Usually, when markets climb to record levels and stay there, investors start thinking about bubbles. However, Brian Belski, chief investment strategist at BMO Capital, believes that we’re just in the midst of a counter-intuitive time.
In a recent note, Belski ruminates at length on the current conditions, and investors’ guesstimates that 1H21 will see a stock bubble.
“Widespread speculation of an imminent stock market bubble, not to mention calls for a potential sharp correction in the first half of 2021, only to be followed up by strength during the second half, represents excessively consensus thought by most clients we speak with,” Belski wrote.
But here the plot thickens – Belski isn’t sure that the common wisdom has called conditions right: “We believe the first part of 2021 will be much stronger than most investors are imagining.”
Belski explains that with the Joe Biden ensconced in the White House, and supported by Democrat majorities in both Houses of Congress, a new corona response stimulus package will likely be larger than expected. Combined with vaccine programs and a solid Q4 earnings season, Belski believes that a cyclical uplift will hit the markets and extend through the year.
Against this backdrop, the stock analysts at BMO are taking their cue from Belski, and choosing their top picks for 2021. Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get the lowdown on what the near-term holds for these top picks.
Tronox, Ltd. (TROX)
We will start with Tronox, a mining and specialty metal manufacturing company. Tronox mines titanium ores and zircon, which are used to produce titanium chemicals: titanium dioxide and chemical sands, primarily, which are used in dyes. Tronox products are found in paints, papers, plastics, and other common products. Useful byproducts of the manufacturing process include caustic soda, gypsum, iron sulfate, and various acid compounds.
A solid industrial niche, with essential products in a variety of sectors, gives Tronox a firm foundation for growth, and the share value reflects that. The stock rose an impressive 106% over the past 12 months.
In Q3, the last reported, Tronox showed $675 million at the top line, up 17% sequentially. Improved market demand, and consequent improved TiO2 (titanium dioxide) sales through the quarter powered the higher revenues.
Looking ahead, Tronox has recently issued new Q4 guidance – and these preliminary numbers were far better than expected. For the last quarter of CY20, Tronox is guiding toward revenue of $783 million – which will be a 13.6% year-over-year gain.
Based on all that Tronox has going for it, BMO analyst John McNulty tells investors that his bullish thesis remains very much intact.
“We listed TROX as one of our top picks for 2021 [based on] our belief that the strength of the cycle would surprise investors in the near term on the volume side and in the intermediate term on the pricing side. The 4Q “blowout” supports our near-term thesis while… recent price hikes give us greater confidence in our intermediate-term thesis as well as our belief that our 2021 and 2022 estimates are solidly too low. We continue to believe TROX offers the most upside of any name in our space looking out through 2021,” McNulty commented.
Unsurprisingly, McNulty gives Tronox an Outperform (i.e. Buy) rating, and a $23 price target. This conveys his confidence in TROX’s ability to rise 36% over the next twelve months. (To watch McNulty’s track record, click here)
What does the rest of the Street think? As it turns out, 3 out of 4 analysts that have published a recent review see the stock as a Buy, making the consensus rating a Strong Buy. Meanwhile, the $19 average price target indicates ~13% upside potential. (See TROX stock analysis on TipRanks)
Netflix, Inc. (NFLX)
Netflix hardly needs any introduction. It’s one of the famous FAANG stocks, a group of tech companies whose sheer size and rate of growth have helped to power the markets over past few years. The FAANGs include Facebook, Amazon, Apple, and Google – so Netflix is in good company, even if its $239 billion market cap puts it in a distant fifth place for size behind its peers.
Revenue has grown steadily in every quarter for the past two years, reaching $6.64 billion in 4Q20. That wasn’t the only good news from Q4. The company reported that it had exceeded 200 million paid subscribers in the quarter, and is now looking forward to turning cash flow positive for the first time.
On the balance sheet after Q4, Netflix has $15 billion in debt and $8.2 billion in cash on hand. As long as the company turns out hits like ‘The Queen’s Gambit’ and ‘The Midnight Sky,’ which had 68 million and 72 million viewers respectively in their first four weeks, the debt is considered sustainable.
Analyst Daniel Salmon, rated 5-stars by TipRanks, rates Netflix as Outperform (i.e. Buy) in his recent note for BMO. Salmon gives the stock a $700 price target, implying an upside of 30% for 2021. (To watch Salmon’s track record, click here)
Describing Netflix as a ‘Top Pick’ in his headline, the analyst goes on to say: “We raise our ARPU estimates driven by recent price increases, leading to higher revenue estimates […] While the pricing increases may slow the subscriber growth somewhat, we do not anticipate similar level of churns as in 2019 and think total subs can surprise to the upside in 2021. We think there is another leg as the FCF generation becomes reality, and we continue to like the lack of antitrust/regulatory overhang versus rest of FANG.”
There are plenty of Buy ratings for Netflix amongst Salmon’s colleagues – 23, in fact. With the addition of 6 Holds and 3 Sell, the stock has a Moderate Buy consensus rating. The average price target stands at 632.90 and implies ~17% upside for the foreseeable future. (See NFLX stock analysis on TipRanks)
The third stock on BMO’s top picks list, Corteva, was once the agricultural unit of the chemical giant Dupont, before being spun off as an independent company in mid-2019. The company currently boasts a market cap of $30.3 billion – making it the world’s largest aggrotech company.
Corteva fuels its growth through a diverse product line, including seeds, crop protection, and digital land management, all designed to improve crop yields and acre value. Corteva’s seed lines include such staples as corn, wheat, soy, and sorghum – all of which are either eaten directly, shifted into processed foods, or used as livestock feed. Land management is essential to all aspects of farming, at all scales, from wheat farmers to dairy and meat producers.
The third calendar quarter is Corteva’s slowest, and Corteva showed year-over-year declines in earnings and revenue. At the same, the 52-cent EPS and the $1.86 billion reported revenue both beat the analyst forecasts.
Watching Corteva for BMO, Joel Jackson writes, “Our favorite idea for 2021 is CTVA… There’s a strong pathway if 13-14x multiples keep rolling forward to future years as CTVA continues to penetrate deeper into seed traits… we believe 2021 could be a much stronger year for CTVA, which could deliver 20%+ EBITDA growth (we don’t believe this is fully appreciated by the Street although it’s starting to get there). CTVA’s earnings bridge for 2021E could be leaning closer to bull case scenarios as … higher crop prices provide better seed price opportunities (lower rebates), and crop protection sales fare better than expected.”
These comments support an Outperform (i.e. Buy) rating, and Salazar’s $48 price target suggests that CTVA has room for a 18% upside in the coming year. (To watch Jackson’s track record, click here)
All in all, Corteva’s Moderate Buy analyst consensus rating is based on 8 reviews, breaking down to 5 Buys and 3 Holds. The $43.90 average price target suggests room for ~8% upside growth from the current trading price of $40.71. (See CTVA stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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