Credit Suisse says buy these 15 stocks that represent its analysts' 'highest-conviction' calls and are set to outperform despite the market's doubts

Caetano Barreira/Reuters

Analyst consensus can be a valuable tool for investors.

By pooling the opinions and ideas of some of the smartest minds on Wall Street, analyst consensus allows the average investor to build a case for their own investment ideas. After all, if a large group of professional analysts likes a stock, why shouldn't you?

But analyst consensus is a double-edged sword. When everyone sees the upside to a stock, the market may push the price too high, and your potential investment can become overvalued. 

So, the trick is to find a stock that not only has strong fundamentals and catalysts that will propel its business forward, but also has been overlooked or underestimated by the rest of the market.

That's what makes a list like the one below an incredibly powerful asset for smart investors. And in a market that continues to climb to record highs regardless of what's thrown at it, investors could use some help finding attractive bargains. 

Credit Suisse recently compiled its US research analysts' "highest-conviction outperform ideas" from all across the stock market into one list. These are also stocks where "Credit Suisse analysts' estimates and target prices are above consensus and consensus is not overly bullish." To measure this, the report compares Credit Suisse analysts' EPS estimates for the next fiscal year and their target price estimates on a 12-month rolling basis to consensus estimates. 

The result is a comprehensive list of excellent investment opportunities that may just perform better than anyone expects. Below, we highlight the analysts' investment theses, the risks to their outlooks on each stock, and how they arrived at their target prices. 

Ticker: AMZN

Investment Thesis: "Our Outperform investment thesis for AMZN is based on the following: 1) ecommerce segment operating margin expansion as it grows into its larger infrastructure, 2) optionality for faster than-expected FCF growth vis-à-vis its advertising segment, and 3) upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by ongoing capital intensity in the business."

Pushback: "We believe that current investor expectations are that those sectors that saw cyclical headwinds during 2020 (advertising and more generally travel and ride share) should accelerate during 2021, and those sectors that saw a cyclical tailwind in 2020 (e-commerce and more generally online games and food delivery) should decelerate"

Target Price: "We use the discounted cash flow (DCF) method to calculate our $4,000 target price for Amazon. Our five-year DCF uses a 3% terminal growth rate and a market-implied discount rate derived by discounting our unlevered FCF (free cash flow) estimates from 2021 through 2026 to arrive at the stock's current trading price. We then applied this discount rate to our 2021-2026 unlevered free cash flow estimates for AMZN. Risks include: 1) Higher-than-expected capital intensity for either ecommerce or AWS and 2) extended duration of COVID-19 impact."

Source: Credit Suisse

Ticker: APTV

Investment Thesis: "We expect APTV to avg. ~7pts of organic revenue growth over market through 2025, one of the best growth outlooks within the space. The growth is driven by product lines such as Active Safety and High Voltage Electrification, which are tied to key secular trends in the automotive industry (i.e. Autonomy, Electrification, and Connectivity). Strategic decisions that prioritize cash flow (i.e. Autonomous JV with Hyundai) and a strong balance sheet also help to support APTV's growth. This combination of benefits should keep APTV favored by thematic and ESG investors. Moreover, we expect APTV has ample liquidity to navigate production shutdowns and a challenging industry backdrop." 

Pushback: "Valuation is rich given APTV is still an auto company exposed to the cyclical light vehicle end markets. However, we'd note that mid/high single digit organic revenue outgrowth over the market in 2018-20 despite volatile end markets provide a strong proofpoint of the company's ability to withstand tough macro. Moreover, thematic/ESG investors may be willing to pay a premium."

Target Price: "Our $170 target price assumes a 16.0x multiple on $3 billion of FY'22E EBITDA. We view the multiple as reasonable given APTV's best-in-class organic revenue outgrowth, as well as optionality related to electrification and autonomous driving. Risks: end market volatility, margin headwinds from tech spend."

Source: Credit Suisse

Ticker: CAT

Investment Thesis: "CAT is an industrial bellwether with a long cycle reflected in its sales which are highly correlated with the ISM PMI on a 3-month lag. CAT has undertaken significant restructuring since the prior industrial recession reducing $1.8B in structural cost and 25M of square foot capacity and earnings power and cash flow generation is underappreciated in our view. CAT retail sales have remained muted with Machines slowly recovering and E&T still near trough. Commodity prices including copper, iron ore and nickel have been strengthening and the depressed mining business should begin to recover. The oil and gas business should see a cyclical bounce as oil prices improve however exposure continues to weigh on the multiple in our view. CAT substantially reduced channel inventory in 2020 ($2.9B by year end) and should benefit from operating leverage in 2021." 

Pushback: "Concerns on the macro, valuation, lack of investment thesis outside of the cycle compared to peers, commitment to traditional energy, lack of marketing its alternative energy and ESG efforts to investors." 

Target Price: "Our $264 target price for CAT is based on 18.5x our 2023 EPS estimate, discounted back. This is a historically in-line multiple at this point in the cycle. Risks: general economic risk, rising material costs or supply chain distortions, execution risk, and dealership consolidation."

Source: Credit Suisse

Ticker: CHX

Investment Thesis: " CHX is our preferred defensive SMID OFS name, given its production orientation, high-quality portfolio, and idiosyncratic cost-out and revenue growth opportunities. We think a defensive name such as CHX merits investor attention, given a challenged near-term Oil Services outlook. In 2021, we expect continued year-over-year contraction in oilfield activity in the United States as well as in international markets. We think the long-term outlook for US Oil Services is structurally impaired vs. pre-downturn. Against that backdrop, we like CHX's defensiveness from a product perspective (more production, less D&C), quality (high-quality product portfolio), and idiosyncratic opportunities (on costs and revenues). We expect these attributes to drive better-than-peer performance over the next 12 months." 

Pushback: "If the cycle is turning (i.e., oil is finding a bottom & '21 is a recovery year for OFS markets), CHX's peers with more leverage to that upcycle will outperform. In this case, CHX is a relatively more defensive stock in a bull market. Also, CHX is already favored within the buy side community. We think the idiosyncratic opportunities on the revenue/cost sides continue to be underappreciated as CHX has traded more like a low quality OFS name." 

Target Price: " Our $21.50 DCF-based price target (7.5% WACC, 0% terminal growth) contemplates normalized Cash Flow Return on Investment (CFROI®) of ~14% (vs. long-term OFS/equipment manufacturing median CFROI of 8%/15%). Risks to our thesis include integration and expansion risk (APY-ECL Upstream), cost synergy realization, balance sheet leverage, term structure of debt maturities, geographic and geopolitical risk, and commodity price risk."

Source: Credit Suisse

Ticker: DVN

Investment Thesis: "DVN differentiates itself as the first among E&Ps to introduce and implement the 'base + variable' dividend approach, which we estimate should support a total cash return yield of ~6.5% on 2022E assuming current strip prices, well above E&P peers' ~2-3% and compelling vs. the S&P 500 at ~3%. Despite this attractive FCF/cash return yield, low balance sheet leverage among peers (net debt/EBITDX ~1.0x at YE21 and further down to ~0.6x at YE22 assuming strip prices), and continued track record of operational execution, shares are trading at steep discount to large-cap E&P peers on 2022-23E EV/DACF." 

Pushback: "Potential M&A."

Target Price: "At current strip prices, DVN trades at a ~1.5x discount to peers on 2022E EV/DACF, too wide a valuation gap in our view considering its ability/commitment to accelerate cash returns to shareholders and lower financial leverage. Our $30 target price is based on a blended ~5.0x 2022E EV/DACF and ~0.8x NAV. Risks: oil prices, operational execution."

Source: Credit Suisse

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