One way to come up with new stock ideas is to listen closely when Wall Street insiders speak. After all, analysts and fund managers often have decades of experience working for them and unlimited research budgets at their disposal. Given their resources, experience, and market influence, it can be a smart idea to tune in when they have something important to say.
So which stocks do Wall Street insiders have their eyes on right now? We asked a team of investors to weigh in and they picked Royal Gold (NASDAQ:RGLD), Activision Blizzard (NASDAQ:ATVI), AbbVie (NYSE:ABBV).
Gold, the way pensions like it
Reuben Gregg Brewer (Royal Gold): Government pension plans from California, New York, Florida, Ohio, Texas, Oregon, Michigan, and Louisiana own shares of Royal Gold. If these giant funds, and their teams of financial advisors, are using Royal Gold to gain exposure to precious metals for their thousands of constituents, shouldn't you take a look? But here's the interesting thing: Royal Gold isn't a gold and silver mining company.
Royal Gold is a streaming company. It provides cash up front to miners in exchange for the right to buy silver and gold at reduced rates in the future. Miners get an alternative source of financing, particularly beneficial when banks and capital markets are down on the precious metals industry. And Royal Gold locks in low prices and thus high margins. The chart below helps prove that out -- that while giant miners like Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM) have seen their EBITDA margins sink deep into the red a couple of times over the last decade, Royal Gold's EBITDA margins have remained high and steady.
There are a few more reasons to like Royal Gold, too. For one, it has a countercyclical bent because miners tend to need the most cash in commodity downturns. That means it has the best opportunities to build its business when the mining industry is struggling. Two, it doesn't have investments in just a handful of mines. Like most miners, it has investments in 38 producing properties, 24 development projects, and 130 evaluation and exploration stage properties. You can't get that type of diversification from a miner.
Three -- and this should really interest income investors -- the precious metals streaming company has increased its dividend for 16 consecutive years. In good times and bad, Royal Gold's wide margins have allowed it to reward shareholders with dividend hikes. When you see all the positives, you can understand why pension funds from around the country have invested in Royal Gold -- and why you might want to follow along in their footsteps.
A leader in next-generation entertainment
Keith Noonan (Activision Blizzard): Video game publisher Activision Blizzard has been one of the year's best-performing stocks, and, according to some Wall Street insiders, its growth story is just getting started. In an August letter to clients, Jefferies analyst Timothy O'Shea had this to say about the company:
With its stable of core franchises and a multitude of future growth opportunities, ATVI is building a Disney-type media business for the 21st Century, but with (much) higher operating margin.
He went on to say that the company had a range of promising growth avenues in mobile, advertising, esports, full-game downloads, consumer products, and in-game purchases. I agree with this general premise and think that describing Activision Blizzard as a Disney-type opportunity is an apt way to summarize the company's outlook. Video games are still a relatively young medium with substantial, untapped commercial potential, and Activision looks poised to retain its current leadership position in the growing industry and become a multimedia powerhouse.
Trading at roughly 30 times forward earnings estimates, Activision Blizzard might look expensive, but the company is still delivering rapid growth and many of its promising opportunities are still in the early phases of unfolding.
This red-hot big pharma company just scored an upgrade
Brian Feroldi (AbbVie): 2017 is shaping up to be a heck of a good year for shareholders of the biopharma giant AbbVie. Including the company's generous dividend payments, shareholders have enjoyed a total return of more than 48% since January. That's a big move for a $140 billion company. However, if you believe an analyst at Leerink Partners, the good times are far from done.
The analyst recently upgraded AbbVie's stock to outperform and offered up a price target of $106. If achieved, that represents a double-digit gain from today's $90 price tag.
What's behind the bullish call? The analyst provided three reasons for the upgrade:
First, AbbVie just announced that it has resolved an important legal battle with Amgen (NASDAQ:AMGN). Amgen is developing a biosimilar product candidate for AbbVie's megablockbuster drug Humira. Since Humira accounts for 60% of AbbVie's revenue, this biosimilar product candidate is a real threat to the company's business. The settlement calls for Amgen to pay AbbVie a royalty for use of its intellectual property and for Amgen to hold off launching the drug until 2023.
Second, AbbVie boasts a strong pipeline that includes three potential blockbusters drugs that could be in regulators' hands within the next year. If all goes well, then these drugs could collectively rake in billions in annual sales.
Finally, Leerink thinks that AbbVie's projected earnings growth estimate of 14% annually over the next five years is conservative given the above information. With shares trading around 14 times forward earnings and offering up a dividend yield of 2.9% (that only consumes 60% of profits), Leerink thinks AbbVie' stock is still a bargain, even including the recent bull move.
Brian Feroldi owns shares of Activision Blizzard. Keith Noonan owns shares of Activision Blizzard. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.