As the stock market has soared to record highs unimagined by many investors a few months ago, the odds of finding reasonably priced stocks with significant upside potential has become more challenging. Nonetheless, 6 well-known investing gurus have identified a variety of overlooked stocks that they say have potential, according to Barron's in a recent cover story, as outlined below. These stocks could see even bigger price gains if the Federal Reserve cuts interest rates on Wednesday, a move that's widely expected.
These 6 gurus are: Scott Black, founder and president of Delphi Management; Abby Joseph Cohen, senior investment strategist at Goldman Sachs; Henry Ellenbogen, former manager of T. Rowe Price New Horizons fund; Todd Ahlsten, lead portfolio manager of the Parnassus Core Equity Fund; Meryl Witmer, a general partner of the hedge fund Eagle Capital Partners; and William Priest, CEO of Epoch Investment Partners.
Significance For Investors
"Investors are looking for two things: They want a resolution of the U.S.-China trade dispute, and the bond market is pricing in an interest-rate cut this year," said Scott Black. "If the trade dispute is resolved, the market could take off, even though stocks are expensive. More likely, interest rates will come down because the U.S. economy is slowing," he added.
- Stocks with big upside potential still can be found in a pricey market.
- Trade and interest rates are key concerns for investors now.
- Small-cap and mid-cap stocks could outperform large caps if volatility rises.
Scott Black's Picks
Black recommends Kemet Corp. (KEM), the leading manufacturer of capacitors, a key component of circuit boards. The stock is down by nearly 25% from its 52-week high. The consensus estimate calls for a 36% increase year-over-year in 2Q 2019 EPS, per Yahoo Finance.
"The semiconductor market has been in a slump, but Kemet manufactures diverse devices for a variety of end markets. At six times expected earnings, the stock is practically being given away," Black says.
Black's other pick is TriplePoint Venture Growth BDC Corp. (TPVG), an established business development company (BDC) based in Silicon Valley, with a dividend yield of nearly 10% and a forward P/E less than 9. "This is a growing franchise and an interesting way to participate in the venture-capital business," according to Black.
Abby Joseph Cohen's Favorites
Abby Joseph Cohen suggests the SPDR S&P Dividend ETF (SDY). "I like it because it is linked to the S&P 1500, which means it can include mid-cap and small-cap names," she said. "Small and mid-cap stocks could outperform large-caps should there be increased volatility like we saw in November and December of last year," added Joseph Cohen.
Cohen also likes Japanese auto-parts company Denso Corp. (6902.Japan). She observes: "Denso supplies Toyota Motor [Corp.] (TM) the hybrid market leader, with many core pieces needed to build these vehicles. A lot of what Denso makes ultimately could be modified for use in fully electric vehicles."
Cohen's final pick is U.S. pharmaceutical company Eli Lilly & Co. (LLY). Goldman's analysts, she says, see strong potential for its new products in the areas of diabetes, cancer, pain management, and immunology, and project that EPS will grow at a compound annual growth rate (CAGR) of 14.6% in the 2019 to 2022 time frame.
Todd Ahlsten's Shopping List
Todd Ahlsten recommends semiconductor manufacturer Nvidia Corp. (NVDA). He said: "Nvidia’s best days are ahead. The opportunity is tremendous." In particular, he is enthusiastic about a software system called CUDA. "About a million people are developing GPUs based on CUDA software. This gives Nvidia a very wide moat," he says.
Nvidia also has a health care and medical imaging platform called Clara. "This is called domain-dependent expertise, and it could give the company a long runway for growth," Ahlsten notes. He adds: "Data centers use a ton of energy. Nvidia’s GPUs and CUDA are going a long way toward helping reduce energy demand."
To be sure, the outperformance of these guru bargains depends heavily on a stable or expanding economy fueled not only rate cuts, but an end to a U.S.-China trade war that has already hurt GDP growth. Like other stocks, these bargain plays could turn sour if the economy downshifts sharply or if an expanded trade war sends the market into a prolonged decline.