Today, May 9, 2022, Dow Jones is trading at 32,899, the S&P 500 at 4,123, and Nasdaq at 12,144.
The consensus is that the markets still have a long bumpy road ahead. With inflation going up, interest rates rising, and growth going down, now’s the time to consider where you put your money.
Even though analysts are bearish on the market as a whole, they are bullish on stocks with strong fundamentals and growth potential. For this post, we compiled the 4 best stocks to buy now, May 9, 2022, based on an average upside of at least 20% given by Wall Street.
Let’s take a look…
1.) Lithia Motors (LAD)
Founded in 1946 and based in Medford, Oregon, the company owes its growth in large part to its dealership acquisitions in small markets during all these decades.
Recently, it entered the Canadian market through its acquisition of Pfaff Automotive and now aims to grow in any part of the US, regardless of market size. Perhaps, more strategic acquisitions are on the way.
Based on a 12 analysts’ 12-month median $445 price target, Lithia has a 49.91% upside right now (currently trading at $296.84 per share). There’s a high estimate of $578 which presupposes that the stock’s price will nearly double in under a year and a low estimate of $300.
Frankly, we think that the high estimate is overly optimistic, but based on the recent performance and the current valuation of the business, a 50% change in price could be justified. Let’s see why…
For an auto dealer, Lithia’s revenue was outstanding considering it generated 74% more sales than it did the previous year. Its return on equity was also exceptionally high at 23% and it grew its EPS by 87%.
As for liquidity, Lithia seems to have plenty of it too. The current ratio was 1.4 and its earnings before interest were 9.1 times its interest expense.
Last but not least, we were happy to find out that Lithia’s performance is still undetected by the market. The stock is trading at only 8.1 times its EPS and 1.8 times its book value. It must be a matter of time until a correction occurs here.
Source: LAD 10-K
2.) Encore Wire (WIRE)
The largest portion of its target market consists of electrical distributors providing building wires among other products to electrical contractors.
What’s noteworthy here is that Encore Wire is in a business that is expected to enjoy good growth in the following decade. Copper wire demand may increase all over the world and this market could reach $267.17B by 2030, realizing a 6% CAGR from 2021 to 2030.
Based on 2 analysts, WIRE seems to have a 12-month estimated 38.95% upside (average estimated price target is $178.50 per share (currently trading at $128.46). The highest price target is $182 per share and the lowest $175.
The stock is already ~60% up in the last 12 months and it only recently became a mid-cap. This means that even if coverage is thin right now, it’s only a matter of time for Wall Street to focus on the company’s merits and be the catalyst for the currently projected upside.
And the numbers support this upside…
First of all, Encore had outstanding revenue growth of 103% last year and its EPS Y/Y growth was 612.5%, which we could safely say that it’s phenomenal.
And if that wasn’t enough, the company generated an impressive 40.4% return on its equity. However, even more impressive is their return on assets being at 35.4%.
Setting these results aside, it’s also interesting to observe how close ROE and ROA are to each other, indicating a conservative capital structure. In fact, the company has a debt to equity ratio of 0.11 and no long-term debt at all.
But a conservative capital structure is not enough if a business lacks liquidity. That is, however, not the case with Encore. It has a current ratio of 6.7 and its most liquid assets are 2.8 times bigger than its current liabilities.
These promising numbers are accompanied by an incredibly low valuation too. The stock is currently trading at 4.9 times its EPS and 2 times its book value. That certainly seals the deal and makes the projected median target price far from unreasonable.
Source: WIRE 10-K
3.) Essent Group (ESNT)
Essent Group (NYSE: ESNT) is a US mortgage insurer that provides credit protection to mortgage investors and lenders mainly by backing a portion of the unpaid mortgage principal in the case of default.
Starting just before the housing market crisis in 2008, Essent Group grew to a market leader and today writes mortgage insurance in all 50 states.
For such a prominent company as Essent, the median price target is reasonable. Its fundamentals also point to a positive price change in the short term…
Let’s look at profitability and growth first. Essent has had a ROE of 16.1% and a ROA of 11.9%. What’s even better is the 57.5% Y/Y growth of its EPS.
Now, the stock also ticks the box for long-term stability too if you consider that the company had a current ratio of 3.8x and an interest coverage ratio of 100.3x.
Obviously, the company has enough liquidity to make bankruptcy look like a far-fetched scenario. And its debt to equity ratio of 0.35x further contributes to its stability.
The cherry on top is that you can have all this stability and great performance for very cheap. Right now, the stock is trading at 6.9 times its EPS and 1.1 times its book value.
Source: ESNT 10-K
4.) Taylor Morrison Home
Taylor Morrison Home Corporation (NYSE:TMHC) is a US house construction company with a concentration in single family homes in California, Florida, Texas, Illinois, Arizona, Colorado, Georgia, and North Carolina.
In addition, the company provides financing services to homebuyers. But it derives most of its revenue from construction projects mainly in the west and central states of the US.
Taylor Morrison also develops master-planned and lifestyle communities.
Based on the 8 analysts’ $34 per share average price projection for the following 12 months and TMHC’s current price ($27.72), the stock has a 22.66% upside. The highest price target for the stock is $48 and the lowest one $28.
While the upside suggested by the highest estimate looks too optimistic, the median price target is reasonable. Based on the company’s fundamentals, we’d say it actually is very conservative and the stock price could grow even more once the market realizes the value here…
Taylor Morrison had a good run last year with a 17.2% ROE and witnessed its revenue grow by 47.5% (Y/Y). Its earnings per share also enjoyed an outstanding Y/Y growth of 175.5%.
On top of that, its very high liquidity (current ratio: 3.9, interest coverage: 234.9) provides some stability to the profitability and growth that is yet to come.
As for value, the stock is trading at only 5.3 times its earnings per share and 0.9 times its book value.
For such performance, liquidity, and capital structure, the stock is unreasonably cheap right now. We believe such valuation provides a wide margin of safety that increases the chance of realizing the projected upside and more…
Source: TMHC 10-K
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