In Feature

Six investment pros shared their favorite North Carolina stocks for 2017 and companies to avoid, continuing a long Business North Carolina tradition. With the ranks of publicly held companies dwindling, this year’s forecasts include some companies based outside the state but with large Tar Heel operations. The picks range from international giants to speculative small-cap stocks.


Rules of the Game

Pickers were asked to select their three favorite North Carolina stocks. Graphs are based on each stock’s performance between Jan. 1, 2016 and  Dec. 13,  2016 (please see the linked PDF).  Expected growth rates and percentage of industry analysts with “buy ratings” is based on data from Thomson/First Call.


Ann Benjamin Zuraw

President, Zuraw Financial Advisors LLC, Greensboro

Lowe’s Cos. (low)

Market Cap:  $63.4 billion
P/E Ratio: 27
Expected five-year EPS growth: 16%

Lowe’s is the second-largest home-improvement retailer in the world with 2,300 stores. Recent earnings were disappointing, particularly in same-store sales growth compared with Home Depot, leaving a valuation discount. More household formation and bank lending should prompt more home-improvement spending. The company plans to repurchase more than 30% of its shares over the next five years.

Analysts with buy recommendations: 63%

 

Laboratory Corp. of America (LH) 

Market Cap: $12.9 billion
P/E Ratio: 20
Expected five-year EPS growth: 10%

The second-largest independent U.S. clinical laboratory with 1,800 service sites has cost and automation advantages compared with most rivals, and an aging population and increased focus on preventive care should boost revenue. The 2015 purchase of New Jersey-based contract-research organization Covance gives Labcorp exposure to a fast-growing health care sector.

Analysts with buy recommendations: 71%

 

BNC Bancorp (BNCN)

Market Cap: $1.5 billion
P/E Ratio: 22
Expected five-year EPS growth: 10%

Formerly operating as Bank of North Carolina, the parent of BNC Bank is poised to take advantage of increased lending, rising interest rates and potentially reduced regulations. Since 2010, it has completed about 15 acquisitions with management showing skill in consolidation. The purchase of High Point Bank Corp. increased assets to $7.5 billion.

Analysts with buy recommendations: 67%

 

Avoid:  Sonic Automotive (SAH) 

The third-largest U.S. auto dealership company faces challenges because sales have peaked and Trump administration policies could boost the prices of imported cars. The founding family holds a fraction of the stock but almost total voting power. As a fiduciary, I am uncomfortable with shareholders not having equal voting rights.


Patrick Rush

Chief executive officer, Triad Financial Advisors, Greensboro

Syngenta AG (SYT)

Market Cap: $38.1 billion
P/E Ratio: 31
Expected five-year EPS growth: 8% 

A leading Swiss agricultural company with significant operations in North Carolina, it is being  acquired by ChemChina at about $93 per share. Regulators are considering the buyout and have delayed their decision, sparking speculation that the deal will be called off. If approved, shareholders have a 20%-plus upside to the price as of mid-December.

Analysts with buy recommendations: 100%

 

Laboratory Corp. of America (LH) 

Market Cap: $12.9 billion
P/E Ratio: 20
Expected five-year EPS growth: 10%

The stock looks like it is selling at a discount. Multiples related to earnings, book value and sales are significantly lower than their peer group, though the Burlington-based company continues to grow at a much faster pace.

Analysts with buy recommendations: 71%

 

Curtiss-Wright Corp. (CW)

Market Cap: $4.6 billion
P/E Ratio: 25
Expected five-year EPS growth: 8%

If President-elect Trump follows through with his agenda of increased military spending, Curtiss-Wright should benefit. The stock rallied 15% in the three weeks after the election and 47% in 2016, yet still trades in line with industry averages.

Analysts with buy recommendations: 57%

 

Avoid: Old Dominion Freight Line Inc. (ODFL)

Great, well-run company, but the stock had a huge rally in 2016 and looks too rich at $87 per share in mid-December. It is trading at higher price-to-earnings and price-to-book value multiples than its peer group. I would short this stock in the short-term and wait for a better buying opportunity.


Christy Phillips

Director of research and senior portfolio manager, Franklin Street Partners, Chapel Hill

Laboratory Corp. of America (LH)

Market Cap: $12.9 billion
P/E Ratio: 20
Expected five-year EPS growth: 10%

LabCorp, a low-cost diagnostic laboratory business that spans the nation, is diversifying beyond its roots. Its Covance clinical-research subsidiary supplies more diagnostic data and broadens the revenue stream. Integrating Covance slowed LabCorp last year, but the company is poised for increased growth and profitability, boosting its price-to-earnings ratio. Our goal is $150 a share.

Analysts with buy recommendations: 71%

 

Extended Stay America Inc. (STAY) 

Market Cap: $3.3 billion
P/E Ratio: 28
Expected five-year EPS growth: 11%

Extended Stay America, a lodging company with a market cap of $3.3 billion, has strong cash flow and trades at an attractive valuation. About half of revenue comes from business customers, including many construction-related workers, so higher infrastructure spending should boost revenue. Earnings per share growth should exceed 10%, and the dividend yield is about 4.7%

Analysts with buy recommendations: 33%

 

VF Corp. (VFC) 

Market Cap: $23.4 billion
P/E Ratio: 22
Expected five-year EPS growth: 9%

VF relies on its North Face, Vans and Timberland brands for more than half of revenue, with each sporting above-average profit margins. Warm weather in 2016 slowed sales, but these and other brands are poised for global growth. Shareholder value could be enhanced through a large share buyback program, outsized growth of the direct-to-consumer channel or future acquisitions. With earnings growth recovering to the high single-digit range, our one-year target price is $68 a share.

Analysts with buy recommendations: 42%

 

Avoid: Qorvo (QRVO) 

The stock had a tremendous move in 2016, consistent with the semiconductor industry as a whole. The valuation appears extended, and we think Qorvo will underperform the broader market in 2017.


Don Olmstead

Managing director, Novare Capital Management, Charlotte

BB&T Corp. (BBT) 

Market Cap: $36.9 billion
P/E Ratio: 17
Expected five-year EPS growth: 6%

The Trump administration is sparking expectations of higher interest rates, less regulation and potentially higher U.S. economic growth, all of which would boost the profitability of banks. The stock yields nearly 3%, and BB&T has a strong balance sheet. Its diverse revenue base allows the company to generate higher returns on assets with less volatility than peers.

Analysts with buy recommendations: 41%

 

Hanesbrands Inc. (HBI) 

Market Cap: $8.7 billion
P/E Ratio: 18
Expected five-year EPS growth: 12%

Shares have pulled back due to investor concerns about the growth prospects of some retail apparel areas, but its markets appear to be stabilizing, and the company has been supplementing organic sales growth with acquisitions. The stock is attractively valued at current levels, especially considering its profile of double-digit earnings growth, significant free cash flow and annual dividend increases.

Analysts with buy recommendations: 69%

 

Argos Therapeutics Inc. (ARGS)

Market Cap: $194 million
P/E Ratio: N/A
Expected five-year EPS growth: N/A

Argos Therapeutics has significant upside potential over the next year.(Warning: small-cap biotechnology stocks typically carry significant volatility.) It is involved in breakthrough cancer research, and its proprietary Arcelis technology, using a patient’s own cancer cells to generate individualized immunotherapies, positions the company well for growth. Also, rhetoric around drug prices may lessen under a Republican administration.

Analysts with buy recommendations: N/A

 

Avoid:  CREE (CREE) 

The stock’s valuation looks expensive on both an absolute level and relative to peers, especially given inconsistent growth trends over the past few years. The company’s LED business faces significant competition from Asian suppliers, which may affect pricing.


Frank Jolley

President, Jolley Asset Management, Rocky Mount

 

Tyson Foods inc. (TSN) 

Market Cap: $21.2 billion
P/E Ratio: 13
Expected five-year EPS growth: 22.7%

Tyson, successor to Wilkes County-based Holly Farms, is the second-largest processor and marketer of chicken, beef and pork products. Tyson trades at just 12 times next year’s estimated earnings and is 25% off the highs made in September.

Analysts with buy recommendations: 64%

 

IBM Corp. (IBM) 

Market Cap: $156.7 billion
P/E Ratio: 13
Expected five-year EPS growth: 2.9%

IBM, a pioneer at Research Triangle Park, provides information-technology products and services worldwide. The shares trade at 12 times next year’s earnings, yield 3.5% and are trading 25% below the peak level in 2013.

Analysts with buy recommendations: 29%

 

CenturyLink Inc. (CTL) 

Market Cap: $13.3 billion
P/E Ratio: 14
Expected five-year EPS growth: N/A

CenturyLink, a successor to Tarboro-based Carolina Telephone, is an integrated communications company serving residential and business customers. CTL stock declined after announcing the acquisition of Level 3 Communications for $34 billion on Oct. 31. The stock yields 9%.

Analysts with buy recommendations: 29%

 

Avoid:  Papa John’s International Inc. (PZZA) 

Papa John’s is the world’s third-largest takeout and delivery restaurant chain, headquartered in Jeffersontown, Ky., but employing more than 500 people in North Carolina. While the product is tasty, shares trade at 35 times earnings in a competitive industry. The balance sheet shows a negative equity position because the company has $300 million in long-term debt.


Bobby Edgerton

Co-founder, Capital Investment Co., Raleigh

Cato Stores Inc. (CATO) 

Market Cap: $800 million
P/E Ratio: 12
Expected five-year EPS growth: 10%

This debt-free company is definitely oversold after declining 17% in the last year through Dec. 7.  It averages $100 million in cash flow annually, and it has $300 million in cash and a dividend of more than 4%. It’s one of the cheapest stocks in the world. Nowhere in North Carolina can you find a balance sheet like that.

Analysts with buy recommendations: N/A

 

Lowe’s Cos. (LOW) 

Market Cap: $63.4 billion
P/E Ratio: 27
Expected five-year EPS growth: 16%

This is a trusted North Carolina name with $5 billion in cash flow. What is often missed is their land and property are valued — without inflation adjustment — at about half of the company’s total market value. It reminds me of Cracker Barrel, which soared in recent years after investors realized its property was worth more than its stock market value.

Analysts with buy recommendations: 63%

 

Cempra Inc. (CEMP) 

Market Cap: $339 million
P/E Ratio: N/A
Expected five-year EPS growth: N/A

The drug-discovery company has tumbled from $45 in July 2015 to single digits, but has a promising drug that could be vital in fighting infectious diseases. Cempra has about $150 million in cash after reporting net losses of $195 million from 2013-15. Only speculative investors need apply.

Analysts with buy recommendations: 36%

 

Avoid:  Duke Energy Corp. (DUK) 

Higher interest rates will not help utilities, which have to borrow lots of money. Duke’s coal-ash problems remain unresolved. After dividends are paid, the company has negative free cash flow.


Last year’s winners, losers

Our annual Top Stocks feature is more about suggesting ideas and less about competition. But if we were awarding medals, Christy Phillips of Franklin Street Partners would be the 2016 champ after making the two best selections: Insteel Industries, the Mount Airy-based wire maker, gained 85% through Dec. 7, while Raleigh quarry operator Martin Marietta was up 65%. Frank Jolley of Jolley Asset Management had a good year, picking steelmaker Nucor, which gained 63%, while Ann Zuraw of Zuraw Financial Advisors caught the 51% move at trucker Old Dominion Freight Line. The worst pick of the five pros was Zuraw’s suggestion to short Raleigh real-estate company Highwoods Properties. It rose 11%. Another disappointment, picked by Zuraw and Don Olmstead, was Greensboro apparel maker VF Corp., which declined 9%. Overall, the pros showed their stuff with ideas that would have padded a reader’s net worth. Bravo!

Image courtesy of illustration by Kathryn Galloway
David Mildenberg
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.
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