The S&P 500 closed out 2020 with a total return of more than 18%, which is incredible considering the U.S. (and most of the world) experienced some period of economic shutdown during the past year.
Incredibly, the year's top stock picks did even better – there was no shortage of doublers, triplers and better despite 2020's brutal conditions.
To deliver double-digit returns for a third consecutive year, which the S&P 500 has done only twice since 1965 (1995-99, 2012-14), the markets and the economy will have to cooperate. A CNBC survey of 20 analysts suggests the index will deliver positive returns in 2021, somewhere between 8% and 22% on the upside. Of those 20, 14 are cautiously optimistic about the year ahead.
"We believe that as we head into 2021, the broader story will continue to be the true 'reopening' of the economy in the U.S. and globally, driven by the distribution of vaccines and increase in global economic activity," one analyst said.
But where are analysts the most bullish?
Read on as we evaluate 21 of the pros' top stock picks for 2021. We used TipRanks' analyst-tracking data to discover the best of the bunch. These stocks have loads of upside potential from current share prices – up to 110%, based on current price targets. And all of these picks have amassed so many bullish recommendations from top-performing analysts that they've earned a Strong Buy consensus rating.
Read on to learn more about what makes these stock picks stand out.
Data, including consensus price targets and ratings, is as of Jan. 21. Stocks listed in alphabetical order.
Aldeyra Therapeutics
- Market value: $538.4 million
- TipRanks consensus price target: $23.67 (100.8% upside potential)
- TipRanks consensus rating: Strong Buy
We'll start with small-cap Aldeyra Therapeutics (ALDX, $11.79), a clinical-stage biotechnology company that develops therapies for people living with immune-mediated diseases. Approximately 7% of the population suffers from these types of diseases, and the incidence rate is increasing.
Aldeyra currently has two therapies in development for treating ocular diseases. Its other pipeline drugs are focused on COVID-19, ovarian cancer, psoriasis and atopic asthma.
Reproxalap is the farthest along of Aldeyra's products, currently in the midst of Phase 3 clinical trials. It is being evaluated for its use to treat dry eye disease, which affects more than 34 million Americans and has a potential addressable market of more than $20 billion, as well as allergic conjunctivitis.
Jefferies analyst Kelly Shi (Buy, $24 price target) says that market-dominant brand names Restasis and Xiidra offer a "suboptimal patient experience," and believes that Reproxalap's profile suggests "commercial competitiveness."
Also in Phase 3 trials is ADX-2191, which is intended to prevent proliferative vitreoretinopathy (PVR), a sight-threatening retinal disease. And on Dec. 22, Aldeyra announced that ADX-1612, which has been clinically tested on more than 1,600 people for the potential treatment of cancer, has been found to help other viral drugs in the treatment of COVID-19.
Again, Aldeyra is a preclinical firm, so it's important to watch the company's cash. The firm finished the third quarter of 2020 with $86 million in cash on its balance sheet, enough to support its operations through 2022.
That's enough for most of the Street. A price target of $23.67 implies the potential for ALDX to double over the next 12 months, putting it among one of the best stock picks on this list by pure upside. Just note that risk is elevated here, too.
Alibaba
- Market value: $703.5 billion
- TipRanks consensus price target: $329.53 (27% upside potential)
- TipRanks consensus rating: Strong Buy
Alibaba (BABA, $260.00) is something of a contrarian stock pick at the moment. While it's the largest e-commerce company in China and a rapid grower, it also has come under scrutiny by Chinese regulators.
On Dec. 24, the State Administration for Market Regulation said it was looking into complaints that the company was forcing vendors to list its products exclusively on Alibaba platforms. Around the same time, Alibaba's financial services unit, Ant Group, was caught in Chinese regulators' crosshairs, and was forced to put its $35 billion initial public offering (IPO) on hold until meeting newly introduced antitrust regulations.
The news of China's increased antitrust scrutiny knocked almost $200 billion from its market cap in just two days of trading.
"It is very hard to predict the outcome of the Chinese government's ongoing investigation into Alibaba and other large consumer internet platforms," Baird analyst Colin Sebastian wrote in a note to clients. "(There is) uncertainty around government oversight and potential for direct regulatory action in the coming year."
However, some analysts believe the issues Alibaba is currently facing provide investors with an opportunity to buy its shares at lower prices. For example, Nomura continues to rate its stock a buy with a 12-month target price of $361, well above its current share price.
In fact, even Alibaba understands the value of its own fallen shares, announcing it would increase its share repurchase program by 67%, to $10 billion.
Baird analyst Colin Sebastian believes that Alibaba is still a good buy despite the regulatory concerns. And ultimately, while tightened regulations could bring more competition into the picture, BABA's long-term growth drivers, including its cloud business, are very much intact.
ATN International
- Market value: $728.3 million
- TipRanks consensus price target: $64.00 (40% upside potential)
- TipRanks consensus rating: Moderate Buy*
ATN International (ATNI, $45.89) is a holding company that owns telecommunication businesses in North America, the Caribbean and Bermuda, as well as a renewable energy business in India.
The company's international telecom segment, which has operations in Bermuda, Cayman Islands, Guyana and the U.S. Virgin Islands, generates approximately 74% of its overall revenue. Its U.S. telecom business, which focuses on rural and private markets, generates 25%, and the renewable energy biz fills the remainder.
Despite the effects of COVID-19, ATN generated revenues of $331.7 million through the first nine months of 2020, 1.6% higher than a year earlier. EBITDA (earnings before interest, taxes, depreciation and amortization) was $90.0 million, up 12.5% year-over-year. ATN finished the third quarter with $135.6 million in cash on its balance sheet, and $83.7 million in long-term debt, for a net cash position of $51.8 million.
In November, ATN announced that it was joining an investment consortium that would pursue telecommunications infrastructure opportunities in Australia. The Symphony consortium includes Stilmark Holdings, an Australian business that owns and operates telecom towers and is partially owned by ATN; and OMERS Infrastructure, the infrastructure division of one of Canada's largest pension funds.
The consortium is interested in buying a portfolio of telecom towers from the Australian subsidiary of SingTel for an estimated 1.2 billion euros ($1.5 billion). To help advise the consortium, it has appointed James Eisenstein, co-founder of telecom real estate investment trust (REIT) American Tower (AMT), as a special advisor.
* The Moderate Buy rating is provided because only two analysts who cover the stock have sounded off within the past three months. But both call ATNI a Buy.
Black Hills
- Market value: $3.8 billion
- TipRanks consensus price target: $72.20 (20% upside potential)
- TipRanks consensus rating: Strong Buy
Black Hills (BKH, $60.26) is a South Dakota-based company with 92% of its assets in regulated natural gas and electric utility businesses. And it plans on growing those businesses significantly, pledging to invest $2.9 billion in them between 2020 and 2024.
The company has almost 1.3 million customers located in eight states, including its home state of South Dakota, which accounts for 20% of its $3.9 billion rate base. Colorado accounts for the highest portion of its rate base (27%), with Nebraska and Arkansas tied for third place (13%).
Included among its $7.6 billion in total assets are 46,000 miles of natural gas pipelines, 9,000 miles of electric lines, and 1.4 gigawatts of electric generation. Black Hills generates 88% of its operating income from regulated utility sources; 86% of its revenues are coal-free.
The utility plans to spend 72% of its $2.9 billion capital investment on ensuring its assets' safety while 11% is for the general plant and 17% for growth. It also has a goal of reducing greenhouse gas emissions by 40% at its electric operations by 2030 and 70% by 2040, and reducing emissions by 50% at its gas utilities by 2035.
Black Hills is one of the top stock picks on this list for income investors, offering up a nice, dependable yield of 3.8%. The company targets a payout ratio (the percentage of profits that go toward dividends) of between 50% and 60% of its earnings. BKH has paid out dividends for the last 78 years with an annual increase for 50 consecutive years, and it has increased its dividend by 6.4% annually over the past five years.
Boston Scientific
- Market value: $53.1 billion
- TipRanks consensus price target: $42.67 (14% upside potential)
- TipRanks consensus rating: Strong Buy
UBS put together 21 compelling stock picks for 2021, and Boston Scientific (BSX, $37.52) was the only medical device company to make that list. The company's growth drivers include its disposable scopes, its Watchman left atrial appendage closure device and the Acurate NEO2 replacement heart valve.
Overall, the medical device company has seven main revenue streams. Its cardiology and endoscopy segments generated $4.7 billion in fiscal 2019 revenue between them while growing those sales at 11% and 9% year-over-year.
Over the past five years, Boston Scientific has delivered compound annual sales growth of 9.3%, from $7.5 billion in 2015 to $10.7 billion in 2019. The company has targeted 6% to 8% annual revenue growth through 2022. Meanwhile, between 2015 and 2019, adjusted earnings per share (EPS) grew by 14.2% annually, and is looking for double-digit growth through 2022.
In Q3 2020, BSX reported a 1.8% decline in sales on a reported basis and a 2.5% decline on an operational basis, largely due to COVID. The bottom line of 37 cents per share was two cents lower than a year earlier.
Nonetheless, "we continue to recommend shares, which we see as having an opportunity for a material re-rating through the year given our view that organic growth can return to HSD territory ex-COVID," writes UBS, which rates the stock at Buy.
Boston Scientific expects to continue outperforming its medical devices peers on an operational basis in 2021 due to several product launches across all of its operating segments.
Cigna
- Market value: $81.7 billion
- TipRanks consensus price target: $258.21 (14% upside potential)
- TipRanks consensus rating: Strong Buy
Cigna (CI, $226.19), one of the country's largest providers of pharmacy benefit management and health insurance services, reported solid third-quarter results in November that included a 14% increase in revenues to $40.8 billion, and a modest 6% decline in adjust income from operations, to $1.62 billion.
Excluding the COVID-related impact to its business in the quarter along with robust results in the same quarter a year ago, it has performed remarkably well in 2020. And that has caught the attention of billionaire David Shaw.
According to TipRanks, Shaw, who founded computational finance firm D.E. Shaw in 1988, added 782,737 shares of Cigna in the third quarter, bringing his total stake to 804,425. At current prices, the position's worth approximately $182 million.
Shaw's not the only one who has Cigna among their favorite stock picks. Deutsche Bank analyst George Hill is also a fan.
"Cigna saw a quarterly uptick in medical utilization – a trend the company believes will persist into the back-half of the year and into FY21, likely resulting in more normalized MLR (medical loss ratio) trends," Hill, who has a Buy rating and $280 price target on CI shares, wrote in mid-December.
"We continue to see Cigna as one of the most attractive growth stories in the MCO (managed care organization) space trading at a compelling valuation, though we concede that investor pessimism regarding the commercial insurance space could prevent the shares multiple from expanding in the near to medium term."
CymaBay Therapeutics
- Market value: $394.0 million
- TipRanks consensus price target: $12.00 (110% upside potential)
- TipRanks consensus rating: Strong Buy
If you have liver problems or are suffering from other chronic diseases – or at least see that there's a market for treatments for those issues – CymaBay Therapeutics (CBAY, $5.72) is a micro-cap healthcare stock you might be interested in investing in 2021.
The company is currently conducting Phase 3 clinical trials to evaluate the safety and efficacy of its seladelpar therapy used to treat primary biliary cholangitis (PBC). A slowly progressive bile duct disease that usually affects women aged 35 to 60, PBC is the most common autoimmune liver disease and affects one out of every 1,000 women over 40.
In 2021, the company will undertake a second Phase 3 clinical trial for seladelpar. If the 52-week trial, scheduled to get underway during Q1, shows similar results to its previous three-month trial CymaBay will file for approval with the Food and Drug Administration.
CBAY reported third-quarter results in early November. Through the first nine months of the fiscal year ended Sept. 30, it had no revenue and operating expenses of $36.7 million, down from $77.6 million in the same period a year earlier. But it did finish the quarter with $161.3 million in cash, providing it with enough money to fund its operating plan into 2022, when it should be ready to gain approval from the FDA.
Devon Energy
- Market value: $12.4 billion
- TipRanks consensus price target: $20.27 (10% upside potential)
- TipRanks consensus rating: Strong Buy
Independent oil and gas exploration and production company Devon Energy (DVN, $18.39) had quite a down year in 2020, losing nearly 40% of its value – a little worse than its energy-sector peers. The poor performance, just like its peers, was due to COVID-19 and resulting lower demand for oil and gas.
Nonetheless, Goldman Sachs has put Devon among its top stock picks for 2021, slapping it with a Conviction Buy rating.
"We believe there is a healthy debate among investors as to whether lower-leverage stocks like EOG are the best way to play an up-cycle vs. stocks like DVN with higher beta but still-favorable leverage," Goldman's Brian Singer wrote in his note to clients.
"With this report, we add DVN to the Americas Conviction List and remove EOG. Our preference for DVN on the (Conviction List) reflects our willingness for slightly greater beta and expected recognition for more transformational changes at DVN."
The analyst notes that the all-stock merger between Devon and WPX Energy will create a company with an enterprise value of approximately $12 billion and U.S. oil production of 277,000 barrels per day.
The companies expect to find annual savings of $575 million through the merger, and expect the deal to be accretive to earnings and cash flow. The combined entity will have $1.7 billion in cash, $3 billion in undrawn credit facilities, and a long-term leverage ratio of 1.0 times EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expense. Devon shareholders will own 57% of the company, while WPX shareholders will own the rest.
Earthstone Energy
- Market value: $437.2 million
- TipRanks consensus price target: $7.60 (36% upside potential)
- TipRanks consensus rating: Strong Buy
Investors who like their investments on the smaller side will gravitate toward Earthstone Energy (ESTE, $5.61), a small-cap independent oil and gas exploration and development company based in the heart of Texas.
Earthstone is on the prowl to grow its business in the Permian Basin. To that end, it announced on Dec. 18 that it would acquire privately held Independence Resources Management LLC for $186 million – $135 million of it in cash and the remainder with 12.7 million Earthstone shares, worth $51 million as of its Dec. 16 closing share price.
"This transaction is another important step in the execution of our growth strategy to further increase our scale with high-quality accretive acquisitions," CEO Robert J. Anderson said.
"This is consistent with our stated strategy to be a consolidator in the Permian Basin and positions us well for additional value-enhancing transactions. We will maintain strict financial discipline as we consider future transactions, both as it relates to valuation and to maintaining our balance sheet strength."
Controlled by private equity firm Warburg Pincus, Independence brings to the table 8,780 barrels of oil equivalent production per day (Boepd) operating in the Midland Basin. It owns 4,900 acres of productive land in Midland and Ector counties and an additional 38,500 acres of land in the eastern Midland Basin.
Expected to be accretive to all financial metrics, Earthstone shareholders will own 84% of the combined company, with Independence shareholders owning the rest. The combined business had adjusted EBITDAX of $246 million as of the end of September 2020.
Energy Transfer LP
- Market value: $17.9 billion
- TipRanks consensus price target: $9.38 (42% upside potential)
- TipRanks consensus rating: Strong Buy
When it comes to midstream oil and gas companies, Energy Transfer LP (ET, $6.62) took it on the chin in 2020. Even including its generous distributions (similar to dividends, but with different tax considerations), the master limited partnership (MLP) lost more than half its value last year. That's well worse than the average of its midstream peers.
And yet, of the nine analysts providing a 12-month price target for ET over the past quarter, eight put it among their buy-worthy stock picks for 2021; the lone dissenter is a Hold. For a stock that has had such a bad year, and that is operating in a challenging business environment, that's a very optimistic view.
In the first nine months of 2020, Energy Transfer had revenues of $28.9 billion, down 29% from a year earlier. Despite the severe decline in sales, it did manage to eke out a $1.64 billion operating profit in those nine months, down from $5.54 billion a year earlier. Also, third-quarter adjusted distributable cash flow (DCF, an important profitability metric for MLPs) increased by nearly 10% year-over-year to $1.69 billion.
ET nonetheless had to cut its cash distribution by 50% in October, to 15.25 cents per unit. That cut is expected to provide $1.7 billion in additional cash flow annually that it intends to use to reduce its debt. Once it gets to a leverage target of 4 to 4.5 times cash flow, it wants to return excess cash to shareholders in the form of share repurchases and increased distributions.
Despite the distribution cut, Energy Transfer still yields more than 9%, providing aggressive income investors with a healthy return.
Enterprise Products Partners LP
- Market value: $48.9 billion
- TipRanks consensus price target: $25.22 (12% upside potential)
- TipRanks consensus rating: Strong Buy
Enterprise Products Partners LP (EPD, $22.42) is one of the largest energy MLPs in the U.S. It provides midstream energy services to producers and consumers of oil, natural gas, and natural gas liquids (NGLs).
The partnership's array of assets includes 50,000 miles of pipelines, a storage capacity of 260 million barrels of NGLs, 14 billion cubic feet (Bcf) of natural gas, 22 natural gas processing plants, 23 NGL and propylene fractionators, and several import/export terminals in Texas.
Despite the difficulties in the energy industry in 2020, EPD has spent $2.9 billion in growth capital expenditures this past year while repurchasing $255 million in units (MLP shares) – it has a $2 billion unit repurchase program in place – and paying out annualized distributions of $1.78 per unit.
Enterprise earns fees for delivering raw materials such as propane, natural gas, ethylene, propylene, crude oil, etc. These are things required by businesses and residences on an ongoing basis, which means its revenues are incredibly stable.
The MLP has a long history of increasing its distribution not every year, but every quarter. However, due to the industry's issues in 2020, it kept its quarterly distribution at 44.5 cents per share throughout 2020. Fortunately, coverage was never an issue – over the first nine months of 2020, EPD had 1.6 times the coverage of its distribution payouts, considerably higher than the industry standard of 1.2 times – and the firm raised its first payout for 2021 to 45 cents per share. It currently yields around 8%.
"EPD's unique combination of integrated assets, strong balance sheet, and track record of driving an attractive ROIC remains among the very 'best in class,'" write Raymond James analysts, who rate EPD a Strong Buy. "In turn, we see EPD as arguably best positioned in the space to withstand the volatile macro landscape."
General Motors
- Market value: $78.8 billion
- TipRanks consensus price target: $54.08 (2% downside potential)
- TipRanks consensus rating: Strong Buy
Investors who bought General Motors (GM, $55.08) stock in the March 2020 correction have done very well for themselves. GM stock has more than tripled since its bear-market trench – and as a result, shares have already outkicked a very bullish Wall Street analyst community's coverage.
At current prices, GM is expected to decline from the average analyst price target.
Morgan Stanley analyst Adam Jonas recently reiterated his Buy rating on the stock while raising his price target, from $53 per share to $57.
"GM is offering fleet services today and appears to have big plans to grow the business. At GM's 2020 capital markets day, the company discussed licensing, subscriptions and customer insight/data opportunities from the connected fleet," Jonas says.
"Just like Tesla monetizes autonomy through its FSD (full self driving) product, it seems GM is ready to increase monetization of its own autonomy solution called 'Super Cruise.'"
Investors need to keep a close eye on GM, perhaps more than any of the other stock picks on this list, to see whether analysts start upgrading their price targets like Jonas did, or pull away from their bullish stances.
Still, there are plenty of reasons to like General Motors longer-term.
Not only has GM bought into the idea of autonomous driving, but it's also betting heavily on the transition to electric vehicles. As part of this push, CEO Mary Barra made the opening speech at the Consumer Electronics Show in Las Vegas in January 2021. Although the show was virtual due to the pandemic, GM previewed some of its new vehicles and products, including its Ultium battery at the show.
GM plans to introduce 20 new electrified vehicles by 2023 and 30 by 2025. It also plans to make a big play to supply electric vehicles to the military – a market that it estimates to be worth $25 billion annually in the future.
"That's an addressable market that we feel we have a right to win and pursue. And that's what we're doing," GM Defensive vice president of growth and strategy told CNBC.
Horizon Therapeutics
- Market value: $17.1 billion
- TipRanks consensus price target: $108.83 (41% upside potential)
- TipRanks consensus rating: Strong Buy
Horizon Therapeutics (HZNP, $77.43) is a biopharmaceutical company that develops and commercializes medicines for rare and rheumatic diseases. Founded in 2008 as a startup with few employees, it has grown to become a $17 billion company.
The company operates two operating segments: Orphan Drugs and Inflammation Drugs. In the third quarter, its seven orphan drugs had revenues of $535 million, more than double the $231 million a year earlier. The company's five inflammation drugs generated $102 million in sales in the quarter, 2.7% lower than a year earlier.
Its two top drugs – Tepezza (treatment of thyroid eye disease) and Krystexxa (treatment of gout flare-ups), accounted for 62% of its overall revenue. Both orphan drugs, the segment generated operating income of $275 million in the quarter, accounting for 83% of Horizon's operating profits.
The company estimates that Tepezza and Krystexxa together should have combined peak sales of $4 billion. Based on annualized sales of $1 billion, Horizon's two most prominent drugs have 300% potential growth over the next few years.
One thing to watch out for in the early innings: On Dec. 17, the company announced that due to Covid-19 manufacturing priorities, its production slots for December at its contract manufacturer, Catalent, had been pushed back to make way for Covid-19 vaccine manufacturing. While that could reduce its sales in the first quarter of 2021, it shouldn't affect things beyond Q1 2020.
Liberty Latin America
- Market value: $2.6 billion
- TipRanks consensus price target: $14.33 (29% upside potential)
- TipRanks consensus rating: Strong Buy
Liberty Latin America (LILA, $11.00) is a leading telecommunication service provider in Latin America and the Caribbean. Its operations cover more than 20 countries under several brands, including VTR, Flow, Liberty and others. Services provided include digital video, broadband, landlines and wireless.
If the name sounds familiar, that's because it's one of billionaire John Malone's many spinoffs. Liberty Latin America was spun off from Liberty Global in January 2018; at the time of the split, the Latin American assets generated $3.7 billion in annual revenue. Malone holds 25.3% of the votes. And Berkshire Hathaway (BRK.B) CEO Warren Buffett, who counts several Malone properties among his holding company's stock picks, is another famed shareholder of this firm.
An essential part of Liberty Latin America's strategy for growth includes acquisitions.
In mid-December, reports surfaced that it was in discussions with Telefonica (TEF) to acquire its Columbian and Ecuadorian operations. It believes there are many Latin American acquisition targets available to it, so it plans to be patient about its moves.
In the summer, it paid $500 million to buy Telefonica's operations in Costa Rica. At the end of October, LILA acquired AT&T's (T) Puerto Rican and U.S. Virgin Islands operations for slightly less than $2 billion.
Third-quarter results, reported in November, showed a 7.8% decline in revenues for the first nine months of the year, to $2.67 billion, while adjusted operating income before depreciation and amortization (OIBDA) was $1.06 billion, off 6.7%. However, LILA also "rebases" results for the estimated impacts of events such as acquisitions and disposals; on this basis, revenues were off just 3.2%, and OIBDA fell by just 1.6%.
2021 should be a more fruitful year. The company's revenues are expected to rebound by 19.3%, and a $3.51-per-share loss should shrink to just 12 cents.
Protagonist Therapeutics
- Market value: $1.0 billion
- TipRanks consensus price target: $41.75 (77% upside potential)
- TipRanks consensus rating: Strong Buy
Protagonist Therapeutics (PTGX, $23.54) is a clinical-stage biopharmaceutical company developing peptide-based therapeutics to treat unmet medical needs.
It currently has three assets in the development pipeline: PTG-300, which is used to treat polycythemia and other blood disorders; PTG-200, which treats inflammatory bowel disease (IBD); and PN-943, which also targets IBD and ulcerative colitis.
The company announced Dec. 16 that the first subject in its Phase 1 study for its PN-235 therapeutic – part of its collaboration with Janssen – got an oral interleukin-23 receptor antagonist peptide. The study is being conducted to determine the safety of the therapeutic, and it expects to receive results this year.
BMO Capital Markets analyst George Farmer provided investors with a positive update on Protagonist after the firm appeared at the American Society of Hematology (ASH) Conference in early December.
"We reiterate our Outperform rating on PTGX shares and increase our target price to $46 following our view of striking updated results from a Phase 2 trial evaluating PTG-300 for treatment of low-medium grade polycythemia vera reported at ASH," Farmer wrote in a note to clients.
The consensus price target of $41.75 is a little lower than Farmer's target, but still puts PTGX among the top stock picks as far as price upside is concerned.
In the first nine months of 2020, Protagonist had licensing and collaborative revenue of $23.0 million, up significantly from -$2.5 million a year earlier. While it lost $47.2 million through the first nine months, it has $200 million in cash on its balance sheet to keep the lights on for the next three to four years.
S&P Global
- Market value: $76.4 billion
- TipRanks consensus price target: $404.00 (27% upside potential)
- TipRanks consensus rating: Strong Buy
S&P Global (SPGI, $317.72), the people behind the S&P 500 Index and many other benchmarks, announced in November that they were buying IHS Markit for $44 billion in an all-stock transaction that includes the assumption of almost $5 billion in debt.
Shareholders will get 0.2838 shares of SPGI for every share held in IHS Markit. Once the deal is completed in the second half of 2021, SPGI shareholders will own 67.8% of the combined entity, while IHS shareholders will own 32.2%.
So, why did S&P Global choose to pay what ends up being 28 times EBITDA (20x including synergies)?
The tie-up gives SPGI it annual organic revenue growth over the next three years of 6.5% to 8% while improving its margins. The firm expects the deal will be accretive to earnings by the end of the second year; it plans to find $680 million in annual synergy savings through the merger.
By 2023, SPGI projects that it will generate $5 billion in free cash flow, 85% of which the Dividend Aristocrat intends to return to shareholders.
IHS Markit brings a significant financial services information business to the table with 88% recurring revenue, almost one-third greater than S&P Global. The combined entity will have $11.6 billion in sales, 76% recurring in nature, with its financial information and ratings segments accounting for 62% of overall sales.
Morningstar equity analyst Rajiv Bhatia believes the price S&P Global is paying is reasonable given how complementary the two companies' businesses are.
"We view the deal as a bet on sector deep data as well as a strategic decision to further embed itself in customer workflows," Bhatia wrote in a note to clients. "Despite the size of the deal, we don't see a ton of regulatory risk from an antitrust perspective."
Shaw Communications
- Market value: $9.0 billion
- TipRanks consensus price target: $22.18 (25% upside potential)
- TipRanks consensus rating: Strong Buy
Shaw Communications (SJR, $17.78) is probably not very familiar to most American investors. However, for those with a Canadian connection – especially a western Canadian one – the Calgary-based cable company is likely to be a household name.
The best way to think of Shaw is that it's a Canadian version of Charter Communications (CHTR). It does cable, internet, wireline phone, and wireless. It doesn't do media like AT&T or Verizon (VZ).
Fiscal 2020, which ended Aug. 31, can best be described as a glass-half-full year. While sales grew by a modest 1.3% to C$5.41 billion, its wireless business grew by 17.4% to C$1.1 billion, with a 69% increase in adjusted EBITDA and 163,300 additional net subscribers.
Shaw's free cash flow (FCF) for the year grew by 39% to C$747 million, with an FCF margin of 13.8%. It used this free cash flow to return C$750 million to shareholders in 2020 – 81% from dividends and 19% from share repurchases.
In fiscal 2021, SJR expects to grow adjusted EBITDA to C$2.39 billion and generate approximately C$800 million in free cash flow after C$1.0 billion in capital expenditures.
Shaw's another one of these top stock picks that are designed for income investors. SJR yields more than 5%, and it's a monthly dividend payer to boot.
TAL Education Group
- Market value: $46.9 billion
- TipRanks consensus price target: $81.67 (5% upside potential)
- TipRanks consensus rating: Strong Buy
TAL Education (TAL, $78.04) is one of China's leading K-12 after-school tutoring providers. It provides small classes, personalized premium services and online courses to students ranging from preschool to the twelfth grade. Its education network covers 90 cities in China.
TAL has had a mixed year thanks to COVID: Its online business progressed nicely, but its in-person business has suffered. The first nine months of its fiscal 2021 saw revenues grow 29.7% to $3.1 billion, but operating income plunged from $178.7 million to a $141 million loss.
"In the third quarter, along with the effective measures China's government has taken to continuously improve the public health situation and economy, we are pleased to see our tutoring business has also demonstrated on-track performance in this fiscal quarter," CFO Rong Luo stated in its press release.
While the company is in 90 cities around China, it believes that its business model is ideally suited to continue growing across the country. To do that, it needs additional capital.
On this front, it announced Dec. 28 that it had completed the sale of $2.3 billion in convertible notes and $1 billion in newly issued Class A common shares. Silver Lake, one of America's largest and focused technology investors, has purchased the convertible notes, which pay 0.50% interest and can be converted into equity any time before Feb. 1, 2026. Silver Lake will own 4.3% of TAL while the investor buying the common stock will hold 2.2%.
UBS, which has a Buy rating on TAL shares, cites other moves for its optimism.
"TAL suggested they would consider rebalancing customer acquisition channels, invest less in more expensive social media channels and more in branding ad and referral," UBS analysts say. "This echoes our findings from recent UBS Evidence Lab survey, and in our view is a step to the right direction.
Vertex Pharmaceuticals
- Market value: $62.1 billion
- TipRanks consensus price target: $280.07 (17% upside potential)
- TipRanks consensus rating: Strong Buy
Vertex Pharmaceuticals (VRTX, $238.64) is a global biotechnology company that creates transformative medicines for serious diseases such as cystic fibrosis (CF).
Currently, it has four approved medicines for the treatment of CF, along with ongoing research and development to develop further options for treating CF, an often fatal genetic lung disease. Other conditions that it's working toward treating include sickle cell disease, beta-thalassemia (blood disorder), and Duchenne muscular dystrophy (progressive muscle degeneration).
In October, Vertex announced that it was putting an end to its Phase 2 clinical trial for VX-814, its potential treatment for rare liver diseases. It was a setback for the Boston-based biotech company, which has seen its revenues grow four-fold since 2015.
The halting of VX-814's development spooked investors. On the day of the announcement, VRTX lost 20% of its value. It has yet to return to where it was trading before October's setback.
Financially, however, the company continues to do well.
In the nine months ended Sept. 30, Vertex's revenues and operating income were off-the-charts good. Revenues grew 66% to $4.58 billion, while operating profits rose 227% to $2.11 billion. The primary reason for the growth so far in 2020 is its launch of Trikafta in the fourth quarter of 2019. It accounted for 61% of its overall revenue.
For 2020 in its entirety, Vertex expects sales of at least $6 billion, $300 million higher than its previous guidance.
Piper Sandler analyst Edward Tenthoff believes the selloff from Vertex's announcement was overdone. He has a Buy rating and a $307 price target.
"While VX-814 for alpha-1 antitrypsin deficiency (AATD) discontinuation was disappointing, we think sell-off in VRTX shares was overdone," he wrote in December. "Follow-on VX-864 has initiated Phase II study, with distinct structure, that may alleviate VX-814's scaffold mediated liver toxicity with data expected in 1H:21."
Veru
- Market value: $625.8 million
- TipRanks consensus price target: $15.75 (76% upside potential)
- TipRanks consensus rating: Strong Buy
Veru (VERU, $8.93) is the sixth and final biotechnology company on this list of analysts' top stock picks. And this small-cap company, which focuses on products related to oncology and sexual health, has one of the highest potential upsides, at 76%.
Veru has three prostate cancer novel medicines in development: VERU-111 for the treatment of metastatic castration-resistant prostate cancer, VERU-100 for the treatment of advanced prostate cancer, and Zuclomiphene for the treatment of hot flashes in men on androgen deprivation therapy (ADT) for advanced prostate cancer.
The company's strategy is to develop new prostate cancer treatments to stop the cancer's progression and create new therapies to help reduce the side effects of prostate cancer treatments. While all three of those products are pre-revenue, they're all in Phase 2 trials or planning for Phase 3.
Veru's revenues come from its sexual health business and its FC2 Female/Internal Condom, the only FDA-approved female-use product to prevent pregnancy. It is sold in the U.S. and 149 other countries, and its manufacturing plant can produce 100 million annually.
In the year ended Sept. 30, FC2 had revenues of $40.6 million. It also had $2.0 million in sales from Preboost, a product meant to treat premature ejaculation that Veru sold for $20 million during the fourth quarter. The company's sexual health division generated operating income of $26.5 million for the year. Unfortunately, the company lost $14.7 million on the year due to research and development costs and a $14.1 million impairment for in-process research and development.
Still, in 2021, the company's oncology business should inch closer to commercial success. In the meantime, FC2's prescription business, which in 2020 grew by 92% year-over-year, has the potential to deliver for shareholders.
Zynga
- Market value: $11.2 billion
- TipRanks consensus price target: $12.32 (19% upside potential)
- TipRanks consensus rating: Strong Buy
The pandemic has been good to Zynga (ZNGA, $10.35), the online gaming company whose games include CSR Racing, Zynga Poker, Words With Friends and the recently shuttered legend FarmVille. Zynga generates revenue from the sale of in-game virtual items from its free-to-use online games and advertising revenue.
In the third quarter ended Sept. 30, Zynga reported its best quarter ever in terms of revenue and bookings. As a result of its success, it raised its 2020 full-year guidance for sales and bookings to $1.93 billion and $2.24 billion, respectively. It's on track for its best year in its history.
Amazingly, Zynga was able to do this while all employees worked from home. It even made an acquisition, buying 80% of Rollic, a European-based developer of hyper-casual games such as Go Knots 3D and Tangle Master 3D.
Wells Fargo analyst Brian Fitzgerald believes the risk/reward on Zynga stock is favorable despite the fact ZNGA gained more than 60% in 2020. On Dec. 15, Fitzgerald upgraded ZNGA from Hold to Buy with a price target of $12.50.
"We think FY21E FCF yield of over 5% limits the risk of underperformance as mgmt. has a successful track record of allocating capital into a TAM growing ~10%/year; moreover, management's commentary on December 9 suggests ZNGA's Q4 is still on track for double digit organic year-over-year growth," Fitzgerald says.
While advertising revenues were relatively flat through the first nine months of the year, online gaming revenues, which account for 86% overall, rose by 62%.
Expect more success in 2021.
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21 Top Stock Picks the Analysts Love for 2021 - Kiplinger's Personal Finance
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