Skip to main content

3 Top Stocks with Tremendous Upside Potential

Growth stocks have been the story of 2020, but after a pullback, it may be time to start considering value stocks. These three stocks that could soar after the election: AmerisourceBergen (ABC), AutoZone (AZO), and Evercore (EVR).

Growth stocks have soared so far in 2020, as the SPDR 500 Growth ETF (SPYG) increased 73.5% from March 23rd to September 2nd, but valuations are getting stretched, which is part of the reason that the market has pulled back recently. That's why it makes sense to start considering value stocks, and I have found three with tremendous upside potential.

From September 2nd, the SPDR 500 Value ETF (SPYV) is down 4.3%, but the SPYG has lost twice as much (9.3%). In addition to high valuations in growth companies, value companies may become more attractive as analysts believe a massive stimulus program will be implemented after the election.

This could trigger higher inflation and higher interest rates, which would be beneficial to value stocks. In fact, value stocks have outperformed growth stocks after every election since 1980, regardless of party, according to Larry McDonald at the Bear Traps Report. This is because the party of the presidential winner typically holds control of the senate as well. This results in a new administration having the ability to get spending bills signed into law.

With the possibility of this type of environment, I have chosen three underpriced stocks, that I believe have a tremendous upside: AmerisourceBergen Corporation (ABC), AutoZone, Inc. (AZO), and Evercore Inc. (EVR).

AmerisourceBergen Corporation (ABC)

ABC is a leading global third-party logistics provider engaged in wholesale pharmaceutical sourcing and distribution of specialty, brand-name, and generic pharmaceuticals and related services. The firm is the second-largest pharmaceutical distribution company in the U.S., which essentially makes it recession-proof.

 

While the company has had recent negative press due to opioid litigations, I believe it is already factored into its price. Plus, ABC is expected to see a fast resolution in those cases anyway. Once those resolutions happen, the stock should see a substantial bump.

The company is also poised to benefit from the distribution of a COVID-19 vaccine. Factors such as an aging baby boomer generation, rapid biologic drug development, and strong pet ownership should drive demand for its conventional drug, specialty drug, and veterinarian distribution services. The company has had strong earnings growth over the past few years and is expected to report its latest financial results this week.

ABC is a highly profitable company with a return on equity of 40.7% and a return on invested capital (ROIC) of 22.7%. The stock is currently undervalued with a P/E of 13.1 and a price to sales ratio of only 0.1.

It is rated a "Buy" in our POWR Ratings system, with a grade of "A" for Trade Grade, and grades of "B" for Buy & Hold Grade, Peer Grade, and Industry Rank. Those are the components that make up our POWR Ratings system. The stock is also ranked #11 in the Medical – Services industry.

AutoZone, Inc. (AZO)

AZO is the dominant seller of aftermarket automotive parts, tools, and accessories to do-it-yourself customers in the United States. Automotive aftermarket retailers are usually recession-proof as most Americans rely on their vehicles to get to work and are more likely to purchase new parts to fix their cars than to buy a new one.

Plus, many people are reluctant to travel on public transportation in fear of catching the virus, which makes a company like AZO all the more critical. The company has been growing from a combination of new store openings and same-store sales growth. It's actually been generating record revenues for 29 consecutive years due to stable growth in the auto parts market and its stores' expansions.

AZO's e-commerce efforts also helped the company weather the pandemic's initial storm, and its cost-cutting initiatives resulted in strong gross, operating, and net margins. Another factor at play is the rise in the "do-it-yourself" arena. We have seen it happen in home improvement, but we are also now seeing it at play with cars, as more people are opting to fix their own cars during the pandemic.

The company has had stable sales and earnings growth and an ROIC of 26.1%. The stock is quite undervalued with a P/E of 15.9 and a free cash flow yield of 8.2%. AZO is rated a "Buy" in our POWR Ratings, with a grade of "A" for Industry Rank, and a "B" for Trade Grade and Buy & Hold Grade. It is also ranked #8 out of 51 stocks in the Auto Parts industry.

Evercore Inc. (EVR)

EVR is an independent investment bank that derives most of its revenue from financial advisory, including merger, acquisition, and restructuring advisory. While the firm has seen a large drop in M&A activity due to the pandemic, this has been offset by its underwriting business as there has been a spike in IPOs.

In the first half of 2020, its underwriting fees increased by 160% to $114.7 million. Plus, its M&A business may be on a rebound. In its most recent earnings call, management talked about exploring strategic deals. So. the stock is well-positioned for a bounce in M&A activity.

EVR reported its most recent financial results on October 21st. Both earnings and revenues outperformed analyst expectations. EPS came in at $1.11, a 192% surprise from the consensus estimate of $0.38. Revenues were $408.5 million, compared to the consensus estimate of $320.49 million.

The company has a very high free cash flow yield of 20.3% and a P/E of 14.4, indicating it's undervalued from its intrinsic value. The stock is rated a "Strong Buy" in our POWR Ratings system. It holds grades of "A" in Trade Grade, Buy & Hold Grade, and Peer Grade. It is also the #2 ranked stock in the Investment Brokerage industry.

Want More Great Investing Ideas?

Why is the Stock Market Tanking Now?

7 Best ETFs for the NEXT Bull Market

5 WINNING Stocks Chart Patterns


ABC shares were unchanged in premarket trading Tuesday. Year-to-date, ABC has gained 17.95%, versus a 5.33% rise in the benchmark S&P 500 index during the same period.



About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

More...

The post 3 Top Stocks with Tremendous Upside Potential appeared first on StockNews.com
Data & News supplied by www.cloudquote.io
Stock quotes supplied by Barchart
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms and Conditions.