12 Contrarian Plays For The Bears

Credit Suisse’s Andrew St Pierre wrote about some companies for which there is a divergence from the consensus view. The analyst mentioned 12 Underperform-rated stocks for which he is “more cautious than consensus.”

Abaxis

Abaxis Inc ABAX - Rated Underperform, with a Price Target of $39.

The company’s competitor IDEXX Laboratories, Inc. IDXX is gaining traction, despite distribution changes. Pierre believes there would be diminishing gains from new distribution relationships.

“Slowing near term revenue growth with the anniversary of several one-time factors, intensifying competition, and diminishing contributions from new distribution relationships does not bode well for expected EPS growth and calls into question its lofty valuation,” the analyst wrote.

American Express

American Express Company AXP - Rated Underperform, with a Price Target of $62.
The Street may be underestimating the costs of rewards, given intensifying competition, and this could adversely impact the company’s earnings by as much as $0.85 over time.

Pierre mentioned that the negative rating was based on:

1. “Increased competition for cobrands has raised the cost of these contracts 20% or more (Delta/Starwood) while others with well over 10% of spend have left Amex (Costco US and Canada, JetBlue).”
2. Rising rewards costs
3. MDRS likely to decline in 2016 and beyond
4. The company’s exposure to rising rates
5. Estimates already reflect impact of the company’s efforts to reduce expenses and repurchase shares

Big Lots

Big Lots, Inc. BIG - Rated Underperform, with a Price Target of $39.

Although there has been an improvement in the company’s performance, there are concerns related to the long-term sustainability of its recovery, and it may be “only a matter of time before momentum slows,” the Credit Suisse report said.

The lack of visibility around Big Lots’ longer-term comparable store sales profile is the biggest issue. Pierre expects comps to struggle to reach the current levels after 2016.

Buffalo Wild Wings

Buffalo Wild Wings BWLD – Rate Underperform The Street expects a recovery in the pace of traffic growth. This may be aggressive, since the company’s aggressive pricing over the past few years may “finally be driving the value-conscious segment of its customer base to more affordable alternative,” Pierre said.

Dollar Tree

Dollar Tree, Inc. DLTR - Rated Underperform, with a Price Target of $70.

The analyst believes that the Street is underestimating the execution risk associated with the company’s acquisition of Family Dollar Stores, Inc. FDO as well as the level of investment required to achieve a turnaround of this underperforming asset.

“We remain cautious on DLTR's acquisition of FDO given concerns about execution risk, management's ability to turn around this perennially poor performing asset, and its overall strategic fit,” the report stated.

Expeditors International of Washington

Expeditors International of Washington EXPD - Rated Underperform, with a Price Target of $42.

“The market-implied expectations for the stock remain at historically high levels after EXPD was the only stock in our coverage universe to post a gain in 2015,” Pierre mentioned. He expects the stock to underperform over the next 12 months.

Expeditors International of Washington’s operating profits and margins are expected to contract in 2016, due to the weak volume demand environment and challenging yield comps.

Ford

Ford Motor Company F - Rated Underperform, with a Price Target of $13.

The company is likely to underperform other OEMs, since its fixed costs have been rising, offsetting pricing/mix benefits from new product launches.

“We are cautious on F because we believe that the combination of further fixed cost increases, passed-peak product cycle, poor inventory management, and inability to generate self-help savings will pressure margins for F,” Pierre commented.

OvaScience

OvaScience Inc OVAS - Rated Underperform, with a Price Target of $4.

The negative rating reflects technological uncertainty and commercial execution risks. “Data to-date suggests that AUGMENT is largely in-line with clinic-reported IVF pregnancy rates, and in fact may be inferior, to standard IVF live birth rates,” the analyst said.

He added that apart from clinical uncertainty, there was commercial risk, since merely 22 commercial AUGMENT procedures had performed in 2015, significantly missing management’s guidance of 1,000.

Potash Corporation

Potash Corporation of Saskatchewan (USA) POT - Rated Underperform, with a Price Target of $15.

Although the market has begun to recognize the impact of weak potash prices, more disappointment is likely given the abundant global inventories and likely weaker-than-expected demand. Moreover, significant new capacity is scheduled to come online in 2017, which could keep global operating rates consistently below ~80 percent, exerting pressure on forward prices.

“We are cautious on POT given global pricing concerns as well as risks around FX, working capital and dividend payment – CSe dividend payout is ~97% of FCF in 2017; in our view the ability to maintain the dividend is contingent on a robust acceleration in demand,” Pierre mentioned.

Valmont Industries

Valmont Industries, Inc. VMI - Rated Underperform, with a Price Target of $106.

Several of Valmont’s businesses, like Energy & Mining, Utility and Irrigation, continue to be cyclically challenged, with limited visibility for improvement. “We believe that the market is expecting a much more accelerated recovery than is prudent...Significant execution risk exists for the company as it tries to ‘right-size’ its businesses,” the report stated.

Virtu Financial

Virtu Financial Inc VIRT - Rated Underperform, with a Price Target of $20.

Pierre believes that “opportunities that arise from electronification are misunderstood, for Virtu to prosper the company has to be willing to be exposed to the risk attached to trafficking in illiquid asset classes or asset classes have to move to a highly electronic stage, moving from voice to partially electronic doesn’t cater to Virtu’s business model.”

Opportunities in China and India are likely to take time to materialize, with significant regulatory hurdles. Moreover, the analyst believes that the Street could be underestimating the stiff competition the company faces and may continue to face.

Willbros Group

Willbros Group Inc WG - Rated Underperform, with a Price Target of $1.90.

The oil and gas segment posted its fifth consecutive loss last quarter, continuing to be negatively impacted by problems projects. Results for 1Q16 are likely to be similar to those reported it Q4, tied to project execution and weaker end market demand.

Leverage issues continue to prevent Willbros Group from capitalizing on its balance sheet to return value to shareholders and mitigate challenged operational results. “We continue to rate WG as Underperform reflecting a challenged end market outlook and ongoing operational issues impacting profitability,” Pierre added.