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🛒 Jefferies' Four Bargain Stocks

🛒 Jefferies' Four Bargain Stocks

Plus, nothing good happens after 2am.

February 18, 2024

Happy Sunday to everyone on The Street.

Nothing good happens after 2 am. That's what my parents told me growing up. I didn't believe them at the time, but now we have data to prove it from the buy now, pay later company, Affirm. According to CFO, Michael Linford, online shopping after midnight is not a great idea. It leads to riskier transactions and a greater likelihood that someone might default on their loans.

“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”

According to a Federal Reserve Bank of New York report, Americans owed $1.13 trillion on credit cards as of the fourth quarter of 2023. This was a $50 billion increase from the previous quarter as inflation climbed along with interest rates. Probably nothing to worry about right? Yikes. Let's dive in.

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Review

The S&P 500 and Nasdaq 100 both halted their five-week winning streak on Friday, prompted by two inflation reports that were hotter than expected, giving fuel to concerns the Federal Reserve might delay interest rate cuts.

Earlier in the week, the Consumer Price Index report revealed an annual inflation rate of 3.1%, surpassing the anticipated 2.9%. Additionally, core inflation, excluding energy and food items, came in higher than predicted at 3.9% instead of the expected 3.7%.

Worries about a challenging path ahead to reach the Fed’s 2% target intensified Friday as the Bureau of Labor Statistics reported a 0.3% monthly surge in the Producer Price Index. This marked a rebound from December’s 0.1% contraction, exceeding the anticipated 0.1% increase.

Traders adjusted their expectations on Fed policy, reducing speculation of cumulative rate cuts for 2024 from 120 to 95 basis points, effectively removing a 25-basis-point rate cut from consideration.

Across all maturities, Treasury yields saw an increase, notably with the two-year yield rising to 4.66% and the 10-year yield surging to 4.3%.

The rise in rates had a negative impact on markets, particularly affecting interest-sensitive sectors like technology, consumer discretionary and real estate. Among indices, the tech-heavy Nasdaq 100 performed below its large-cap peers.

Bitcoin surged past the $50,000 mark, catapulting to a $1-trillion market valuation just a month after the Securities and Exchange Commission granted approval for the first spot Bitcoin exchange-traded fund.

In a similar trend, Nvidia, the semiconductor giant riding the artificial intelligence wave, surpassed both Amazon.com and Alphabet, solidifying its position as the third-largest U.S. company, trailing only Apple and Microsoft.

The Magnificent Seven U.S. tech giants, including Microsoft, Apple, Alphabet, Amazon, Meta Platforms, Nvidia and Tesla, have experienced a 140% stock gain in the last year, triggering market overheating and bubble concerns, according to Bank of America's chief market strategist, Michael Hartnett.

Lastly, after testing Apple’s Vision Pro, Meta Platforms CEO Mark Zuckerberg declared Meta’s Quest 3 virtual reality headset superior in overall quality, citing factors like comfort, ergonomics, a wire-free experience and a vast content library. His comparison aims to dispel assumptions that higher cost equates to better quality.

Preview

Economic Data

Monday: None scheduled, President's Day holiday
Tuesday: U.S. leading economic indicators
Wednesday: Minutes of Fed's January FOMC meeting
Thursday: Initial jobless claims, existing home sales, S&P flash U.S. services PMI
Friday: None scheduled

Earnings

Monday: Transocean Ltd.
Tuesday: InterContinental Hotels Group, Home Depot, Walmart, KBR
Wednesday: Rio Tinto, BAE Systems, Sprott
Thursday: Lenovo, Nikola, Fiverr, Rolls-Royce Holdings
Friday: Bloomin’ Brands, Warner Bros Discovery

Bargain Shopping the Stock Market

Undervalued Stocks

With the S&P 500 at record highs, Jefferies is going thrift shopping.

The investment bank made a list of stocks that might be undervalued but could be due for a turnaround.

To make the list, a company has to have a market cap of at least $2 billion, negative returns over the past 12 months, and at least a 20% return potential upside for the next 12 months.

Going Places

Planes and automobiles are getting some love from Jefferies.

United Airlines (UAL) made the list. The stock is currently trading at about $42 per share, below its 52-week high of $58 per share.

General Motors (GM) is on the list as well. The automobile maker beat top and bottom line expectations with its Q4 earnings report. Its consensus price target implies an upside of around 28%.

Sweet Tooth

Starbucks (SBUX) and Hershey (HSY) are on the roster as well.

The coffee maker has seen shares plummet around 10% in the last year.

Hershey shares have fallen by roughly 17% over the past 12 months. Its consensus price target implies an 8% upside. Analysts bullish on the chocolate maker argue that it has pricing power that could propel revenue higher.

If you enjoy a good bargain, peruse Jefferies’ list and see if you could get some bang for your buck.

Which stock will perform best in 2024?

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Diamonds in the Rough

Potential Winners in the Banking Sector

Financial stocks are feeling the pressure as concerns over commercial real estate lending rise.

The KBW Regional Banking Index (KRX) has fallen more than 7% in the past two weeks. The tumble comes after New York Community Bancorp (NYCB) surprised investors with a poor quarterly earnings report. Its commercial real estate exposure was a concern.

Amid the turmoil, one fund manager sees an opportunity. Cole Smead of Smead Capital highlighted two bank stocks that could benefit.

Desert Oasis

Smead is playing offense with Arizona-based Western Alliance Bancorporation (WAL).

The bank’s return on equity is beating out its peers, at 16.1% related to a peer average of 13.4%.

The stock currently trades at around $60 per share, significantly lower than its share price of $120 in early 2022.

Seeing Double

Another stock Smead likes is UniCredit (UNCRY). He argues that the European bank is trading too low, with investors overemphasizing the economic troubles on the continent.

UniCredit has announced buybacks which the portfolio manager says will help boost the stock price. He believes the stock could double.

Despite his optimism, Smead acknowledges that there are currently elevated risks within the banking sector. He cautions that any investor following his lead should expect volatility in the next few years.

Are you bullish or bearish on bank stocks?

Electrify Your Portfolio

Going Green

Artificial intelligence, cryptocurrency, and data centers are changing the world. But they couldn’t do a thing without power.

The International Energy Agency predicts that electricity usage within these sectors could double by 2026. This usage would be almost equivalent to the electricity consumption of the whole country of Japan.

Many organizations are looking to migrate to green energy for data centers in the future. Barclay’s has compiled a list of stocks that might benefit from this movement.

Renewability Is Key

The firm considered three investment areas when compiling its list. These include data center operators, data center suppliers, and data center grid infrastructure builders.

Some big names like Amazon (AMZN) and Microsoft (MSFT) made the list. Microsoft is aiming to use only renewable energy by 2025. Nuclear energy might be a big part of this shift. Shares of Microsoft are up over 57% within the past year, with a predicted 14% upside over the next 12 months.

Amazon is predicted to play a significant role in the AI-fueled data center boom. Analysts are giving the stock a $203.95 average price target implying an upside close to 20%.

Storage and Efficiency

Digital Realty Trust (DLR) is another player on Barclay’s radar. The company has over 300 facilities globally, with about 126 of them already matched with 100% renewable energy. Shares are up 26% over the past 12 months.

Barclay’s also likes Advanced Micro Devices (AMD). The semiconductor company aims to improve its product’s energy efficiency by 30 times from 2020 to 2025. The company currently accounts for a quarter of the global server CPU market.

Barclay’s has options for investors who want to benefit from the green energy movement.