What do "Wall Street insiders" love?
For starters, they like a lot of the same things other investors like: great growth stories, value-priced shares, and promising turnarounds.
But there are some stocks where Wall Street seems to think it has an edge -- and that can often mean that other investors should be paying closer attention. Here's why our Foolish investors think that Ferrari (RACE -0.96%), Buffalo Wild Wings (BWLD), and Alibaba (BABA 0.28%) all fall into that category.
Ferrari's newest model is the ferocious V12-powered 812 Superfast. Despite its $321,000 (for starters) price tag, the 812 is already sold out through 2018. Image source: Ferrari N.V.
A Wall Street favorite in more ways than one
John Rosevear (Ferrari): What do Wall Street hotshots like to spend their money on? If you believe the stereotypes, they like fancy watches, expensive shoes, and high-end cars -- like Ferraris.
Given Peter Lynch's famous advice to investors -- "Buy what you know" -- it's not too surprising to find that a lot of professional investors like Ferrari's stock, too. Shares of the iconic Italian supercar maker have been on an 18-month tear that started a few months after longtime owner Fiat Chrysler Automobiles spun the company off in late 2015.
What does Ferrari have going for it as an investment? A lot.
- Huge margins. Ferrari's EBIT margin in the second quarter was 21.9%. That's an astonishing number by automaking standards, but it's business as usual for Ferrari. (Compare with General Motors' 10% second-quarter result, considered very good for a big automaker.) That fat margin is the product of Ferrari's tremendous pricing power, which is more like a luxury company's than like a traditional automaker's.
- It's insulated from the auto industry's turbulence. Ferrari's distinguished history of covetable designs and racing triumphs gives it a moat of sorts: No other automaker can ever be Ferrari. Because Ferraris are all about driving pleasure, the company isn't likely to be disrupted by self-driving electric cars any time soon, and its super-well-heeled clientele is somewhat insulated from the global economy's ups and downs.
- It has a growth plan. Ferrari limits its annual production to preserve exclusivity, but CEO Sergio Marchionne thinks the limit can be increased a bit over the next few years without harm. He expects that, plus other initiatives (more limited-edition seven-figure models, careful brand licensing, expanded offerings for owners of classic Ferraris) to drive significant bottom-line growth over the next few years.
All that said, for investors eyeing Ferrari today, there's one big caution: Like everything else having to do with the brand, Ferrari's stock is quite expensive. That run-up in its share price means it's now trading at a daunting 34 times its expected 2017 earnings. That hefty valuation reflects Ferrari's growth prospects, its status as a luxury-goods company rather than a regular automaker -- and, of course, Wall Street's excitement about the stock.
Despite that caution, I think the shares could go considerably higher from here as that growth plan takes hold. There's just no other company like Ferrari.
Beer, wings, and activist investors
Steve Symington (Buffalo Wild Wings): A slowdown in the casual-dining industry hasn't been kind to Buffalo Wild Wings. But after a contentious proxy battle through which Marcato Capital recently won three seats on B-Dubs' board of directors, it's obvious the activist investor saw something it liked about the wings, beer, and sportscentric restaurant chain.
Marcato started lobbying over a year ago to convince Buffalo Wild Wings to -- among other things -- streamline its operations and pursue a more aggressive franchising strategy. And Buffalo Wild Wings, for its part, argued that Marcato's criticism was misplaced, as the company was already working to drive down costs, boost traffic, and implement multiple initiatives to "address changing customer demands and sentiment."
Either way, Marcato quickly exerted its influence after winning the board seats. Longtime CEO Sally Smith announced she will step down by the end of this year, and the company launched an ambitious refranchising program putting up 83 company-owned locations for sale in June.
More recently, however, Buffalo Wild Wings shares plunged last month as higher wing costs and slowing traffic weighed on its results in the second quarter. But the company simultaneously pushed forward with its sales and margin-driving initiatives, including the rollout of its Blazin' Rewards program to all locations, the pilot of smaller-format locations to focus on takeout and delivery, and a shift in its popular Wing Tuesday promotion to less expensive boneless wings.
Of course, it's too early to say whether Marcato Capital's efforts will revive Buffalo Wild Wings' share price. But anything is clear, it's that Marcato believes in the promise of Buffalo Wild Wings to achieve market-beating gains for its investors.
Image source: Alibaba Group Holding Limited.
A Chinese internet leader
Keith Noonan (Alibaba): After up-and-down performance following its 2014 initial public offering, Chinese e-commerce giant Alibaba is having a breakout year and has emerged as a favorite among tech investors. The stock is flying high on stellar earnings performance and promising business prospects, and several investment firms have recently published reports anticipating significant upside for investors even as shares have roughly doubled year to date.
Atlantic Equities upgraded its rating on the stock from neutral to overweight and has set a $215 price target on the stock -- representing roughly 24% upside from its current share price of $174. Additionally, Alibaba's Aug. 17 quarterly report prompted Barclays to increase its price target on the stock from $180 to $200 and Raymond James Financial recently to raise its price target on the stock from $190 to $220. While following firm recommendations and price targets is far from a guaranteed recipe for investing success, there are compelling reasons to expect that Alibaba still has room to run.
Last quarter saw the company generate roughly $2.1 billion in profit on $7.4 billion in sales, and it's positioned to continue generating great margins as it scales up its business. Alibaba's online sales platforms accounted for roughly 86% of sales in the June-ended quarter and are still growing at a rapid clip (up 58% year over year), but the e-commerce leader also has other exciting growth prospects. The customer base for the company's cloud computing platform increased 75% year over year in the last quarter, reaching over 1 million, and revenue for the segment was up 96% year over year. While cloud sales accounted for just around 5% of revenue in the quarter, the business could quickly become a much larger contributor.
Alibaba currently trades at roughly 35 times forward earnings estimates, but its growth potential looks to justify that premium, and it's not hard to see why the stock is currently a Wall Street favorite.
