In case you haven't heard, the popular consensus among fund managers and market analysts suggests that the Magnificent Seven mega-cap tech stocks may not have another strong run in 2024.
Then again, the broader stock market isn't expected to do much better either.
US large-cap stocks are now considered to be trading at fair value, which means there isn't much leeway for gains, according to Dave Sekara, chief US market strategist at Morningstar. Mid-caps trail closely behind at a 5% to 6% discount, but small-caps trade at a tantalizing 16% discount.
Bank of America's advice is to look for value, particularly in previously overlooked areas like small-cap stocks that will benefit as the Fed cuts rates and economic conditions ease.
According to a January 19 note from Bank of America's equity and quant strategists Jill Carey Hall and Nicolas Woods, corporate profits slumped and hit their trough in 2023. Year-over-year profit growth turned positive for large caps in the third quarter of 2023, but it has yet to do so for small caps.
However, Carey Hall expects small caps to post positive growth in the final quarter of 2023 and outpace their larger counterparts for the remainder of 2024. As a result, she believes small-cap stocks will then outperform large-caps for the first time in over seven years.
A January 29 note by Hall and Woods added that value and small caps are a perfect pairing. The strategists built a list of stocks that Bank of America analysts dubbed their best picks for 2024 within the small and mid-cap category, with 65% of the names leaning toward value. It also includes stocks that are increasing their market share and margins, M&A beneficiaries, and companies expecting unusual growth.
The 31 stocks listed below are based on Bank of America's review of more than 1,000 US stocks between $1 billion to $15 billion market cap, or are listed in a benchmark small or mid-cap US index such as the S&P 500 or Russell. These names have an average potential upside of 29% over the next 12 months.
A similar list compiled by the bank for 2023 had an equal-weighted return of 12.8% as compared to its small and mid-cap benchmark, the Russell 2500, which had a total return of 9.8% for the same period.
1. Dycom Industries, Inc.
Ticker: DY
Market Cap ($ million): 3,379
Sector: Communication Services
Price objective: $125.00
Justification: "Dycom (DY) is our top SMID cap pick heading into 2024 as we prefer its 1) exposure to incremental telecom/cable company wireline buildout initiatives, 2) improving margin profile, and 3) position to capture its share of the forthcoming ~$42bn Biden Infrastructure Bill BEAD funding. DY's top customers like AT&T (T), Lumen Technologies (LUMN), and Frontier Communications (FYBR) expect flat fiber passings y/y in 2024 with anticipated runway into 2025, which we view positively, and we expect BEAD funding to flow to the States in late 2024/early 2025."
Source: Bank of America
2. Ralph Lauren Corporation Class A
Ticker: RL
Market Cap ($ million): 9,314
Sector: Consumer Durables & Apparel
Price objective: $165.00
Justification: "We think RL has more room for gross margin expansion driven by lower cotton costs and structural tailwinds which include a greater direct-to-consumer mix and continued average unit retail (AUR) gains. Importantly, we think the stock can still outperform in a bleak wholesale environment, given high quality and lower relative exposure vs peers."
Source: Bank of America
3. Trex Company, Inc.
Ticker: TREX
Market Cap ($ million): 8,821
Sector: Homebuilders and Building Products
Price objective: $90.00
Justification: "TREX is our best SMID cap idea for 2024 in our sector given: 1) continued outperformance of composite decking relative to other building product categories due to the conversion from wood, 2) $60-80mm of revenue that will fall in 1H24 instead of 4Q23 due to an early buy timing shift, 3) distributors are entering 2024 more confident than last year following strong sell-out performance in 2023 despite a choppy macro environment, 4) Trex has a robust product launch schedule (strongest since 2019 in our view) including color and geographic expansion for Signature, 5) adjacent categories are gaining traction (including recently launched fasteners and entry level railing), and 6) we believe Trex (and Azek) are gaining share from smaller tertiary brands."
Source: Bank of America
4. Lamb Weston Holdings, Inc.
Ticker: LW
Market Cap ($ million): 15,042
Sector: Food and Beverages
Price objective: $138.00
Justification: "Catalysts for LW include: 1) Continued capacity additions (~1.2bn lbs) through FY25 spanning both North America and International regions. Recall that the LW Meijer acquisition added ~2bn lbs of capacity and has so far brought in higher revenues than initially expected. 2) Color on tailwinds/headwinds as a result of its enterprise resource planning (ERP) transition. Beginning in 3Q LW transitioned some of its central systems in North America to a new ERP system. Though shorter term its ERP transition is expected to pressure margins given higher manufacturing costs from reduced fixed leverage, the transition is not expected to have a material impact on the full year. 3) Result of current pricing negotiations. Even if LW were to give back some price (largely in Global), the magnitude would be small and likely offset by positive mix."
Source: Bank of America
5. e.l.f. Beauty, Inc.
Ticker: ELF
Market Cap ($ million): 8,674
Sector: Household and Personal Care
Price objective: $190.00
Justification: "we see four main catalysts for ELF's success: 1) the expectation for ELF to double market share in color cosmetics over the next 4-5 years, 2) expanding ELF Skin with mix-accretive innovative products, 3) adding distribution for Naturium, and 4) building out an international presence."
Source: Bank of America
6. Harley-Davidson, Inc.
Ticker: HOG
Market Cap ($ million): 4,686
Sector: Leisure Brands/Retailers
Price objective: $40.00
Justification: "Harley-Davidson (HOG) is well positioned for 2024 given a cascading of well-received custom vehicle operation (CVO) model innovation into the broader touring lineup. HOG's last significant product refresh for its touring lineup was Project Rushmore in August 2013, which led to a 16% increase in touring shipments and 6% increase in global retail sales in the year following the launch."
Source: Bank of America
7. Tempur Sealy International, Inc.
Ticker: TPX
Market Cap ($ million): 8,920
Sector: Retailing-Hardlines
Price objective: $57.50
Justification: "TPX announced its plan to acquire Mattress Firm in May 2023, and the deal is expected to close by the end of 2024. We believe in TPX's ability to continue to take share in the mattress industry, and the Mattress Firm acquisition closure in 2H24 will bring an added benefit. We are also encouraged to see that TPX is considering selling roughly 200 stores to clear out anti-trust concerns. We are modeling $9.029bn revenue in 2025 for the combined entity, as compared to $5.370bn without the acquisition. We are confident that TPX will keep outperforming the industry in 2024 given strong product launches, marketing investment, and weak overall competition."
Source: Bank of America
8. Bath & Body Works, Inc.
Ticker: BBWI
Market Cap ($ million): 9,589
Sector: Retailing-Specialty
Price objective: $48.00
Justification: "We think Buy rated candle and personal care products retailer Bath & Body Works (BBWI) is one of the most compelling stocks in our coverage with catalysts in place for both sales recovery and margin expansion. We expect 2H24 to reap most of the benefits of new category growth, customer acquisition, unit growth, and avg. unit retail (AUR) support. It is also one of the few retailers in our coverage with remaining raw material cost benefits into 2024. These factors should combine for strong earnings and Free Cash Flow in F24."
Source: Bank of America
9. Chesapeake Energy Corporation
Ticker: CHK
Market Cap ($ million): 10,138
Sector: Oil and Gas
Price objective: $120.00
Justification: "Pro forma, it will have a market cap of ~$18.6bn and will be the largest natural gas producer in the US at ~7.3 billion cubic feet/day. On relative basis, we believe outperformance will be supported by a number of factors including: Possible eligibility for inclusion in the S&P 500 and that it may see a reinstatement to investment grade, per rating agency commentary. Its initial estimate of "bankable" annual synergies of $400mm could move higher resetting the company's cost base. As well as exposure to potentially more attractive marketing opportunities given its size and scale and proximity to the Gulf Coast."
Source: Bank of America
10. TechnipFMC plc
Ticker: FTI
Market Cap ($ million): 8,957
Sector: Oilfield Services and Midstream
Price objective: $23.00
Justification: "TechnipFMC (FTI) is a long-cycle Oil Services subsea pure play, one of the two companies that make up ~80% of the global subsea market. It is set to grow revenue and (even more so) margins in the next 2-3 years as it executes on very strong backlog and continued order momentum. We forecast strong 10%/27% revenue/EBITDA CAGR over 2024-26 for FTI."
Source: Bank of America
11. Blue Owl Capital, Inc. Class A
Ticker: OWL
Market Cap ($ million): 22,331
Sector: Financials- Asset Management
Price objective: $21.00
Justification: "We believe OWL and the Alternative Asset Managers remain in a period of robust secular growth as institutions and individuals reallocate into alternative investments. Additionally, we believe the valuation / stock correction is providing investors an attractive entry point with OWL's defensive qualities underappreciated. Specifically, almost all of OWL's management fees are insulated from redemptions (permanent capital) which is why we see no downside risk to EPS across any macroeconomic scenario."
Source: Bank of America
12. F.N.B. Corporation
Ticker: FNB
Market Cap ($ million): 4,966
Sector: Banks
Price objective: $16.00
Justification: "Transformation underappreciated. Market share gainer, improved capital position + credible management team. FNB offers investors exposure to a high-growth, geographically diverse mid-cap bank, at a discount. FNB screens as best to benefit from a 100bp rate cut. Coupled with its high-quality deposit base, we believe FNB's balance sheet is well positioned to mitigate rate headwinds in 2024 and provide more support for net interest income vs. peers."
Source: Bank of America
13. Insmed Incorporated
Ticker: INSM
Market Cap ($ million): 3,964
Sector: Biopharma
Price objective: $37.00
Justification: "Insmed's commercial asset Arikayce, an inhaled antibiotic, continues to gain traction for refractory non-tuberculosis mycobacterial pulmonary disease (NTM-PD), a bacterial lung infection, with recent clinical data supporting near-term expansion into earlier stage patients, a potential combined opportunity of >$1B (2030e BofA $1.9B vs. cons $1.6B). That said, in 2Q Insmed plans to report pivotal data for lead candidate brensocatib, a novel dipeptidyl peptidase 1 (DPP-1 inhibitor); in our view, positive data should establish the asset as the first treatment for non-cystic fibrosis bronchiectasis (NCFB) while also de-risking it for other inflammatory indications, (e.g., cystic fibrosis, chronic rhinosinusitis without nasal polyps, hidradenitis suppurativa) that could collectively generate an underappreciated >$5B peak (2030e BofA $3.0B vs. cons $2.6B). With additional updates from mid-stage asset treprostinil palmitil inhalation powder (TPIP), a novel pro-drug formula of vasodilator treprostinil, currently indicated for pulmonary arterial hypertension (PAH) and pulmonary hypertension associated with interstitial lung disease (PH-ILD), also expected 2024."
Source: Bank of America
14. Springworks Therapeutics, Inc.
Ticker: SWTX
Market Cap ($ million): 3,115
Sector: Biopharma
Price objective: $50.00
Justification: "SpringWorks (SWTX) is launching their first drug (Ogsiveo for desmoid tumors) with recent share momentum in our view still undervaluing commercial opportunity and an encore approval for their second drug (mirdametinib for NF1-PN) possible by early-2025. We therefore see room for shares to trade higher in 2024 as lead assets and earlier pipeline step through key derisking catalysts, with investor sentiment just beginning to come around on the name."
Source: Bank of America
15. Amylyx Pharmaceuticals, Inc.
Ticker: AMLX
Market Cap ($ million): 1,038
Sector: Biopharma
Price objective: $42.00
Justification: "AMLX is a commercial-stage biotech company focusing on neurodegenerative diseases. They have a commercial Relyvrio, which was approved in 2022 for the treatment of ALS (Lou Gehrig's disease) patients. AMLX shares have came down significantly over the past year after seeing a slow down of patient enrollment in the US and rejection from EU for approval given questions on drug's benefit to patients in slowing disease progression and extending survival. That said, AMLX now trades at <2x EV/ '24 revenue and is considered one of the top M&A targets this year, if the confirmatory trial (PHOENIX) can show positive results in 2Q24."
Source: Bank of America
16. Sarepta Therapeutics, Inc.
Ticker: SRPT
Market Cap ($ million): 11,107
Sector: Biotech
Price objective: $164.00
Justification: "We are bullish on the commercial opportunity for Elevidys (gene therapy) in Duchenne muscular dystrophy (DMD). After receiving an initial accelerated approval in 4-5 year-old patients in June, the company submitted an efficacy supplement requesting a label expansion to include all DMD patients regardless of age or ambulatory status. The launch so far has exceeded Street expectations and we think a label expansion could significantly increase the commercial opportunity. We are confident that the totality of data us supportive of a label expansion. We currently model Elevidys risk-adjusted peak sales of $2.4bn (US/EU probability of success: 75%/60%) assuming 35% peak penetration contributing $78/sh to our PO. Our base case assumes a label expansion to all ambulatory patients (~50%) but management has commented they expect a broad label inclusive of all patients, which would represent additional upside to our estimates."
Source: Bank of America
17. HealthEquity Inc
Ticker: HQY
Market Cap ($ million): 6,596
Sector: Health Care Technology and Distribution
Price objective: $85.00
Justification: "HQY continues to benefit from the increase in interest rates over the last two years as new contracts roll-over at higher yields. As a result, HQY saw meaningful operating leverage in the P&L through CY23. We expect meaningful margin expansion to continue at least through FY26 as a recently disclosed cash maturity schedule suggests that HQY will benefit from a longer than previously anticipated rates tailwind, something the market is yet to fully appreciate. Overall, modest weakness in the WageWorks consumer-directed benefits (CDB) business should be more than offset by higher custodial rates, steady growth in health savings account (HSA) members and assets, and member adoption of enhanced rates products."
Source: Bank of America
18. Option Care Health Inc
Ticker: OPCH
Market Cap ($ million): 5,507
Sector: Home Care/Long-Term Care
Price objective: $43.00
Justification: "Option Health (OPCH) is our favorite home care name; it has no Medicare rate risks, an increasing upside from future deals, and an attractive low/mid-teens EBITDA growth, while trading at a 10% discount to the historical avg multiple. While the market seems to be concerned that OPCH will try to chase another home health asset, we believe the company will stay close to its core business (such as its recent home infusion nurse staffing deals)."
Source: Bank of America
19. Exact Sciences Corporation
Ticker: EXAS
Market Cap ($ million): 11,625
Sector: Life Science Tools and Diagnostics
Price objective: $88.00
Justification: "Exact Sciences (EXAS) enters 2024 in a strong position. It reached colorectal cancer screening market penetration rate of ~10% in 1Q'23, generated positive free cash flow in 2Q'23, and submitted a new premarket approval (PMA) application for its new and improved second generation Cologuard in December. This comes after years of investor worries of slow market adoption and volume growth."
Source: Bank of America
20. Air Lease Corporation Class A
Ticker: AL
Market Cap ($ million): 4,736
Sector: Aerospace
Price objective: $60.00
Justification: "In our view, Air Lease (AL) is strongly positioned given the aircraft supply/demand mismatch and the current macro environment. As demand for aircraft outpaces supply, we expect to see 1) a general increase in lease rates and 2) more opportunities for highly profitable aircraft sales. We see a particular catalyst for outperformance as the yield curve returns to normal and financing costs come down. AL is currently trading below book-value while it is selling aircraft well above book-value."
Source: Bank of America
21. United Airlines Holdings, Inc.
Ticker: UAL
Market Cap ($ million): 13,957
Sector: Airlines
Price objective: $60.00
Justification: "We see a valuation disconnect vs UAL's execution and its more favorable leverage outlook than we originally expected. While industry risks remain and capex is above historical norms, UAL has outperformed the industry on revenues, can maintain about 2.5x leverage through this capex cycle, and trades towards the low end of historical valuations."
Source: Bank of America
22. CACI International Inc Class A
Ticker: CACI
Market Cap ($ million): 7,629
Sector: Defense Electronics
Price objective: $385.00
Justification: "CACI continues to develop open-source solutions and utilize "software as a superpower" to meet customer needs. CACI's position on a number of critical government contracts (such as FocusedFox and Spectral) is indicative of the company's ability to stay on top of next-generation technology and solutions. We see significant opportunities for growth stemming from CACI's portfolio focused on key government investment areas such as SIGINT (Signal Intelligence), EW (Electronic Warfare), cyber, and space. We believe these areas are likely to remain well-funded in the event of a longer than expected continuing resolution, and this combined with CACI's strong backlog should insulate the company from a government funding lapse."
Source: Bank of America
23. Knife River Corporation
Ticker: KNF
Market Cap ($ million): 3,733
Sector: Machinery / Waste / E&C
Price objective: $81.00
Justification: "KNF operates with little overlap from larger public peers. Its end markets also skew heavily towards public works projects, and we expect KNF to benefit from healthy state budgets and infrastructure spending. Spun off from MDU Resources in June, KNF has executed very well on Operational improvements since then. We expect its turnaround efforts to continue to show through in cost controls, and (importantly) EBITDA margin (+270bps YoY 2023 EBITDA guide) as it scales up its materials business & grows into its (largely public works) contracting exposure (firm has already surpassed 2025 EBITDA target set at launch). We think KNF has a clear path forward as a consolidator and value compounder."
Source: Bank of America
24. Teekay Tankers Ltd. Class A
Ticker: TNK
Market Cap ($ million): 2,063
Sector: Shipping
Price objective: $72.00
Justification: "Teekay Tankers (TNK) is highly leveraged to rates (96% spot exposure), which are likely to see upside following Red Sea disruption and longer haul voyages around the Cape of Good Hope. We believe the dynamic threat of Houthi attacks and consequent re-routing of vessels around the Cape of Good Hope, and lower transit limits across the Panama Canal to 18 ships/day (from 30-40 under normal fluidity conditions), will continue to increase ton-mile demand, thus elongating the supernormal tanker rate cycle."
Source: Bank of America
25. Knight-Swift Transportation Holdings Inc. Class A
Ticker: KNX
Market Cap ($ million): 9,251
Sector: Transportation
Price objective: $64.00
Justification: "Knight-Swift Transportation (KNX) is well positioned for the eventual truckload cycle inflection, and its path to ramp returns from its 2023 acquisition of top-ten carrier US Xpress (USX; largest by fleet size, whereas it carried one of the worst operating metrics of any public carrier) should be a major profit potential for KNX into 2024-25."
Source: Bank of America
26. Wayfair, Inc. Class A
Ticker: W
Market Cap ($ million): 6,625
Sector: Internet/e-Commerce
Price objective: $85.00
Justification: "Wayfair is well positioned for accelerating revenues over the next two years given category improvement and continued share gains. BAC aggregated credit and debit card data suggests the furnishings category is steadily improving, and we think the category should return to modest growth by 2025, led by an expected rebound in housing volumes (per homefinder.com, people spend approx. $16k on furniture per move). Furthermore, Wayfair cost savings from recent layoffs are expected to drive $600mn+ in 2024 EBITDA in a flat revenue environment."
Source: Bank of America
27. CyberArk Software Ltd.
Ticker: CYBR
Market Cap ($ million): 9,679
Sector: Cybersecurity
Price objective: $255.00
Justification: "we believe CyberArk's product and positioning is unique. The total addressable market (TAM) of the Privileged Access Management (PAM) market continues to expand, as does the definition of who is considered a privileged user, supported by digitalization and the transition to Cloud. The current TAM for PAM is $20bn, up from $9bn in 2020, and we highlight that the overall market penetration is less than 5%, leaving plenty of room for growth. Additionally, the company is a market leader in a critical area of cybersecurity spend, and secular tailwinds should support continued acceleration of growth through CY26."
Source: Bank of America
28. Fastly, Inc. Class A
Ticker: FSLY
Market Cap ($ million): 2,693
Sector: Data Networking
Price objective: $28.00
Justification: "We expect Fastly to have another strong year of out performance. Growth should continue to accelerate towards the 2026 target of 20% supported by all three verticals: delivery, security and edge compute. For delivery, vendor consolidation trends in the Content Deliver Networking (CDN) market, and the rollout of platform unification, which is expected to be completed by 1H24, should drive increased cross-sell motion and subsequent gross margin improvements through the back half of CY24. The company should also see continued strong security growth with the launch of DDoS and Bot Mitigation products, as well as continued demand for the managed security offering. Lastly, early data supports Fastly's leading position in the edge compute market as half of the package deals signed this quarter included edge compute functionality, and we expect compute to materially contribute to revenues by 4Q24."
Source: Bank of America
29. Gitlab, Inc. Class A
Ticker: GTLB
Market Cap ($ million): 10,807
Sector: Enterprise Software
Price objective: $74.00
Justification: "GitLab is a mission-critical DevSecOps platform that drives high return on investment (ROI) which is trusted by millions of developers around the world. We believe GitLab is positioned to deliver 25%+ growth over the medium-term by executing a three pronged growth strategy: 1) land and expand; 2) releasing new add-on products such as AI and planning; and 3) pricing power. We see the growth as sustainable as GitLab has executed its product roadmap strategy well since IPO, which we expect to continue in the future driving further differentiation from the competition. GTLB currently trades at 15x EV/CY24E revenue, or 0.6x on a revenue growth adjusted basis, which is comparable to its infrastructure software peers at 0.6x. Our $74 PO is based on 15.5x EV/CY24E revenue, or 0.65x growth adjusted, which we believe is warranted given its strong positioning in a $50bn+ DevSecOps TAM, revenue upside potential, and healthy operating margin expansion trends."
Source: Bank of America
30. Sealed Air Corporation
Ticker: SEE
Market Cap ($ million): 5,321
Sector: Materials Packaging and Paper/Forest
Price objective: $42.00
Justification: "SEE is cutting costs, redeploying its sales resources, and focusing on recapturing market share. While SEE may wind up unsuccessful in its efforts to improve performance, the recent trends are encouraging and the 60% relative and 9x absolute P/E multiple provide potential downside protection."
Source: Bank of America
31. American Homes 4 Rent Class A
Ticker: AMH
Market Cap ($ million): 12,697
Sector: Real Estate- REITs
Price objective: $44.00
Justification: "AMH owns the second largest single family REIT portfolio in the US. The single family sector benefits from limited supply, the low availability of existing homes for sale and shifting demographics supporting single family renting. AMH stands out for its internally managed and owned development platform. At the end of 3Q, AMH had a 4% loss to lease (difference between market rent and in-place rent) and an over 3% earn-in (contribution to rental income for the following year from leases in existence at the end of the current year, assuming no further market rent growth), both of which set up AMH well for 2024. This gives us even more confidence that AMH is best positioned to outperform its residential peer set"
Source: Bank of America
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