is expected to continue to grow. They think that revenue on the top and bottom line should come in at or slightly below consensus levels, and although the stock has outperformed year to date, much of that is catch-up from a poor 2016.
The Stifel analysts noted this in the report:
Our key focus will be around cloud bookings growth (which management previously suggested can be a record quarter) along with the rate of license decline, given the on-going cloudshift.
Shareholders are paid a 1.4% dividend. Stifel has a $44 price target, which is in line with the consensus target of $44.36. The shares closed most recently at $42.79.
This stock was formerly a gigantic holding in Bill Ackman's Pershing Square hedge fund, but he sold the last of it this week and posted a reported $4 billion loss. Valeant Pharmaceuticals International Inc. (VRX) develops, manufactures and markets pharmaceuticals, over-the-counter products and medical devices worldwide.
The company has an extensive list of products that treat everything from severe acne to Wellbutrin XL for major depressive disorder in adults; Jublia for onychomycosis of the toenails; Xenazine for chorea; Targretin for cutaneous T-cell lymphoma; Arestin, a subgingival sustained-release antibiotic; and Provenge for the treatment of prostate cancer.
The final Ackman trade to clear his entire position may very well be the ultimate contrarian indicator. The Stifel team remain positive on the shares, especially at current levels. The analysts noted in their report:
Valeant has since rebuilt its management team, pursued asset sales to simplify the business, strengthened the balance sheet, and has refocused investment into growth assets and research and development. Despite this, the stock has continued to decline and Ackman is finally capitulating and taking the tax loss, with Valeant representing ~$300mn (or <3% of its capital) down from what was a multi-billion dollar investment.
The Stifel price target is a massive $45. The consensus target is lower at $19.81, and the shares closed Tuesday at $10.89, down over 10% on the day.
Many would consider these four stocks to be contrarian plays. While they may still have work to do, improvement in metrics and achieving goals should help to gradually push the shares higher, and the downside at current trading levels seems minimal.