Tuesday's best stock ideas

The author sees U.S. Bancorp (USB) shares as an attractive buy after a 22% drawdown since August. He sees Q3 earnings as a surprise potential due to the regional bank's deposit growth and integration of Union Bank into business operations. As interest rates stabilize, savers will likely return to depositing balances in banks, providing upside potential for USB. The bank’s acquisition of Union Bank could also bring positive updates and save them $900M in run-rate costs, attracting more investors. Despite the possibilities of weak deposit flows and delayed benefits from the merger, the author sees a low-risk, high-reward potential for USB due to its current discounted valuation and 6.2% dividend yield. He expects USB shares to increase by approximately 45% based on a projected price-earnings ratio of 10-11X for FY 2024 earnings. Hence, even though there are few sectors that escaped the recent valuation meltdown, the author considers USB as a standout opportunity.

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The author advocates for Philip Morris (PM) due to its shift towards Smoke Free Products (SFPs), aiming for SFPs to constitute over 50% of revenues by 2025 from 35% currently. PM's new 2024-26 targets include a 9-11% ex-FX EPS growth, with a 6-8% revenue growth outlook. The U.S. entry of PM's IQOS is structured to mitigate risks, aspiring for a ~10% market share by 2029. Despite a 3% cut in 2023 EPS outlook due to currency issues, new offerings like LEVIA and ZYN Ultra are seen positively. At a P/E of 16.5x and a 5.6% Dividend Yield, the author foresees a 98% total return by 2026, reinforcing a 'Buy' recommendation. The upward re-rating potential from higher SFP contribution, favorable positioning among ESG investors, and a possible transition to a buyback plan post-2025 are additional bullish indicators.

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The author expresses bullish sentiment towards Devon Energy (DVN), given its current undervalued status compared to its peers. Exxon Mobil's possible acquisition of Pioneer Natural Resources has increased the spotlight on Devon Energy due to both its attractive valuation and production capabilities. Devon Energy trades at 6.6x its forward EPS estimates, a significant discount compared to Pioneer's 9.9x and Exxon Mobil's 12x. Although Pioneer may attract Exxon due to its Permian Basin resources and possibly retiring CEO, Devon's cheaper valuation makes it more appealing. Despite its multi-year low trading price, Devon continues to scale its oil production, expecting Q3 production to range between 322K to 330K barrels per day. The author also highlights Devon's attractive dividend yield, brought about by the energy company's robust dividend distributions amidst higher oil prices. The author advises investors to consider strategic portfolio restructuring, suggesting buying Devon at its current low prices while selling Pioneer at its all-time highs.

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Brighton Pier Group (PIER.L) has shown notable growth over the last decade with an impressive 12.4% CAGR on revenue and a 37% CAGR on EPS. Despite joining the industry in 2016, the company has used both organic growth and acquisitions to establish a formidable foothold. The company's recent underperformance, with shares down from their recent top of £1.08, is an anomaly when contrasted with its performance over the last 10 years. Furthermore, the Brighton Pier Group currently trades at a TTM P/E of 2.44x, below its 5-year average of 4.5x, indicating undervaluation. Another encouraging sign is the improvement in the company's gross margin from 78.9% in 2013 to 86.2% as of September 2023. The company's diverse portfolio, popularity of its sites, and positive growth outlook make it a compelling investment, despite the increased debt levels driven by Covid-19. The company is actively working to restructure and pay down this debt.

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Eagle Point Capital is bullish on Davita, which leads the dialysis industry in the U.S. with a combined market share of 75% together with Fresenius. DaVita's dominant position makes it the industry’s lowest cost producer. The company has been struggling with COVID-19, as many patients missed treatments or passed away during the pandemic, resulting in negative treatment volume growth of 2% in the years 2021 and 2022. However, treatment volume has been growing for two consecutive quarters, signalling business normalization. Despite a disappointing proposed increase of 1.6% in dialysis treatment payment rates by the Centers for Medicare & Medicaid Services (CMS) for 2024, Davita's large size gives it bargaining power over commercial insurers. With a current earnings multiple of ten times, less than the industry's historical valuation of 17 times, and the company's leverage ratio nearing their goal of 3.5, Eagle Point Capital believes Davita will resume buying their stock and their multiple will normalize. Despite the increase of GLP-1 and GLP-2 inhibitors like Ozempic, Wegovy and Mounjaro causing weight loss, a major factor of ESRD, Davita estimates that GLP1-s could only impact around 6% of its potential patients over the long term, signalling lower risk. The bearish event of the company's stock dropping by 20% in November due to the pandemic's effects, followed by a rebound to almost $100, reinforces Eagle Point Capital's bullish stance that Davita's long-term prospects have not waned.

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The author recommends Alico Inc. due to its vast Florida land assets, notably in citrus farming, despite setbacks from Hurricane Ian and citrus greening disease. Post-storm, Alico's share price dipped but is expected to recover through insurance and likely Federal relief, similar to aid received after Hurricane Irma, totaling an anticipated $40-50 million. This relief could offset debt or fund share buybacks. The hurricane also spiked orange juice prices, promising higher revenues for Alico. Efforts to combat citrus greening, particularly testing Oxytetracycline, could rejuvenate citrus yield and improve finances. Alico's management, incentivized through a share price-linked bonus structure, and strategic land sales align with shareholder interests. The company is exploring better land use for potential developments and marketing 23,000 acres of ranch land, which could fetch over $115 million, further solidifying its financial stance. Compared to other real estate firms, Alico appears undervalued with a target equity value of $290 million or $38.00/share, indicating over 50% upside from the current price. Through improving citrus operations, monetizing non-core assets, potential land development, and anticipated relief funds, Alico presents a significant investment opportunity at a large discount to its net asset value, according to the author.

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