Anyone involved in the investment game knows that it’s all about “stock selection.” Choosing the right stocks to leave your money behind is vital to ensure a strong return on an investment. Therefore, when the Wall Street pros consider a name to be a “Top Pick”, investors should keep it in mind.
The habits TipRanks platform, we looked up details on three stocks that recently received the ‘Top Pick’ designation from some of the Street analysts.
So let’s dive into the details and find out what makes them so. Using a combination of market data, company reports, and analyst commentary, we can get an idea of what makes these stocks so attractive for the second half of 2021, and why all three are rated as Strong Buys by the analyst consensus.
Mimecast, Ltd. (MIME)
We’ll start with Mimecast, a cloud-based cybersecurity company with a focus on email management. The company’s products protect customers from ransomware, data loss, supply chain impersonation, brand exploitation and other forms of email-related security breaches. Mimecast started in 2003 and is based in London, UK.
MIME has reported consecutive quarterly revenue increases in each quarter for the past two years. The most recent printout, for the fourth quarter of fiscal 2021, had both above and below the line, with revenue of $133.9 million, up 17% from the same quarter a year ago. Earnings per share were 9 cents, more than double the F4Q20 report’s 4 cents. Mimecast generated $24 million in free cash flow during the quarter.
Mimecast achieved these good results after strong retention figures. The company reported a net retention rate of 104%, with an upsell rate of 113%. Management noted that web security, awareness training and internal email protection were particular strengths, with the segments gaining 300, 800 and 900 customers respectively. While these numbers are objectively good, they represent a slide for MIME; pre-pandemic revenue retention was consistently close to 110%.
Mimecast is working hard to keep its product offering strong, to maintain those retention numbers. In one example, earlier this month, Mimecast announced a new product, CyberGraph, that uses AI to detect phishing and impersonation attacks.
Nehal Chokshi, 5-star analyst at Northland Securities, notes that the retention rate has fallen but points out it is rising — and management has plans to address the issue. He writes: “As employment begins to rise, which our channel audits and small business call to be a tailwind as of June 23, the effective retention rate of 600 basis points of net income from declining employment should reverse. Less obvious is the increased customer loyalty that should manifest as a reduction in customer churn as FY22 evolves due to (1) MIME work with customers in need due to the pandemic and (2) continued increase in # SKUs per customer to 3.5, from 3.3 at the start of the pandemic, which has also historically been correlated with higher loyalty.”
Chokshi rates MIME as Outperform (ie a buy), as befits a top pick, and his price target of $80 implies a 45% increase over one year. (To view Chokshi’s record, click here.)
Overall, MIME derives its Strong Buy consensus rating from 10 ratings, including 8 Buys and 2 Holds. The stock is trading at $55.24 and their average price target of $62.90 suggests room for another 14% in price gain. (Check out Mimecast’s stock analysis on TipRanks.)
super microcomputer (SMCIA)
We stick with technology and look at Super Micro Computer. This information technology company specializes in server-based computing, designing and manufacturing blades, networking equipment, rack solutions, servers and server management software for data centers, cloud computing applications and high-performance computing.
The pandemic showed an opening for companies capable of providing the infrastructure needed for cloud and data center applications – precisely the niche of Super Micro Computer. The company announced in June that it had expanded its production capacity and doubled its production. SMCI now boasts that it can provide more than two million servers annually. The move to higher production is intended to meet the rising global demand for cloud and data storage.
Super Micro reported its results for the second quarter of fiscal year 2021, which coincided with the Q1 calendar, in May. Turnover rose by 7.8% successively and by 16% year-on-year. Earnings per share came in at 35 cents, 6 cents better than in the same quarter last year. Both results exceeded analysts’ expectations. The company used $124 million in cash flow in operations and reported a capex of $19 million. Total cash position at the end of the quarter was $179 million, versus $85 million in bank debt.
A stable niche business, growing production and a healthy balance sheet have all impressed Northland’s Chokshi, which covers SMCI. He writes, “With the expanded, lower-cost manufacturing base, we expect SMCI’s superior efficiencies, stemming from the company’s unique building block architecture, to increase market share with large hyperscale data centers… We believe equities are extremely attractively priced with 10x EV/NI on an FY22 basis.”
As one of Chokshi’s Top Picks, SMCI also gets an Outperform (Buy) rating. The analyst’s $50 share price target implies a 43% increase in the coming year.
This stock has one asset that investors should always keep in mind: a unanimous assessment of the Wall Street consensus. All three recent reviews have been positive, giving the stock a Strong Buy rating. SMCI has an average price target of $48, which represents a 37% increase from its share price of $34.97. (Check out Super Micro’s stock analysis on TipRanks.)
Scotts Miracle-Gro Company (SMG)
Let’s switch. The last stock on our list is, in the analyst’s view, an unorthodox decision, but worth a closer look by investors. Scotts Miracle-Gro is known as a maker of garden products – RoundUp brand weed killer, various plant foods and seeds. In addition to RoundUp, the brands of the company are Ortho and the eponymous Miracle-Gro.
In addition to its traditional, long-standing presence in the garden and garden market, Scotts has also entered the cannabis market. The company’s Hawthorne subsidiary has seen strong growth in recent quarters, and management’s forecast for full-year 2021 cannabis sales growth is in the range of 40% to 45%.
In its most recent quarter, Q2 (the company’s fiscal quarter ended April 3), Scotts reported continued strong customer demand across all divisions, with total US consumer sales increasing 23%. Hawthorne’s sales led the way, increasing 66% in the second quarter. Total revenue was $1.83 billion, up 32% yoy, and earnings per share came in at $5.43, for a 52% gain. Again, the results exceeded consensus estimates.
At the same time, Scotts shares are down 29% since they peaked in early April this year. In a counterintuitive way, the economic reopening may be partly to blame. As consumers return to restaurants and brick-and-mortar stores, home and garden may take a backseat — and investors are pulling out of SMG in anticipation of that effect. Trust analyst Bill Chappell notes this as a “back to normal” issue.
However, Chappell is still bullish on SMG and sees the current weakness in the stock price as an entry point. He describes the stock as a “favorite pick” and writes, “We note that the company has a track record of special dividends when it is cash-equivalent, and it wouldn’t be surprised if one was announced before FYE.” We believe that the news stream will gradually become more positive for the [cannabis] legalization trend as we approach election season… We continue to believe that the hydroponics industry is the safest way to follow the cannabis legalization trend in the US. SMG is the clear leader in what we see as a duopoly.”
Chappell rates SMG stock as a buy, and his $250 price target expects stock growth of 38% over the next 12 months. (To view Chappell’s track record, click here.)
Chappell represents the bulls at Scotts, but he’s not alone. The Strong Buy consensus rating is based on a 4 to 1 breakdown of Buys over Holds. The stock is priced at $180.41, with an average price target of $228.6, representing a 27% increase for the coming year. (Check out Scotts MiracleGro’s stock analysis on TipRanks.)
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Disclaimer: The opinions expressed in this article are those of the recommended analysts only. The content is for informational purposes only. It is very important to do your own analysis before making any investment.