6 Top Stocks From Argus Research: A Mid-Year Review

As an independent research group, Argus Research is not beholden to specific companies for investment services and can therefore assess stocks from an unbiased an impartial perspective. Their advisors were standout performers in the MoneyShow.com annual 2019 Top Picks report and we turn to them now for updates on their January picks. Stephen Biggar, Argus Research We are maintaining our buy rating on PayPal Holdings following the company's first-quarter earnings report, which again demonstrated strong growth in payment volume and number of active accounts. The stock rose 37% in the first half of 2019. Management continues to forecast mid- to high-teens revenue growth, even with a 3.5% headwind from the sale of the company's receivables portfolios to Synchrony. In October 2018, PayPal entered into partnerships with American Express and Walmart . The American Express partnership allows PayPal to access American Express tokens and enables integration with the American Express platform, including the ability to transfer and use American Express rewards points at PayPal merchants. The partnership with Walmart enables PayPal to offer cash-in and cash-out money services at Walmart retail stores. PayPal Cash Mastercard customers can also use their PayPal balance to shop in store, on a mobile device and online at Walmart. At its most recent Investor Day in May 2018, management said that the company had an addressable market of more than 3.6 billion internet users, and had the goal of serving 1 billion of these users on its platform. The company sees significant growth potential from expanding financial services for underserved populations, including 'un-banked' Americans. PayPal, which was spun off from eBay in July 2015, is taking advantage of the changing payments landscape, and we believe that several trends favor the company's growth. These include greater adoption of mobile devices for payments, and the technological integration of different payment types and channels. With 277 million active accounts, PayPal is a leader in innovative payment mechanisms and has strong brand recognition. In our view, the company has several competitive advantages as it seeks to grow payment volumes. These include a strong international presence, with 100 million non-U.S. users in more than 200 countries. The company also provides merchants with end-to-end payment authorization and settlement capabilities, as well as instant access to funds. David Coleman, Argus Research We are maintaining our buy rating on First Solar Inc. , a leading solar energy company; we view the firm as well positioned in the solar industry based on its positive cash flow and solid balance sheet. The stock rose 55% in the first half of 2019. We also like the company's focus on cadmium telluride technology, which should provide a cost advantage relative to more commoditized technologies like polysilicon. In particular, FSLR's technological investments have enabled the company to lower the cost of solar generation on a per-watt basis and to improve its conversion efficiency. They have also helped the company to expand its opportunity set of utility-scale projects. On May 2, the company reported first-quarter 2019 net sales of $532 million, down from $567 million a year earlier, reflecting lower systems project revenue in the U.S. and Japan. The company reported a first-quarter GAAP loss of $0.64 per share, compared to earnings of $0.78 per share a year earlier. We had expected a loss of $0.05 per share. For all of 2018, EPS came to $1.36, compared to a loss of $1.60 per share in 2017. Along with the first-quarter results, management provided updated full-year 2019 guidance. Management projects net sales of $3.5 billion-$3.7 billion, up from its previous guidance of $3.25 billion-$3.45 billion. The company expects earnings to be back-end-loaded this year, with the firsrt half affected by plant start-up costs. We are lowering our 2019 EPS estimate to $2.71 from $2.99 and maintaining our 2020 estimate of $3.31. On valuation, FSLR recently traded at 22.1 times our 2019 EPS forecast, in the middle of the historical average range of 4.5-37.7 and below the peer average of 26.3. Investors should expect FSLR's financial results to be uneven on a quarter-to-quarter and year-to-year basis due to the timing of revenue recognition. Chris Graja, Argus Research In May, Home Depot reported fiscal first quarter EPS of $2.27, up 9.1% from the prior year, reflecting a 6.4% increase in operating income and continuing share repurchases. The stock rose 22% in the first half of 2019. Increasing returns on capital, signs of improving customer service during recent store visits, a solid economic environment, and impressive execution of the business plan support our conviction that even after raising the operating margin by more than 400 basis points over the last five years, Home Depot still has room to increase earnings. In the first quarter of fiscal 2020, the trailing four-quarter return on invested capital was 45.4%, up 940 basis points from last year's first quarter. Based on Home Depot's sales forecasting, which has correctly anticipated growth in the home improvement market, the most important drivers of future sales are likely to be based on the overall economy rather than housing activity. HD is focusing on strong GDP growth, housing turnover, household formation, homeowners' equity and the age of the average home. Some homeowners may stay put as a result of higher mortgage rates and use their improved finances to make improvements to their existing home. We continue to believe that there has been significant underinvestment in housing. About 70% of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. Private Fixed Residential Investment is still near a 66-year low, at 3.2% of GDP, and well below the average of 4.6% since 1946. Fixed residential investment has been a drag on economic growth in the last three quarters. We would expect PFRI to approach and likely exceed the long-term average before we'd be concerned that too much capital has been allocated to residential housing. We are maintaining our buy rating with a price target of $220. John Eade, Argus Research Lockheed Martin Corp. has consistently surprised Wall Street in recent years, regardless of whether defense spending is rising or falling. The stock rose 38% in the first half of 2019. In recent quarters, government spending on defense has again started to accelerate, which should boost earnings. We have a favorable view of the company's focus on international revenue diversification (now 25% of sales), and expect increased geopolitical tension to benefit sales and earnings going forward. The shares face ongoing headline risk, as the company's F-35 fighter jet program has been targeted at times by President Trump, whose trade and tariff tweets and threats have also had a negative impact on the share price. But management has a history of navigating through challenges. The company is mindful of shareholder returns and has raised the dividend at a double-digit rate for the past 16 years while also aggressively buying back stock. Based on the company's pipeline growth and historical focus on margins, we are raising our 2019 EPS forecast to $20.20 from $19.45. Our estimate is above the midpoint of management's target range and implies growth of 11%. We look for accelerated growth in 2020, reflecting the backlog as well as some changes in pension responsibilities and accounting, and are boosting our EPS forecast to $24.25 from $21.40. Our long-term EPS growth rate forecast is now 10%, up from 9%. The current yield of 2.9% is high for the industry. Our target price for this buy-rated blue-chip defense company is $370, raised from $330, based on expectations for faster growth. We view the shares as a suitable core holding in a diversified portfolio. Jim Kelleher, Argus Research Arista Networks rose 24% in the first half of 2019. The stock sold off following a generally upbeat analyst & investor day on June 6. Investors responded negatively to a more cautious growth outlook from the company. At the same time, Arista announced further refinement of its campus strategy, an enhanced partnership with Microsoft Azure, and other long-term positives that reflect a further widening of Arista's available market. Building on its Mojo Networks acquisition and its cognitive campus architecture, Arista announced a new family of campus leaf switches and WiFi 6 (802.11ax) access points. Arista first announced its cognitive campus strategy in 2018, with spline switches that combine the functions of core and access switches. Also during 2018, Arista announced its CloudVision solution for unified wireless and wired campus environments. Arista is also working with Microsoft to integrate Azure Cloud with Arista EOS to manage hybrid-cloud environments. The shares were slammed in May, falling 15% after the company delivered better-than-anticipated first-quarter results but expressed caution regarding the second-quarter outlook. Arista, which has seen a slowing in its business with cloud titans, did not provide a more upbeat outlook for that business. We expect this digestive phase to work down across 2019, with strong growth resuming among cloud titans in 2020. Having declined from peak prices in the $320s to the $250 level, ANET shares trade at levels last seen (briefly) in autumn 2018 and before that in winter 2018. We regard share-price weakness as an opportunity to establish or add to positions in what we regard as a premier long-term holding in the cloud network space. We are reiterating our buy rating to a 12-month target price of $320. In addition to Arista Networks, I have a buy-rating on Nvidia Corp. . The stock is up 24% in the first half of 2019. The company continues to post negative annual returns but is seeing slightly more positive signs in its core end markets. These include gaming, hurt by crypto demand collapse, and data center, which has been impacted by inventory absorption at the cloud titans. Those markets showed hopeful signs in the fiscal quarter ended April 2019, although the pace of recovery will likely be measured rather than rapid. Professional Visualization continues to grow, and automotive has resumed growth after de-emphasizing infotainment to focus on autonomous. In gaming, Nvidia has been impacted by run-off of excess mid-range inventory related to the demise of the crypto-currency boom. Deteriorating economic conditions mainly in China had also impacted consumer demand. Nvidia has also experienced disappointing sales of the new generation of flagship gaming GPUS using ray-tracing technology. We expect this market to perk up in summer 2019 as OEMs begin building product for the upcoming holiday season. In March, Nvidia announced a deal to acquire Mellanox , which provides chips facilitating advanced data center connectivity. We believe the $6.9 billion all-cash bid is reasonable for a high-quality and profitable company with market leadership in a key, wide-moat niche. Nvidia is acquiring complementary (rather than overlapping) assets, and the combination will strengthen NVidia's position in the AI data center. We regard any weakness in NVDA as an opportunity to establish or add to positions in this preeminent vehicle for participation in the AI economy. We believe that most technology investors should own NVDA in the age of deep learning, AI, and GPU-driven applications acceleration. We are reiterating our buy rating with a 12-month target price of $200. The shares recently traded at 22.4 times our 2019 EPS forecast, above the peer median of 20.1 for electric and gas utilities with fully regulated operations, and above the midpoint of the five-year historical range of 16.3-23.0.

6 Top Stocks From Argus Research: A Mid-Year Review

These top picks rose between 22% and 55% in the first half of 2019.

Columnist Conversation

Monday Morning Fibocall for 10/26/2020

This Weekend on Real Money

Friday Morning Fibocall for 10/23/2020

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.