U.S. investment bank reveals its favorite stock picks — here are 10

Published Wed, Aug 25 202111:14 PM EDT

Food and agriculture, energy, financials, defense and airlines are all business sectors that could offer compelling value for investors over the next year, according to U.S. investment bank Seaport Global. In a research note Friday, Seaport analysts identified the key macroeconomic themes to look for within these sectors, and the stocks best placed to capitalize on them. Here are 10 of the firm's top picks: Agribusiness and food Packaged food companies with strong emerging market presence stand to provide superior growth, argued Seaport analyst Eric Larson. Food companies with significant EM exposure lagged the rest of the world early in the pandemic, but they are now recovering. Larson argued that they will generate more favorable revenue comparisons in the next two or three quarters, compared to developed market peers. He pointed to Kellogg's as a prime example, with 20-23% of the U.S. multinational's total sales coming from EM regions and already delivering positive sales surprises. The company also raised its dividend and resumed substantial share buybacks in the first quarter, and is trading at a 19% discount to its peer group, Larson highlighted. Meanwhile agribusiness is enjoying a multi-year recovery, with strong global grain demand creating substantial growth opportunities for companies across the supply chain. "For the first time in 7-8 years, this favors input suppliers, grain processors and producers, while disfavoring buyers of grain for their finished products," Larson said. A top pick was Archer-Daniels-Midland , which Larson expects to benefit from a continuation of tight grain supplies, strong demand and price volatility. Automotive retail Although automotive retail stocks have performed well over the past 18 months, Seaport analyst Glenn Chin argued that they still represent good value for investors, since earnings have grown at a faster rate than share prices. On estimated earnings per share in 2022, the sector collectively trades at a 60% discount to the broader market, Chin highlighted, despite the group's "proven ability to maintain/grow profitability under the most dire economic scenarios." Earnings per share is a measure of companies' profitability, calculated by dividing total profit by the outstanding shares of its common stock. Chin cited Asbury Automotive Group as a prime example. The company has what he termed an "ambitious, but achievable" five-year plan which implies more than 20% revenue and earnings growth. It also offers compelling value and is "one of the best, if not the best," operator in the group. Homebuilders With inventory of new and existing homes low across major economies and materials costs expected to normalize following a period of steep inclines, Seaport believes homebuilders are a worthwhile pursuit for investors. Seaport analyst Mark Weintraub highlighted that valuations look attractive, particularly that of KB Home , which has improved its competitive positioning and boosted its return profile of late. Seaport sees the stock, which closed Wednesday's session at $43.24, hitting a conservative $50 by the end of the year. Weintraub suggested this is an "undemanding" figure compared to Seaport's projected book value for KB Home at the end of the next fiscal year. Energy The balance sheets of energy infrastructure companies are well placed to handle volatility in commodity prices, Seaport believes, with free cash flow generation and debt reduction having been a key focus of capital allocation for the industry. Analyst Sunil Sibal flagged Targa Resources as emblematic of this trend. The Texas-based company achieved its deleveraging goals in the second quarter and is poised to generate $800 million plus of free cash flow annually, Sibal projected. "TRGP has established an integrated midstream footprint in the Permian with connectivity to the U.S. Gulf Coast and export markets," Sibal said. "Increasing Gas to Oil ratios in the Permian would provide opportunity for volume growth even if the crude volumes remain flat in the basin." Financials An interest rate hiking cycle is not priced in by the markets, according to Seaport analyst James Mitchell, who said the potential benefit to financial institutions from higher rates is not yet reflected in earnings-per-share forecasts or their share prices. "No doubt strong trading and underwriting activity, driven by uncertainty and volatility surrounding the pandemic, will slow as economic uncertainty declines," Mitchell said. "However, low expectations are already built into consensus forecasts, and our work shows that volatility (and activity levels) can persist for years following a recession." Meanwhile valuations are "not cheap but not expensive," he added, currently sitting at modest premiums compared to five-year averages. Wells Fargo and Goldman Sachs were the two big Wall Street players named as top picks, the former offering the best long-term profit improvement story and the latter set to be rewarded for its strategic revamp over time, according to Mitchell. Airlines Airline stocks have taken a beating since the onset of the coronavirus pandemic, with earnings recovery now delayed by the spread of the delta variant. Seaport does not expect airline stocks to perform better until at least mid-September or October, with cases hopefully in retreat and the variant risk subsiding. "From our fundamental standpoint, however, the near-term demand weakness pushes out our thesis, but it doesn't impact our 1-year view of the fundamental story," analyst Daniel McKenzie said in the report. "We're looking for a valuation recovery once we begin to see more compelling revenue catalysts, such as the U.S. govt finally embracing the idea of a travel passport; the opening of int'l corridors; and/or a positive inflection in business demand." McKenzie tipped JetBlue and American Airlines to be primary beneficiaries of these trends. A partnership with American Airlines gives JetBlue a way to expand its network without expanding fixed costs, he pointed out. Meanwhile AAL's improved corporate and transatlantic revenue, costs and a plan for balance sheet de-risking have all strengthened its case. Aerospace and defense Seaport believes investors are underestimating defense spending growth in the U.S., projecting that 2022 full-year appropriations will likely be far higher than President Joe Biden's request. Lockheed Martin is well-placed to capitalize, according to analyst Richard Safran, given the importance of its F-35 fighter jets and the company's growing market share. Development programs are shifting to production, which Safran suggested would benefit margins.

Traders work at the New York Stock Exchange (NYSE) in Manhattan, August 3, 2021.

Andrew Kelly | Reuters