The markets are looking slightly healthier right now. Fingers crossed, this market comeback is set to last. In any case, it’s reassuring that RBC Capital is still bullish on the markets for 2019.
The firm writes: “Despite the volatility that we have witnessed in the global markets, for 2019 our analysts are maintaining a pro-growth, pro-cyclical bias.”
But you need to be prepared. The bull market is getting long in the tooth, and portfolios need to be adjusted accordingly.
As RBC explains “[Given] that we are entering the 10th year of this bull cycle and perhaps the later stages of a multi-year economic expansion, we are being circumspect with our investment recommendations.”
As a result the firm’s 2019 stock picks skew toward best-in-class operators. “We point investors to industry leaders, taking a more nuanced approach to our positive bias” says the firm.
Here I dig down into 10 stocks from the firm’s Top Global Stock Ideas for 2019. Using TipRanks, I can also ensure that all these stocks score a ‘Buy’ consensus from the Street.
Let’s take a closer look now:
Top Stock Idea: CVS Health (CVS)
Our first stock is CVS Health Corp (NYSE:CVS). The retail pharmacy giant is at an inflection point in its corporate life cycle. The company has just acquired insurer Aetna for a whopping $69 billion.
“We view the valuation on CVS shares as very attractive” writes RBC Capital’s George Hill (Track Record & Ratings). That’s due to the expected earnings power and strong cash flow of the two combined companies, as well as the potential upside from reducing healthcare costs.
RBC expects earnings growth to drive share out-performance over the next few years. This will see the valuation on CVS shares closing the gap with peers says the firm.
Indeed, it has a $100 price target on CVS shares, indicating huge upside potential of 59%.
Plus expect serious synergies from merging the two businesses. CVS recently reiterated its target for >$750mm in annual synergies in the second full year post-integration (2021). So watch this space. Interested in CVS stock? Get a free CVS Stock Research Report.
Top Stock Idea: Waste Connections (WCN)
I can’t deny, solid waste isn’t the most appealing industry. But these stocks become a lot more attractive when you consider the investing opportunity at hand.
Goldman Sachs’ Brian Maguire is a big fan of the waste sector. He says the Waste sector that should be a core holding in every portfolio, especially “so late in the economic cycle.”
As for Waste Connections Inc (NYSE:WCN) specifically, the firm’s Derek Spronck (Track Record & Ratings) sees prices surging to $85. Management’s effective cost discipline and price-led organic growth should drive excess cash generation, says the analyst.
This cash can fund meaningful acquisitions, which can in turn drive above-industry EBITDA growth and FCF generation at 10%-15% of revenue on a sustainable basis.
“Owing to the company’s best- in-class EBITDA growth and FCF generation, we value the WCN shares at a 13.5x multiple” explains Spronck.
The conclusion: “We see Waste Connections continuing to deliver 10%+ FCF growth on a compounding and sustainable basis and recommend it as a core holding for investors.” Get the WCN Stock Research Report.
Top Stock Idea: Suncor Energy (SU)
Here’s a stock on the way to becoming a major oil player. Suncor Energy Inc (NYSE:SU) is the second-largest refiner in Canada, with three refineries and 364,000 bbl/d of processing capacity. Essentially, it specializes in production of synthetic crude from oil sands.
Investor attention is spiking right now. That’s after the company reported another fine quarter.
“Suncor’s third-quarter results further reinforced our confidence in its integrated model and free cash flow generation” cheers RBC’s Gregory Pardy (Track Record & Ratings). “The company resides in an enviable position where it can deliver upstream growth commensurate with rising shareholder distributions.”
With this in mind, he reiterates his buy rating and $53 CAD price target (for upside of over 50%).
“In our view, Suncor Energy remains Canada’s energy producer of choice given its integrated model, defined upstream growth, capital discipline, free cash flow generation, and demonstrated track record of shareholder distributions” he concludes. Get the SU Stock Research Report.
Top Stock Idea: Facebook (FB)
“Arguably the best risk-reward in Large Cap Internet” is how RBC’s Mark Mahaney (Track Record & Ratings) sums up Facebook Inc (NASDAQ:FB) stock. His $190 price target indicates upside potential of 53%.
He is remaining bullish on FB because it stills owns two of the largest media assets in the world (Facebook & Instagram) & the two largest messaging assets in the world (Messenger & WhatsApp).
All four of these assets still have significant monetization potential. Indeed, Messenger and WhatsApp are still in the early stages of monetization — which means big potential lies ahead.
Plus FB’s aggressive investments are improving platform security and creating future revenue streams (Such as Stories and VR/AR). Meanwhile, even under pressure, FB is producing impressive growth (25%+ 3-yr Revenue CAGR & ~20% EBITDA CAGR through 2021). Get the FB Stock Research Report.
Top Stock Idea: GDS Holdings (GDS)
Turning to China, we have IT stock GDS Holdings Limited (NASDAQ:GDS). This is a company that designs, builds, and operates data centers, with approximately 370 customers across China. It provides a platform for the technology that is transforming China.
“We believe GDS has potential to outperform its peers given its positioning in an under-penetrated, growing market with strong customer demand trends and limited competitive supply” writes the firm’s Jonathan Atkin (Track Record & Ratings).
This Top 15 analyst believes GDS is well positioned to capitalize on strong datacenter and IT outsourcing demand trends from multiple sectors, including Chinese and international cloud and Internet firms.
Also in the stock’s favor: the unique barriers to entry for foreign competitors in the Chinese datacenter market. Atkin sees prices more than doubling to hit $52. Get the GDS Stock Research Report.
Top Stock Idea: Lululemon (LULU)
True, the retail sector is a challenging spot right now. But athleisure-focused Lululemon Athletica Inc (NASDAQ:LULU) continues to stand out from the crowd.
“In a softlines space desperate for growth, our Outperform rating on LULU is based on our expectation for sustained baseline mid-teens top-line” states RBC Capital.
Looking ahead, the firm’s Brian Tunick (Track Record & Ratings) sees LULU smashing its current targets:
“With 2020’s $4B sale’s target easily within reach, we expect LULU’s path to $6B+ from $3.2B today should look similar to what we see now, including at least 10% footage growth, men’s business north of $1B, a digital ecommerce penetration of 30%+, and International.”
This services-sector analyst has a $165 price target on the stock for 46% upside potential. Get the LULU Stock Research Report.
Top Stock Idea: Prudential Financial (PRU)
From the financial sector, we have insurance giant Prudential Financial Inc (NYSE:PRU).
“Prudential is our overall favorite idea in the life insurance sector” writes RBC’s Mark Dwelle (Track Record & Ratings). He is predicting 56% upside from current levels.
As Dwelle points out, the company has delivered a 13-14% ROE (return on equity) over each of the last two years. The best part, he expects them to do it all over again in 2019. “The company is a market leader across most major product lines and all the business units have performed both consistently and well” says the top-ranked analyst.
Shareholders also benefit from a significant capital return program. Think about the $2 billion of buybacks planned for 2019 and a rising dividend to boot. Right now the dividend produces a lucrative yield of over 4%.
“With shares trading at a discount to book value, we see reasons to expect multiple expansion and we believe the shares make an attractive core holding for investors seeking broad exposure to the sector” concludes the analyst. Get the PRU Stock Research Report.
Top Stock Idea: Restaurant Brands (QSR)
Despite under-performing the restaurant sector in 2018, Restaurant Brands International Inc (NYSE:QSR) is the top stock pick of five-star RBC analyst David Palmer (Track Record & Ratings). QSR is the owner of Popeyes, Tim Hortons and Burger King.
Palmer spies a favorable setup heading into 2019 given three catalysts: 1) Tim Hortons improvement with all-day breakfast, loyalty, kids meals, a new coffee program, and marketing initiatives, 2) Popeyes unit growth accelerating internationally and 3) re-acceleration in Burger King U.S. sales with a greater value and premium balance.
“An unwarranted valuation discount to peers and an over 3% yield should attract long-term oriented investors in 2019” predicts Palmer.
Over the next five years, he estimates that QSR could average annual total return of 15% (12% EPS growth plus 3% dividend yield). That’s with relatively high-visibility unit growth (6%+) and free cash flow (6%+).
“Given this powerful growth algorithm, we believe shares could be worth $108 in five years, which implies an over 100% return assuming reinvested dividends” sums up the analyst.
Interestingly, QSR boasts only buy ratings from analysts in the last three months. Get the QSR Stock Research Report.
Top Stock Idea: Anadarko (APC)
Texas-based Anadarko Petroleum Corporation (NYSE:APC) is an American petroleum and natural gas exploration and production company. Not only does it boast a core U.S. asset base (Permian & DJ basins), but it also runs operations in Africa, Mexico and Colombia.
The stock has a stellar writeup from RBC Capital’s Scott Hanold (Track Record & Ratings). “Anadarko is our top large cap pick that provides both value and growth” he writes.
The value proposition for this stock is twofold. Above average implied shareholder returns with the potential for more stock buybacks and dividends increases. Indeed, the company has an approx. cash balance of $4 billion for debt reduction and buybacks.
Plus its free cash flow (FCF) yield could be ‘among the top inn the peer group’ according to Hanold.
“The company has a dividend yield at over 2%, in the top tier to the peers. We think increased dividends will be another outlet for FCF” writes the analyst, citing the company’s sustainable (and highly competitive) 10-14% production growth rate for oil. Get the APC Stock Research Report.
Top Stock Idea: Xylem (XYL)
Xylem is the largest publicly-traded US water equipment and services company. The company wants to, as it says, “solve water” by creating innovative and smart technology solutions to meet the world’s water, wastewater and energy needs.
This sets XYL up for a strong 2019. As Dray explains. “with investors increasingly nervous over the industrial cycle peaking and a potential economic deceleration, we expect defensive names with long-term megatrend appeal and a dedicated base of water-focused investors like Xylem to benefit from any prospective risk-off market rotation.”
And Xylem specifically offers attractive scarcity value. This is thanks to its differentiated water treatment know-how, including its early-mover advantage in the relatively new arena of smart water networks.
“Broadly, we continue to be impressed by Xylem’s leverage to the sustainable/defensive megatrends of water quality, water scarcity, and water security” concludes Dray. Get the XYL Stock Research Report.
TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.