Stock picks to buy, cheap companies with strong earnings for 2021 – Business Insider

  • Investors who watched the rise of companies like Amazon have rewarded shares of firms with high sales growth, but Jefferies strategist Steven DeSanctis says the trend is due to fade. 
  • DeSanctis says companies that are more profitable and offer better returns on equity should take the lead over higher-revenue-growth stocks over the next few months.
  • DeSanctis’ stock picks are “Buy”-rated companies that are expected to post earnings and sales growth, are trading at reasonable valuations, and are exposed to strong economic trends overseas.
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As the US economy gets up off the mat and the stock market grows more volatile, investors are going to want to change their priorities.

That’s the verdict from Jefferies small- and mid-size stock strategist Steven DeSanctis, who says he sees growing signs that higher-returning, more profitable companies are likely to take a leadership position as the calendar shifts to 2021.

Over the last few years investors have developed a taste for companies with strong sales growth, a style that didn’t have much of a track record as an investing style. Companies like Amazon seem to have proved that big sales growth can turn around sustained bottom-line losses.

“A number of large Tech/Comm Serv/Consumer stocks have proven that strong revenue growth will translate into strong earnings growth at some point,” DeSanctis wrote in a note to clients. “The market clearly likes finding stable revenue growth in a world in which nothing is growing.”

That helped those stocks during the coronavirus downturn six months ago and it’s sustained them over the course of the market’s sharp recovery. But DeSanctis thinks they’re likely to fall behind over the rest of this year, and revenue growth won’t seem as special as overall growth improves.

“Higher [return on equity] thrives in a faster GDP environment,” he said, adding that lower-return, higher-sales companies are expensive by historic standards — and while those companies often do very well in the six months following an economic downturn, investors start to look elsewhere after that point.

“When US GDP is greater than 3%, highest sales growth names tend to lag the overall universe by 6%,” he said. “We see volatility staying elevated, and this helps our quality theme.”

DeSanctis suggests that investors looking for profitable, high-quality companies make sure to look at firms that do a significant amount of business outside the US because of their stronger economic tailwinds. He says they’ll benefit from the improving economic trends and from the weakness it will trigger in the dollar.

“We think the economic news in both Europe and China will continue to improve, while data in US will be mixed,” he said. “Europe and China are getting back to full capacity with the US lagging behind.”

For that reason, he’s most interested in companies that get at least 20% of their revenue from overseas.

The following 15 stocks all fit the bill, and they also meet the following criteria: They have “Buy” ratings from Jefferies analysts, their market capitalizations are between $1 billion and $30 billion, and their per-share earnings and sales in 2021 are expected to grow at least 2% from their pre-pandemic 2019 levels.

Two other criteria to help cement the return potential of the stocks. Their returns on equity are at least 10%, and their estimated price-to-earnings ratios for 2021 are under 25, giving them room to appreciate, as unlike some of their lower-growth and lower-return peers, they’re not overly expensive.

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