Mixed signals over recent weeks have placed investment analysts all over the map when it comes to their growth stock recommendations. Some see the S&P 500 Index headed for a nasty fall, while others feel the bull market is still making a roar.
On Oct. 12, HSBC Holdings Plc technical analyst Murray Gunn wrote in a note to clients:
“With the U.S. stock market selling off aggressively on October 11, we now issue a RED ALERT,” he said. “The possibility of a severe fall in the stock market is now very high.”
That’s not very encouraging. On the flip side, technical analyst Chris Ciovacco wrote Oct. 12 that the charts are bullish on the S&P 500.
It’s hard to know who investors should believe. But there’s a solution. Rather than try to time the market, buy the stocks of companies expected to do well in the coming weeks regardless of where the overall markets are headed.
In the past week, analysts have been busy adjusting their price targets up and down. Wall Street thinks these seven growth stocks will appreciate by double-digits over the next 12 months. Clearly, if you’re looking for growth stocks to buy, these should on your watchlist.
Growth Stocks to Buy: Amazon.com, Inc. (AMZN)
12-Month Price Target: $1000
Cantor Fitzgerald raised its Amazon.com, Inc. (NASDAQ:AMZN) price target Oct. 12 by 20% to $1,000. It’s hard to believe the markets have come so far that we’re now getting four-digit stock prices, but here we are nonetheless.
It’s hard not to like Amazon given all the different businesses it’s involved in. Amazon Web Services, on its own, is a $10 billion business that will generate approximately $750 million in operating income in fiscal 2016. It’s by far AMZN’s most profitable segment.
In September, I compared AMZN to Netflix, Inc. (NFLX). The fact that you get Amazon’s Prime video streaming service along with AWS and its e-commerce business when you buy its stock, in my opinion, makes NFLX superfluous.
Amazon’s free cash flow in the 12 months ended June 30, 2016, was $7.3 billion, 66% higher than in 2015. Its current free cash flow yield is 1.9% — not exactly a value investor’s dream. But consider where it’s come from: Five years ago, it generated $1.8 billion in free cash flow from $17.9 billion. That’s one dollar in free cash from $10 in assets. Today, that’s up to $1.12 per $10 in assets.
It might not seem like a lot, but with all it has going on, it’s more than plenty.
Growth Stocks to Buy: Merck & Co., Inc. (MRK)
12-Month Price Target: $70
You don’t often think of drug companies when a stock’s target price is increased 23% by an analyst, but that’s exactly what happened Oct. 13 when Bank of America raised its target price on Merck & Co., Inc. (NYSE:MRK) from $57 to $70. Equally important, it raised its rating from “neutral” to “buy.”
BAC believes Merck’s lung cancer drug, Keytruda, will get early approval from the Food and Drug Administration. It will then go on to be the standard of care when it comes to lung cancer. It also sees good things from Merck’s Alzheimer drugs which are expected to benefit from some of the positive news Eli Lilly and Co (NYSE:LLY) has received for solanezumab, its Alzheimer drug in clinical trials.
InvestorPlace Chief Technical Analyst Sam Collins also believes Merck is a buy. Just not right away. He likes an entry point below $60. However, Collins’ audience is more geared to short-term traders. Long-term investors need not be nearly as precise because, at least in the eyes of Bank of America, $70 is just around the corner.
Growth Stocks to Buy: Caterpillar Inc. (CAT)
12-Month Price Target: $112
It looks like we’ve hit a bottom in commodity prices. At least you might surmise as much given Goldman Sachs’ recent upping of its 12-month target price for the maker of heavy equipment to $112 from $76, a 47% increase.
Many of Caterpillar Inc.’s (NYSE:CAT) mining clients are getting much more optimistic about the future and that’s already fueled a significant move in CAT’s stock price so far in 2016, up 28% year-to-date through October 17. If Goldman Sachs is right, investors getting in today can expect a nice one-year return despite missing some of its rebound.
The commodity downturn forced Caterpillar to restructure its business closing more than 20 plants in the process. However, analysts are starting to recognize the heavy lifting Caterpillar’s management undertook over the past three years to make it more cost conscious. Finding $2.25 billion in annual savings during this period, a rebound in commodity prices would act like a slingshot on CAT’s future earnings.
A long-time dividend payer, CAT stock looks priced to move.
Growth Stocks to Buy: Encana Corp (ECA)
12-Month Price Target: $14
Barclays recently boosted the target price of the producer of oil and natural gas by a whopping 40% to $14. At the same time, it also upped Encana Corp’s (USA) (NYSE:ECA) (rating from “equal weight” to “overweight,” which is great news for long-suffering shareholders.
Down 8% on an annualized basis over the past five years, the upgrade suggests the worst is over for the Calgary-based company. With oil prices remaining stubbornly low, Encana continues to cut expenses to remain competitive.
In 2016, it’s already found $50 million in annual savings, much of it from getting price concessions from its suppliers. Those in the industry believe they’ll be able to hang on to approximately one-third of the cost savings found in recent years regardless if oil prices recover.
Earlier in October, it held its annual investor day in New York City. A key takeaway from that presentation is its commitment to having cash flow fund its capital program post-2017. While that requires it growing cash flow by 300% over the next five years, it’s confident it can achieve that.
Once saddled with an awful balance sheet, its recent $1 billion equity offering puts the company on stronger financial footing. Now, if only oil prices could cooperate.
Growth Stocks to Buy: Seagate Technology PLC (STX)
12-Month Price Target: $50
It didn’t take long for analysts to jump all over the Seagate Technology PLC’s (NASDAQ:STX) announcement that its September quarter would see higher revenues and gross margins than originally expected.
Morgan Stanley increased its price target by 20% Oct. 12 to $36. While that sounds good, it really only brings its target price up to its current price. More interesting is the 19% bump by Brean Capital to $50 from $42.
Brean Capital sees Seagate’s gross margins hitting as high as 32% by the end of 2018’s calendar year. That’s great news considering they’re currently hovering around 23%. The last time gross margins hit 30% or higher was in fiscal 2012.
STX stock got rocked in 2015 losing 41% of its value. In April, it looked as though its stock was in for more pain, dropping by almost 50% in the span of the month, but has since battled back recovering all of what it lost and then some.
Brean Capital’s enthusiasm for Seagate’s future suggests the data storage company’s stock can expect good times ahead.
Growth Stocks to Buy: Gap Inc (GPS)
12-Month Price Target: $32
It’s not quite a “buy” recommendation, but on Oct. 10, Deutsche Bank changed its rating on Gap Inc (NYSE:GPS) from “sell” to “hold” while also upping its target price 33% to $24. But according to Jefferies, GPS stock could trade as high as $32 per share over the next year.
Things haven’t been going too well for the once-iconic retailer. Glenn Murphy left as CEO in February 2015, replaced by current CEO Art Peck. Soon after, Stefan Larsson, the former head of Old Navy, left the company to be CEO of Ralph Lauren Corp (NYSE:RL) in September 2015.
Peck has been slowly rebuilding the company and it appears his moves are starting to pay off. Jefferies analyst Randal Konik recently visited the company and came back impressed with what was happening at the company once run by Mickey Drexler.
“We view risk/reward attractive here, with momentum at Old Navy and stabilization at Gap offsetting challenges at Banana Republic, the multiple near trough levels, and cash flow inflecting,” Konik wrote in a note to clients.
Over at Deutsche Bank, it made the changes in rating and target price because Gap has been doing what it needs to do to right the business. That’s closing stores, cutting costs and improving its supply chain.
It’s not perfect, but it’s getting better.
Growth Stocks to Buy: Finisar Corporation (FNSR)
12-Month Price Target: $39
I’m not going to pretend that I’m all that familiar with Finisar Corporation (NASDAQ:FNSR) business other than it makes optical components necessary for high-speed voice, video and data communication.
Goldman Sachs, however, does know a thing or two about its business. As a result, the investment bank raised Finisar’s target price Oct. 11 by $15 to $39. More importantly, it now has a buy rating on FNSR stock.
In early September, Finisar delivered strong first quarter earnings along with a very positive outlook for the remainder of the year. At the time, Jefferies analyst James Kisner wrote in a note to clients that Finisar is benefitting from strong industry trends in both the Datacom and optical components’ markets. His only concern was Finisar’s ability to carry those trends farther than a quarter or two.
With a stock price below $30, it appears that Goldman Sachs feels FNSR has some room to run with 30% upside or more on the horizon.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.