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 pros might have an edge. That can often mean that other investors should be paying closer attention. Here's why our Foolish investors think that Ferrari (RACE 1.35%), Intuitive Surgical (ISRG 0.98%), and Apple (AAPL 5.98%) all fall into that category right now.
Ferrari is celebrating its 70th birthday in 2017 with fat profit margins and an intriguing growth plan. Image source: Ferrari N.V.
When Wall Street hotshots buy what they know
John Rosevear (Ferrari): "Buy what you know," famed fund manager Peter Lynch advised investors. An awful lot of highly paid car-loving Wall Street pros seemed to take that advice, jumping into Ferrari (the stock) a few months after longtime owner Fiat Chrysler Automobiles (FCAU) spun off the supercar maker in late 2015.
How has that worked out? The stock took off starting in about February of last year:
Ferrari's share price has leveled off a bit lately, but it might just be stopping for breath. Even at these lofty prices, Ferrari still has a lot going for it as an investment:
- Huge margins: Ferrari's EBIT margin in the second quarter was 21.9%. Compare with the (pretty good) 9.7% EBIT margin that BMW AG's (BAMXF -3.53%) automotive business generated over the same period. Ferrari's margin is astounding for an automaker, but it's business as usual for Ferrari: Its third-quarter margin should be in the same neighborhood when Ferrari reports on Nov. 2.
- A hard-to-disrupt business: Ferrari's history and racing prowess make it a uniquely covetable auto brand; Ferrari's super-rich clients are somewhat insulated from economic ups and downs; and Ferrari lovers aren't likely to abandon their rides for a robot taxi service any time soon. (In fact, Ferrari will probably stick with its beloved internal-combustion engines for many years yet, though it is adopting hybrid powertrains.)
- A growth plan: The company has long capped its annual production in order to preserve exclusivity (and pricing power), but CEO Sergio Marchionne thinks the limit can be raised somewhat over the next few years. That, plus other profit-boosting initiatives, gives the supercar maker a path to profit growth.
But there's a big caveat: that lofty price. Right now, like its cars, Ferrari's stock is really expensive. Ferrari is arguably better compared to luxury companies than to mass-market automakers, but at 32 times expected 2017 earnings, its valuation is lofty even by luxury standards. Still, I think its hot status on Wall Street could mean that its valuation keeps pace as profits grow. That could give it considerable room to run over the next three or four years.
New opportunities for an old favorite
Cory Renauer (Intuitive Surgical): Wall Street insiders aren't the only analysts who love this pioneer of robot-assisted surgery. The shares have gained 2,462% since the Motley Fool Rule Breakers service first recommended the stock around 12 years ago, and it looks like there could be another growth spurt ahead.
When the company reported third-quarter earnings recently, procedures performed grew an impressive 15% over the previous year, and sales of instruments consumed by each procedure grew in lockstep to $401 million for the quarter. Intuitive Surgical also reported impressive uptake of new systems, placing 26% more than it did during the same quarter last year.
Increasing availability of the company's da Vinci systems is one reason analysts at both RBC Capital and Morgan Stanley raised their price targets for the company recently, but there's more. A few short years ago, hernia-repair revenue comprised a tiny sliver of the company's top line. In recent quarters hernia repairs have been the company's biggest growth driver, and Intuitive has only scratched the surface of this big opportunity.
With more than 4,200 of its surgical systems installed in major hospitals across the globe, there is a growing chance that surgeons would find the next application that opens up an opportunity to rival the size of the hernia-repair market. Although there are plenty of visible avenues to growth, the paths we can't see yet are downright thrilling.
When Wall Street takes its own advice
Chuck Saletta (Apple): Every last one of the Wall Street analysts who follow technology giant Apple has either a "strong buy," "buy," or at least "hold" call on its shares. Not only that, but the average rating on the stock is between "strong buy" and "buy" on that scale. Indeed, the most recent Wall Street move on Apple's stock was an upgrade to "overweight" by KeyBanc.
CEO Tim Cook has kept Apple on an impressive profit-growth path since taking the top job in 2011. Image source: Apple, Inc.
What's interesting is that Wall Street isn't only telling you to buy Apple's shares -- it actually owns a substantial fraction of those shares as well. Indeed, over 60% of the company's shares are held by institutional investors.
On the surface, there's a lot to like about Apple. It's expected to be able to grow its earnings at a healthy 12% clip over the next five or so years, yet it only trades at around 14 times anticipated earnings. It sports a decent dividend, yet it only pays out around 27% of its earnings, giving it ample room to increase that dividend. And of course, with the recent launch of the iPhone 8 and iPhone X, Apple is kicking off a new wave of product upgrades, giving it opportunity to juice its sales.
If there's a risk to all that love for Apple, it's this: The device maker depends on that upgrade cycle to get a substantial portion of its growth. If customers decide that a future generation of iPhones isn't worth the price of the upgrade, the company's growth could falter.
