Investors typically have a single New Year’s resolution in mind: to make more money. While the goal is decidedly easy, attaining it is a lot more difficult.
So, what’s the best way to build a return-producing portfolio? There are different strategies, for sure, but one way is to follow the guidance of the experts.
Every January for the last 15 years, investment firm Stephens starts the year with a Best Ideas list. The firm’s analysts choose stocks in each sector with the best fundamental investment characteristics, ones which they believe are poised to outperform the market in the following 12 months.
Looking into Stephens’ “top picks” list for 2020, we’ve chosen three stocks that TipRanks, a company that tracks and measures the performance of analysts, reveals as “strong buys” and offer healthy upside potential.
Aaron’s Inc. (AAN)
Let’s start with a look at Stephens’ specialty finance pick, rent-to-own retailer Aaron’s.
Aaron’s lets you lease household goods and furniture through monthly payments, following which, the buyer gets to own the leased goods. The model lets the underserved and credit challenged customers buy goods they otherwise couldn’t afford.
While its legacy brick and mortar stores have been the company’s main revenue driver in the past, Aaron’s Progressive Leasing arm, which provides lease-to-own financing to traditional retailers, has become a key revenue driver since Aaron’s bought Progressive in 2014.
Outlining increasing competition and the decline of Aaron’s store-based revenues as possible risks, Stephens’ analyst Vincent Caintic is “okay with this decline, so long as the decline does not accelerate and Progressive maintains its growth trajectory.” Caintic added, “In contrast with slowing consumer demand for financing (as we’ve seen with credit cards and auto lending), virtual rent-to-own should do well in 2020, primarily because the industry is still in its nascent growth stage. Customers who have not had point-of-sale financing opportunities in the past will now increasingly have the option due to the Aaron’s offering.”
Caintic reiterated an Overweight rating on Aaron’s stock alongside a price target of $80, indicating upside potential of 40%.
All in all, Wall Street’s confidence on the rental stock speaks for itself; AAN has received a whopping 6 “buy” ratings in the last three months. Meanwhile, the $84.33 consensus price target suggests a potential upside of 46% from the current share price.
Staar Surgical Company (STAA)
Stephens’ best idea for the medical device and hospital supply sector is implantable lenses developer, Staar Surgical.
The first quarter of 2020 should see Staar begin an FDA clinical trial for the company’s Visian EVO family of lenses. The implantable collamer lenses are designed to treat myopia and myopia with astigmatism. Staar is also poised to receive a CE Mark for its EDOF lens for the treatment of emerging presbyopia, which should prove a further catalyst for expanding the company’s addressable market.
Stephens’ Chris Cooley thinks Staar is “poised to continue to realize accelerating organic revenue growth coupled with margin expansion and GAAP profitability.”
According to Cooley, Staar’s revenue growth will be driven by the “high-margined Visian EVO offering.” The 5-star analyst expects gross margin to increase from 75% in CY19E to over 80% by CYE22. This will result in cash and cash equivalents increasing from $5 million to more than $25 million by CYE22.
Cooley added, “STAA’s uniquely positioned device portfolio possesses significant strategic value within a sector whose larger cap bellwethers are increasingly searching for opportunities to drive not only accelerating growth but also long-term margin expansion.”
Accordingly, the 5-star analyst reiterated an Overweight rating on Staar shares, with a price target of $56, which implies over 60% upside from current levels.
The Street is on the same page as Cooley. A Strong Buy consensus rating is formed from a unanimous 5 “buy” ratings. With an average price target of $49, the analysts believe the lenses developer can add 43% to its share price in the coming months.
CarMax Inc (KMX)
Revving up, we move onto the largest used car retailer in the US, CarMax. The Richmond, Virginia based company had an excellent 2019 and according to Stephens’ Rick Nelson, the bullish trend is set to continue in 2020.
What excites Nelson the most about KMX’s potential is its increasing focus on an omni-channel experience. “A sophisticated website platform featuring vast inventory selection, detailed vehicle specs, professional and consistent pictures, online financing options and transactional capabilities shifts sales dependency away from associates and towards leverage-able technology investments,” Nelson said. 50% of the platform’s roll-out is expected to be completed by February. SSS (same store sales) in Atlanta, the company’s most advanced omni-channel market, have increased at a double-digit rate since the launch.
The affordability of used cars is set to be a further catalyst for growth, too. As the spread in pricing between new and used vehicles increases, KMX is poised to take advantage; 78% of KMX’s inventory consists of nearly new cars, which provide most of the new technology features without the new vehicle price tag.
Nelson concluded, “We believe KMX’s ongoing roll out of omni-channel capabilities is a game changer, allowing the Company to capitalize on its trusted brand, close proximity to customers, vast inventory selection and logistical expertise… We expect KMX to be the primary beneficiary of shifting consumer purchasing preferences that favor an omni-channel experience.”
Therefore, the 4-star analyst left his Overweight rating and $115 price target as is, suggesting upside potential of 32%.
Overall, this ‘Strong Buy’ stock is no Wall Street secret. After all, in just three months, the stock has attracted 7 “buy” ratings versus 2 “holds.” With a return potential of 23%, the stock’s consensus price target stands at $106.88. In other words, optimism backs this used-car retailing story.