JPMorgan's 24 Stocks That Are More Attractive Than Apple
Robert Holmes
BOSTON (TheStreet) -- The S&P 500 has rallied 6.6% in the first six weeks of the year, with Apple(AAPL) leading the charge. But not every stock in all leading industry has come along for the ride. That means investors can find opportunities in some of the laggards.
Professional investors, including TheStreet's Doug Kass, have joked that this is an "NBA" stock market: Nothing But Apple. That's because the maker of the iPhone and the iPad has seen its stock go parabolic, rising day after day to new all-time highs. Apple shares are up 23% this year and hit a record $503.83 on Monday, the first time the stock has crossed the $500 level.
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Apple's revenue and earnings growth has disproportionately supported the S&P 500. In other words, Apple's amazing performance has masked the weaker overall performance of stocks.
JPMorgan strategist Thomas Lee, often criticized for being overly bullish on the prospects for stocks, says Apple's contribution is certainly impressive but isn't as extraordinary as it's made out to be. While he does note that Apple represented 79 cents of the $1.80 year-over-year increase in fourth-quarter S&P 500 profits, Lee also points out that, since 1990, top outliers have added 16% annually to earnings per share.
What JPMorgan's Lee is essentially saying is that Apple's huge contribution doesn't make the overall equity market less healthy. Instead, Lee argues that investors should start focusing on lagging stocks within leading sectors as the equity market continues to move higher.
For this, Lee set up a simple screen to find opportunities. His team looked for stocks in outperforming industries based on year-to-date price performance. Those stocks must be underperforming the S&P 500 this year, are rated "overweight" by JPMorgan's team, and there must be upside relative to the analysts' price targets.
Lee's suggestion, though, should be taken with a grain of salt. The only reference to Europe, which is still struggling with a massive debt crisis, in the report's 33 pages comes as Lee suggests the business cycle has the potential to accelerate as Europe exits a recession. The word "debt" doesn't show up once in Lee's research note.
For investors who think the market could still rebound and are looking for opportunities, Lee's screen returns 24 potential candidates. I've ranked the top 10 based on the spread between the firm's price target and where the stock trades currently, which are detailed below and on the following pages.
The 14 other stocks making Lee's list are FMC Technologies(FTI), International Flavors & Fragrances(IFF), Boeing(BA),Raytheon(RTN), Tyco(TYC), Time Warner(TWX) and Omnicom Group(OMC).
The others are McGraw-Hill(MHP), Varian Medical(VAR), Aon(AON), Ace(ACE), Boston Properties(BXP), Simon Property(SPG) and KLA-Tencor(KLAC).
10. Amazon.com(AMZN)
Company Profile: Amazon is the largest Internet retailer. The company also produces the popular Kindle eBook reader and the Kindle Fire tablet.
Share Price: $185.48
Potential Upside: 13% based on a price target of $210
On Feb. 1, after Amazon reported disappointing results for the fourth quarter, JPMorgan analyst Doug Anmuth cut his price target for Amazon to $210 from $235, although he maintained the firm's "overweight" rating on the stock.
"We believe Amazon's [gross merchandise value] growth likely remains strong and is growing faster than revenue, and that Amazon's shift toward third-party is at least temporarily (but perhaps longer) depressing revenue and raising margins," Anmuth wrote. "We think we could see some further weakness in Amazon shares in the very near term, but we'd view further pull-backs as buying opportunities."
Company Profile: KeyCorp is a Cleveland-based bank holding company with more than 1,000 retail locations in 14 states across the U.S. and $89 billion in assets.
Share Price: $8.17
Potential Upside: 16% based on a price target of $9.50
After KeyCorp opened the books on its fourth quarter in January, JPMorgan analyst Steven Alexopoulos said that with the bank's earnings per share on a treadmill, capital return will be key to unlocking value.
"With earnings improvement at KEY limited over the near term, we believe the key to unlocking shareholder value will lie in the bank's ability to return capital to shareholders," Alexopoulos wrote.
8. CareFusion(CFN)
Company Profile: CareFusion offers products and services that focus on preventing medication errors and hospital-acquired infections.
Share Price: $24.92
Potential Upside: 16% based on a price target of $29
In January, after CareFusion preannounced its fiscal second quarter numbers, JPMorgan analyst Michael Weinstein wrote that each of the medical systems businesses outperformed his expectations, with another solid quarter from the company's Pyxis and a rebound for ventilators.
"While Pyxis tends to be the higher-margin business within Med Systems, the challenge for CFN as a whole is that its highest margin businesses (Procedural Solutions; and Infection Prevention in particular) are getting hit the hardest," Weinstein wrote.
Company Profile: DirecTV is a digital satellite television provider to nearly 20 million subscribers in the U.S. and another 11 million in Latin America.
Share Price: $44.92
Potential Upside: 18% based on a price target of $53
JPMorgan analyst Philip Cusick reiterated his "overweight" rating on DirecTV on Jan. 30, noting that the worries over the company -- U.S. growth and programming costs and consumer risk -- are well understood.
"Even on more conservative numbers we expect DTV in 2012 to grow EBITDA by 8% (the highest among its pay TV peers) and buy back 15% of its shares while trading at approximately 10x 2012 EPS," Cusick wrote.
6. Rockwell Collins(COL)
Company Profile: Rockwell Colins is an aerospace and defense company that develops communication and aviation electronic solutions for both commercial and government usage.
Share Price: $59.10
Potential Upside: 18% based on a price target of $70
JPMorgan analyst Joseph Nadol wrote on Jan. 20 that Rockwell Collins' first-quarter results allayed some fears over the defense industry.
"We see double digit earnings growth for the next 3+ years, driven by its commercial business," Nadol writes. "Within Commercial Systems, we expect market share gains and a cyclical upturn to fuel top line growth and high incremental margins should enhance the impact of this growth on earnings."
Company Profile: Allegheny is one of the largest producers of specialty metals, including titanium, nickel- and cobalt-based and zirconium alloys.
Share Price: $47.43
Potential Upside: 22% based on a price target of $58
In January, JPMorgan analyst Michael Gambardella cut his price target on Allegheny to $58 to $60, although he reiterated his "overweight" rating.
"Longer term, we believe ATI's increasing titanium exposure, new alloys and expanding vertical integration should ultimately command a higher multiple," Gambardella writes.
4. Quanta Services(PWR)
Company Profile: Quanta Services offers infrastructure solutions to the electric power, natural gas pipeline and telecommunication industries.
Share Price: $22.20
Potential Upside: 24% based on a price target of $27.50
In December, JPMorgan analyst Scott Levine wrote that a meeting with Quanta's management highlighted a robust outlook for transmission and distribution.
"We came away confident in our positive outlook for Electric Power, particularly transmission, where recent awards have helped drive PWR's backlog up +25% over the past year," Levine wrote.
Company Profile: Newmont Mining is the world's largest gold producer.
Share Price: $60.70
Potential Upside: 32% based on a price target of $80
In January, JPMorgan analyst John Bridges wrote that Newmont surprised some investors with strong fourth-quarter results.
"NEM was expecting a stronger fourth quarter, which it delivered successfully," Bridges wrote. The company's 2012 production estimates were below Bridges' expectations, although he still maintained an "overweight" rating on the stock.
2. Halliburton(HAL)
Company Profile: Halliburton offers upstream oilfield services to customers, including location, drilling and well construction.
Share Price: $37.02
Potential Upside: 40% based on a price target of $52
On Jan. 31, JPMorgan analyst J. David Anderson noted that while a judge ruled that Halliburton was indemnified from compensatory damages in the Deepwater Horizon oil spill in the Gulf of Mexico back in April 2010, the company is not indemnified from possible future civil and punitive damages.
"HAL isn't out of the woods quite yet, but it's still a positive development with compensatory indemnification resolved," Anderson wrote. "In addition to possible civil and punitive damages (directly or indirectly), a future determination of fraudulence could void HAL's compensatory indemnity. "
Company Profile: Baker Hughes is also an oilfield services company focused on shale gas.
Share Price: $49.91
Potential Upside: 44% based on a price target of $72
While JPMorgan's Anderson writes of the positive developments for Halliburton, he points out in a Jan. 30 research note the weakness in Baker Hughes after the company had a difficult fourth quarter.
"The company's pressure pumping business struggled with the availability, cost and transportation of materials, which limited volume and absorption of Baker's cost structure just as the company was investing in headcount and new capacity," Anderson writes. "We are confident this is not a reflection of weakening demand or pricing (outside the gas basins), but expect margins to be choppy and uneven as improvements derive from a combination of mix improvement, price and volume as costs are absorbed. "
>>To see these stocks in action, visit the JPMorgan's 24 Stocks That Are More Attractive Than Apple portfolio on Stockpickr.
-- Written by Robert Holmes in Boston.
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