Broad markets are at or near all-time highs. Over the past year, the S&P 500 has gained 15.6%. The tech-heavy Nasdaq 100 has nearly doubled that return, rising 29.7% off the back of strength at tech titans like Apple Inc. (NASDAQ:AAPL), up 56.5%, Amazon.com, Inc. (NASDAQ:AMZN), up 44%, and Facebook Inc (NASDAQ:FB), up 30%.
After those torrid gains, it’s not hard to worry that overall upside in U.S. markets might be near an end. The U.S. economy has strengthened, but overseas performance remains middling at best.
A post-election run already has priced in some benefit from uncertain and unclear tax reform plans from the new administration. Rising credit card charge-offs and weakening credit in the auto space imply potential consumer worries down the road. Overall, the U.S. stock market doesn’t look cheap.
But all hope is not lost. There’s still reason to see more improvement from a slow and steady economic recovery. A well-received tax plan at this point could provide added benefits. And cleaned-up corporate balance sheets and still-low Treasury yields make the U.S. equities market one of, if not the, most attractive in the world.
For investors seeing more upside in U.S. equities, here are 10 stocks positioned for another leg up in the bull market. Some are riskier than others, but all should beat the market — as long as the market keeps rising.
Best Stocks to Buy: Scientific Games (SGMS)
Obviously, gaming as a whole should do well in a strong economy. Investors could easily bet on Vegas (and China) plays like Las Vegas Sands Corp. (NYSE:LVS) or Wynn Resorts, Limited (NASDAQ:WYNN). Eldorado Resorts Inc (NASDAQ:ERI), fresh of closing its acquisition of Isle of Capri, offers a national presence in regional casinos — and a substantial amount of operating and financial leverage to drive the stock higher off increased revenue.
But the choice here is Scientific Games Corp (NASDAQ:SGMS), a stock I’ve admittedly long been bearish on. SciGames is coming off a solid first-quarter report, where revenue grew 6% in part due to a spike in gaming machine sales. That spike isn’t necessarily sustainable, but it doesn’t have to be for SGMS to move higher.
The key point in a bullish scenario is that even after increasing 130% over the past year, SGMS still has a market capitalization of just $2 billion. It has $8 billion in debt, which obviously creates risk, but also substantial reward. Meanwhile, the company has moved its Interactive business out from under that debt load, and recent business divestitures by Caesars Entertainment Corp (NASDAQ:CZR) and International Game Technology (NYSE:IGT) suggest that its Interactive business alone could support a reasonable portion of SGMS’ current value.
Results have been good enough to quiet debt concerns, and the big optionality for SGMS remains. If casino operators begin replacing slots — something they’ve put off since the financial crisis — SGMS revenue and profits will soar. With the market cap just ~20% of enterprise value, it doesn’t take much to create big upside for SGMS stock.
SciGames is a risky play, particularly if the economy and/or the gaming sector doesn’t cooperate. But in terms of leverage to further upside, there are few better options in the market.
Best Stocks to Buy: Titan International (TWI)
Cyclical equipment manufacturers like Caterpillar Inc (NYSE:CAT), Deere & Company (NYSE:DE) and CNH Industrial NV (NYSE:CNHI) all are at multi-year highs. More upside is possible, particularly if the economy cooperates. But with CAT, for instance, trading at 28x 2017 per-share earnings, it does appear the easy money has been made.
Investors can move down the supply chain, however, to wheel and tire maker Titan International Inc (NYSE:TWI). Titan supplies those manufacturers (Deere drove 9% of 2016 revenue, for instance) and many others in the agricultural and construction markets.
Assuming cyclical bottoms in those verticals — as investors appear to be doing with CAT — TWI is probably too cheap. The stock does trade at 33x 2017 analyst EPS estimates. But that’s not a terrible multiple for a cyclical stock, particularly if the cycle has years to play out.
Meanwhile, the company has reduced debt, canceled plans to sell its ITM undercarriage business and should benefit from new duties on Chinese tires. It might be a bit too late to capture big upside in the manufacturers, but there’s still time to get in on TWI stock.
Best Stocks to Buy: Matson (MATX)
The shipping industry has been shaken up by the August bankruptcy of Hanjin Shipping. Shipping stocks have been colored by some of the equity issuances and trading in the space, notably at DryShips Inc. (NASDAQ:DRYS).
Both impacts have weighed on shares of Matson, Inc. (NYSE:MATX). MATX stock trades at a 30-month closing low just above $31, in large part due to industry pressures. Weakness in Alaska — a key market for Matson — has contributed as well.
But Matson should be a beneficiary of cyclical strength — assuming that trade agreements, particularly with Asian countries, aren’t changed by the new administration. (MATX shares plunged on the news of Donald Trump’s election, though the stock recovered.) Matson’s balance sheet is much stronger than those of its peers, and its fleet is in relatively good shape.
Should demand pick up — and shipping rates bounce off the lows — MATX should benefit.
Best Stocks to Buy: Brunswick Corporation (BC)
When Brunswick Corporation (NYSE:BC) divested its bowling business in 2014, BC stock became mostly a pure-play on the boating industry. Since then, the company has built out its fitness business through acquisitions, but the lion’s share of Brunswick earnings still come from the boating industry. Between Mercury engines, and boat brands like Bayliner, Crestliner and Meridian, Brunswick is the largest boating manufacturer in the world.
That’s been a steadily improving market over the past few years. Yet BC stock really hasn’t received that much credit from the market. Even as boat demand has normalized coming out of the financial crisis, and Brunswick maintained solid market share, BC stock went nowhere between late 2013 and late 2016.
A recent spike got BC to $60, before a modest decline after decent, but unspectacular, Q1 results. Still, the mid-term bull case for BC, which trades at barely 13x its targeted 2018 EPS, looks solid. A glut of used boats created by the financial crisis has been worked through, leaving plenty of opportunity for new boat sales. The addition of fitness revenues, as well as parts sales, should smooth out Brunswick’s cyclicality somewhat.
But this remains a solid cyclical play, and one that would benefit from increasing home buying (particularly of second homes). Considering those tailwinds, BC’s gains don’t look quite as large as they should have been given market and macro strength. If the economy accelerates the market, at some point, will come around to BC.
Best Stocks to Buy: BlueLinx Holdings (BXC)
There are a number of housing-related plays that could qualify for this list (and indeed, one more to come). But BlueLinx Holdings Inc. (NYSE:BXC) might have the most upside.
That’s true even though BXC stock has gained 65% just since late February. Like SGMS, BlueLinx has an enormous amount of leverage: net debt of $315 million against a market cap just under $100 million. But BlueLinx also has a tremendous opportunity to improve operations through a recent turnaround effort. With Adjusted Ebitda margins in the 2% range, even modest improvement can have a tremendous impact on profits. And increased profits, considering the leverage, are amplified in BXC’s stock price.
This is a risky play, and for the most part BXC has been ‘dead money’ at best since its 2004 spin off from Georgia-Pacific. The distribution model is tough in any environment, as evidenced by BlueLinx’ low margins. But it does look like BXC is worth at least $8 per share even if the business is wound down and its real estate sold; with continued help from the housing recovery, its value as a going concern could be far higher.
Best Stocks to Buy: Cutera (CUTR)
Three down, one to go. Energy-based aesthetics providers have done exceedingly well since the financial crisis after years of disappointment. Zeltiq Aesthetics Inc (NASDAQ:ZLTQ), Cynosure, Inc. (NASDAQ:CYNO) and Syneron Medical Ltd. (NASDAQ:ELOS) all have been acquired at substantial premiums just in the past few months.
The last publicly traded player in the space is Cutera, Inc. (NASDAQ:CUTR) — and it seems very likely to be the next target. Allergan plc (NYSE:AGN), who acquired single-product Zeltiq, could be interested. So could private equity — which acquired long-struggling Syneron.
On its own, Cutera looks solid as well, coming off a Q1 revenue growth of 31%. Doctors are increasingly looking toward the aesthetics space as a way to drive cash revenue. And if confident consumers have more money to spend on those procedures, Cutera likely will be the fourth acquisition in the space.
Best Stocks to Buy: Beazer Homes (BZH)
As in the gaming space, investors probably can’t go wrong in homebuilding should the economy accelerate. Majors like Toll Brothers Inc (NYSE:TOL) and D.R. Horton, Inc. (NYSE:DHI) surely would see continued gains. But the best choice for a bullish scenario appears to be Beazer Homes USA, Inc. (NYSE:BZH).
Beazer trades at 0.6x book value, and operationally still has room for improvement. Leverage is a concern, but Beazer managed to extend its debt maturities earlier this year.
Homebuilding traditionally is one of the most cyclical sectors in the market — and there’s definitely room for the market to improve. Housing starts have grown consistently since the end of the financial crisis — but they haven’t been spectacular. There seems room for better numbers in the industry.
For BZH, short interest has come down substantially — suggesting that even bearish investors see improvement. Further improvement, and a better economy, imply substantial upside for BZH stock.
Best Stocks to Buy: Trinity Industries Inc (TRN)
Like shipping, the railroad industry traditionally offers a great deal of cyclicality. Like agricultural and construction equipment, industry leaders have soared of late.
Turnaround hopes have pushed CSX Corporation (NASDAQ:CSX) to all-time highs. Union Pacific Corporation (NYSE:UNP) has nearly reclaimed late 2014 levels, when the stock was hauling oil out of North Dakota and other markets.
And like with TWI, there’s a supplier that hasn’t quite benefited from the change in sentiment. In this case, the stock is Trinity Industries Inc (NYSE:TRN). TRN shares fell by almost 70% from late 2014 to early 2016, due to lower O&G-driven demand for its boxcars. Shipping weakness impacted Trinity sales and profits as well.
The bottom may not quite be in for Trinity, either. Q1 revenue, reported last week, declined 26% year-over-year. And with EPS guided to $1-$1.25 this year, TRN still trades at about 25x the midpoint of its guidance.
But for a cyclical play, that’s not a huge multiple. And Trinity generated over $4 per share in EPS in 2014. Even if that year represents a bit of a bubble, normalized EPS still likely is closer to $2, at least, giving the stock at low- to mid-teen multiple to mid-cycle earnings.
With suppliers in the space — and cyclical stocks elsewhere — getting much higher multiples, TRN looks too cheap.
Best Stocks to Buy: Cedar Fair (FUN)
Cedar Fair, L.P. (NYSE:FUN) operates 11 amusement parks, three water parks and five hotels across the country, including its namesake property outside Cleveland, Ohio. And it’s not hard to see why FUN stock would benefit from an accelerated economic recovery.
After all, higher discretionary spending would increase both visits to Cedar Fair parks and visitor spend. High fixed costs mean those higher revenues would drop to the bottom line at big incremental margins. Add to that reasonable financial leverage, and FUN has room for upside, even gaining 600%-plus since 2010.
FUN stock also pays a 4.7% dividend, and at under 19x 2018 EPS, isn’t terribly expensive. An outright recession would hurt the stock, but even the current normal seems enough to keep FUN stock rising.
More consumer confidence — and more consumer spending — can get FUN moving toward the triple digits.
Best Stocks to Buy: Haverty Furniture (HVT)
The furniture sector — both residential and commercial — hasn’t acted quite the way one would expect in an economic recovery. Office furniture makers like Knoll Inc (NYSE:KNL), which I own, and Herman Miller, Inc. (NASDAQ:MLHR) are struggling with sales.
The traditional cyclical tailwind for furniture makers might not be what it used to be, but Haverty Furniture Companies, Inc. (NYSE:HVT) could be the exception. The old-line Southern-focused retailer is coming off a decent first quarter, where same-store sales rose 1.6% and EPS increased 33%. New in-store design studios and renovation investments are expected to drive sales going forward.
Meanwhile, much of Haverty’s footprint covers the Southeast, where the economic recovery was later to arrive than elsewhere in the country.
If housing in that part of the country accelerates, Haverty would be a prime beneficiary. With HVT trading at just 16x EPS plus cash, even a modest acceleration implies upside from current levels.
Other than the disclosed position in KNL, as of this writing, Vince Martin did not hold a position in any of the aforementioned securities.