Analysts have very high expectations for the stock market over the next year. Of 183 high-revenue stocks that I keep track of, the average stock has a one year target 33.5 percent higher than its current stock price. Part of this is because analyst estimates have stayed constant while the market had a large downturn in August.
However, it is still important to keep track of analyst estimates from a big-picture standpoint to know how each stock compares to other options available in the market. In this article, I list seven large cap stocks with very high one year price targets and explain why each one has such lofty expectations.
ManpowerGroup (MAN): Price: $38.23 Target: $75.45 Increase: 97.36%
Manpower is a global company that provides workforce services. Human capital is considered by many top business minds to be an excellent source of competitive advantage since a strong employee base is hard to build and can provide a lot of long term value. Manpower’s earnings have been in the red over the past two years, mainly from decreased revenues while expenses stayed constant.
However, in the first two quarters of 2011, Manpower has reported stronger revenue and positive earnings. It is on pace to earn well over $20 billion in 2011, while its market cap hovers at $3.1 billion. MAN has dropped 20 percent in August. Buying its stock is very risky, but if it can bring long term sustainable earnings, investors can earn huge returns from Manpower.
Delta Air Lines (DAL): Price: $7.12 Target: $13.75 Increase: 93.12%
When it comes to investing, I like to stay away from airlines. It is very hard to establish any kind of competitive advantage in the airline industry and Southwest (LUV) is the only airline that consistently posts positive earnings. Since 2010, DAL has traded between $10 and $15, but has decreased in price over the last few months from missing earnings expectations and the economic downturn.
Delta’s market cap is $6 billion with revenues of over $28 billion in 2010. If Delta can somehow find a way to generate consistent earnings, its shares can easily exceed its price target and investors can earn a huge return. However, this is a bet that I’m not willing to make.
Ford Motor Company (F): Price: $10.40 Target: $19.57 Increase: 88.17%
Out of all of the companies on this list, I believe that Ford is the most likely to actually achieve its target price within one year. Ford had positive earnings in 2009 and 2010 and is on pace to have pretty good earnings in 2011. In addition, its earnings have been consistently growing over the past few years. I recently wrote an article that recommended my readers to buy Ford stock.
Its target price is very high because its stock price has decreased over the past year, while its future prospects have been improving. I believe that this is happening because there are much safer buys out there that bearish investors would rather hold and there are now much “trendier” growth stocks out there in the technology sector.
However, I believe there is no reason for Ford to trade at a P/E ratio of 6.2. Its revenues will stagnate because it is a mature company in a very mature industry, but I believe it can effectively continue to cut costs and boost earnings.
TRW Automotive Holdings (TRW): Price: $37.86 Target: $70.44 Increase: 86.05%
TRW is a holdings company that its subsidiaries sell automotive parts. Like Ford, its earnings seemed to have stabilized over the past few years and it looks like it will return to having consistent positive earnings. TRW has a market cap of only $4.7 billion with revenues of $14.38 billion in 2010.
With a P/E ratio of only 5.1, TRW may be a good buy for value investors. It can very easily meet its earnings target if more investors move to the automotive industry.
United States Steel (X): Price: $27.55 Target: $50.46 Increase: 83.16%
US Steel is one of America’s oldest and most historic corporations and has fallen on hard times. It currently has a market cap of $4 billion and negative earnings. In addition, it produces about as much steel as it produced in the early 21st century, so any kind of growth prospects come only from increased prices. US Steel reported positive earnings in the last quarter, but this came after a very long time reporting negative earnings.
Its stock historically trades right around $50, which is probably the reason for its current stock price. However, I would like to see a few more quarters of positive earnings and a more positive outlook on US Steel before I buy it. For those who believe US Steel will continue to lead the domestic steel industry and will return to positive earnings, this is a good time to pick up shares at a discount.
United Continental Holdings (UAL): Price: $17.92 Target: $32.58 Increase: 81.81%
United Continental is another airline with a high one year target. Much like Delta, United Continental has trouble reporting consistent, positive earnings. With revenues of $21 billion in 2010 and a current market cap of $5.9 billion, there can be strong stock growth if earnings rise.
However, this is a very big if. The price target suggests that United Continental’s shares will bounce back from a 2008 price collapse, but will not immediately return to its previous price of around $40.
Goodyear (GT): Price: $11.81 Target: $21.38 Increase: 81.03%
Goodyear is a tire manufacturer who has had some recent financial troubles. It currently has negative earnings, but is expected to have earnings per share of $2.19 in 2012. Trading at $11.81 per share, Goodyear’s stock could grow if it meets its earnings expectations.
However, there are a lot of automotive stocks in the same situation and it may be a long time until investors start buying up Goodyear when there are better options around. By then, Goodyear could very well be back in the red.
All of these companies have a lot in common. With the exception of ManpowerGroup, all of these companies are heavily involved in the automotive or airline industries. They all have high revenues, but have been struggling with earnings.
These kinds of stocks all took a big hit in the recent economic downturn, so they may be able to generate some pretty nice returns. However, these are all very risky investments because any of them have some potential of never being profitable again and losing their value.
If you plan on investing in any of these companies, you should have an extensive knowledge of the company and what risks you may encounter from investing in stocks with high one year targets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.