Recent top stock upgrades from Wall Street analysts can often mean compelling long-term opportunities. When a widely-followed analyst raises the rating or price target on a company, investors pay attention. Such upgrades are usually based on a favorable change in the underlying business, an improving growth outlook or an attractive valuation.
Academic research indicates that positive analyst recommendations can significantly influence stock performance, generating abnormal returns that exceed the market average. This effect is observed across various groups of analysts, suggesting that investors can benefit from incorporating these recommendations into their investment strategies. With that information, here are the three top stock upgrades ready to generate lucrative returns for investors in the second half of 2024.
Digital Realty Trust (DLR)
We start our discussion on top stock upgrades with the real estate investment trust (REIT) Digital Realty Trust (NYSE:DLR), which provides data center, colocation and interconnection solutions. With its comprehensive service offerings, it is well-positioned to capitalize on the growing demand for data center capacity worldwide.
First quarter 2024 earnings from Digital Realty Trust revealed record leasing volume and favorable pricing trends. The REIT posted its highest bookings quarter, benefiting from robust demand for data center capacity, particularly from artificial intelligence (AI)-related workloads. While revenue declined by 1% year-over-year (YOY) to $1.3 billion, EPS jumped 310% to 82 cents.
Meanwhile, J.P. Morgan Chase (NYSE:JPM) sees the company as a substantial beneficiary of cloud and AI demand for data center capacity, suggesting room for further multiple expansion. The investment bank upgraded DLR stock to Overweight, increasing its long-term growth rate estimates due to the robust industry outlook and improved pricing environment.
The REIT continues to launch new products like the Private AI Exchange to support enterprise AI adoption. This platform addresses the growing complexity and performance needs of AI deployments, ensuring connectivity and data processing. The goal is to support enterprise AI infrastructure, enabling rapid creation and extension of AI solutions with robust data and network capabilities.
Year-to-date, DLR stock is up 13%. Shares are trading at a price-to-book (P/B) ratio of over 2.5x. Meanwhile, analysts’ 12-month price targets suggest a potential upside of 5% from current levels.
SAP (SAP)
We continue our discussion of top stock upgrades with the Germany-based global leader in enterprise application software (ERP) SAP (NYSE:SAP). With its comprehensive suite of applications, the company provides solutions that help businesses streamline operations and drive digital transformation.
The software conglomerate reported robust first-quarter fiscal 2024 performance. Total revenue grew 8% YOY to 8.0 billion euros. Despite a restructuring provision of 2.2 billion euros, SAP’s operating profit rose by 16%.
BMO Capital of Bank of Montreal (NYSE:BMO) has upgraded the enterprise software giant, suggesting a high degree of visibility into future booking, thanks to growth in cloud offerings. In the first quarter, SAP saw cloud revenue jump 25% to 3.9 billion euros, while cloud backlog grew 28% YOY marking the fastest growth on record. The company is expected to expand the distribution of its generative AI products in the coming months to further drive cloud growth.
Year-to-date, SAP stock is up 33%. Shares are currently changing hands at 42 times adjusted forward earnings and 7 times trailing sales, which implies a premium valuation. Still, Wall Street’s 12-month price target suggests an 8% upside potential from current levels.
United States Steel (X)
We conclude our discussion of top stock upgrades with the steel producer United States Steel (NYSE:X). It manufactures a wide range of products for various industries, including automotive, industrial machinery, construction and oil and gas industries.
In the first quarter of 2024, revenues for United States Steel declined 7% YOY to $4.16 billion, highlighting the challenges faced by the steel industry amid volatile demand and pricing pressures. Yet, adjusted EPS increased 6% to 82 cents, up from 77 cents in the prior-year quarter.
Nippon Steel (OTCMKTS:NPSCY) is planning to acquire U.S. Steel in an all-cash transaction valued at $55 per share, an advance of over 45% from its current price level. European regulators have approved the deal. It should bolster U.S. Steel’s capabilities and market reach. However, in the U.S., politicians from both parties, along with the United Steelworkers Union, are pushing back against the transaction.
BMO Capital has recently upgraded the company to Outperform, indicating that shares are fundamentally undervalued despite the uncertainties related to the Nippon Steel deal. The investment bank projects the company’s investments should lead to improved profitability and growth.
Year-to-date, X stock is down 22%. Shares are reasonably priced at 11.5 times adjusted forward earnings and just 0.5 times trailing sales. Finally, analysts’ 12-month price target stands at over $44.50.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
