The market pendulum has been swinging from one extreme to the other recently, making a difficult environment for investors to track. The ups and downs of the fast-changing situation are the exact opposite of what investors want to see.
What investors would most like to see, of course, are returns. And whether the markets are up or down, following the analysts’ ‘top picks’ makes a viable investment strategy. The Wall Street pros can do the footwork, and their published reports can inform our market decisions, acting as a set of guideposts for investors.
In this article, we will pinpoint three of these ‘top picks.’ These are all names providing dividends, a sure-fire way to ensure a steady income no matter what direction the market is heading in. If that’s not enough, all three stocks have a ‘Perfect 10’ from the Investing Insights.
The platform gives every stock a single-digit score, based on a summing up from 6 separate factors. The factors used are known to correlate with future overperformance; when they align together it’s a strong indication for buyers to consider. Let’s take a closer look.
Ellington Financial (EFC)
We’ll start in the financial sector, where Ellington Financial (NYSE:EFC) inhabits the real estate investment trust niche. Ellington puts its energies into a wide range of real estate activities, including commercial and residential mortgage loans, equity investments, and mortgage-backed securities. The company uses a series of risk management tools to mitigate the natural risks of mortgage-backed securities, and ensure profits for investors.
Ellington’s recent quarterly report, for 4Q20, showed the third consecutive increase in EPS, which was up 38% from Q3 to reach $1.44. For the full-year 2020, EPS came in at 39 cents per common share, down 15% yoy, on net income of $17.2 million.
Like most REITs, Ellington pays out a regular dividend – and Ellington has been able to maintain regular dividend payments throughout the corona crisis year, despite a cut at the height of the panic. The most recent declaration, made in early February for a March 25 payout, was for 10 cents per common share, the same as the last three payments. The company pays out the dividend monthly, and has been increasing it gradually after last year’s cut. The current payment gives a yield of 7.5%.
In his coverage of Ellington, Maxim (NASDAQ:MXIM) analyst Michael Diana writes, “EFC’s equity is allocated 85% to credit assets, and almost all have done well. Of particular note are non-QM loans and reverse mortgage loans. Not only has demand for these credit classes been high, but EFC also has material equity stakes in the companies that originate these loans; thus, EFC profits twice. With smaller mortgage companies going out of business during the pandemic, competition has decreased, leading to favorable pricing.”
At the bottom line, Diana says simply, “EFC remains our top pick under our mortgage REIT (mREIT) coverage.”
To this end, Diana rates EFC a Buy and his $19 price target suggests a one-year upside of ~20%.
There is general agreement on Wall Street that EFC is a quality investment, and the analyst consensus rating shows that: it is a unanimous Strong Buy, based on 4 recent reviews. The shares are priced at $15.77, and their average target is $17.25, implying a 9% upside potential from current levels. (See EFC stock analysis)
EFC Smart Score
OneMain Holdings (OMF)
Sticking with the financial sector, but in services rather that REITs, we’ll take a look at OneMain Holdings (NYSE:OMF). This company’s subsidiaries offer a range of financial services, including consumer finance and insurance, to a customer base that normally gets neglected by the mainstream finance industry: retail customers who lack access – for whatever reason – to the regular banking and credit financing industry. The importance of this market segment should not be ignored, and OneMain showed that in fiscal year 2020 by bringing in $4.4 billion in total revenue.
Closing out the 2020 calendar year, OneMain reported $1.23 billion in top line revenue for Q4 and $2.67 in earnings per share. While revenues were flat sequentially, EPS was up 43% from the previous quarter – and up 39% year-over-year.
Like EFC, OneMain pays out a dividend – but unlike the REIT, OneMain uses a unique supplemental dividend policy. Each second and fourth quarter, the company pays out its minimum dividend per common share – but in the first and third quarters, it adds a one-time supplement to the payment. The minimum payment is currently set at 45 cents per common share; the last common share dividend paid, on February 25, was for $3.95.
Analyst Michael Kaye, of Wells Fargo, is impressed with OneMain, and doesn’t hold back in his comments on the company: “We believe OMF is one of the best stories in consumer finance and that it is surprisingly still under the radar of many financial investors. OMF is a unique excess capital return story, in our view, and we expect $8.30 of dividends to be paid in 2021 which would equate to a 14.5% dividend yield. We also view the new credit card initiative positively as it should drive incremental growth, add value to their franchise, leverage their underwriting, distribution and servicing capabilities. OMF remains our top pick in our coverage.”
Kaye rates OMF shares an Overweight (i.e. Buy) and his $65 price target implies an upside of 34% over the course of the next year.
It’s not often that the analysts all agree on a stock, so when it does happen, take note. OMF’s Strong Buy consensus rating is based on a unanimous 10 Buys. The stock’s $63.60 average price target suggests a 31% upside from the current share price of $94. (See OMF stock analysis)
OMF Smart Score
Devon Energy (DVN)
For the last ‘top pick’ stock we’re looking at here, we’ll switch over to the energy industry. Devon Energy (NYSE:DVN), with a market cap of $15 billion, owns mineral rights – that is, the right to explore and drill – on 1.8 million acres in Texas and in adjacent areas of Oklahoma and New Mexico. This is one of North America’s most productive oil regions, and in recent years, the output here helped make the US a net exporter of fossil fuels. Devon also controls production areas in the mountain state of Wyoming. All told, Devon has over 10,000 wells in active use and an estimated 752 million ‘barrels of oil equivalent’ worth of proven reserves.
In the fourth quarter of 2020, Devon showed a series of strong performance metrics. Production averaged 333,000 barrels of oil equivalent daily, boosted by a 7% quarter-over-quarter increase in crude oil output. Operations yielded a cash flow of $773 million for the quarter, of which $263 million was free cash flow. In conjunction with the earnings report, Devon announced a regular dividend payment of 11 cents per share, along with an additional variable dividend of 19 cents per share. Both are payable on March 31.
Scotiabank’s Paul Cheng reiterates his decision to make Devon a top pick, writing, “We still see significant fundamental upside despite the YTD outperformance and the stock now trading at >4x its 2020 trough… We see little reason to expect that relevance, size, liquidity, etc concerns will prevent the stock from re-rating higher. As the company continues to deliver attractive fundamental results and execute on its shareholder-friendly strategy in the coming months and years, we expect DVN to outperform as the market gains further appreciation for the story and begins to more fully reflect these fundamentals in the share price.”
Cheng’s Outperform (i.e. Buy) rating is supported by a $30 price target implying a 12-month upside potential of 31%.
Overall, there are 19 recent stock reviews of Devon Energy, and they break down 17 to 2 in favor of Buys versus Holds, making the analyst consensus rating a clear Strong Buy. DVN is selling for $22.83 per share, and the average price target of $24.89 suggests ~9% upside from that level. (See DVN stock analysis)
DVN Smart Score
To find more ideas for stocks trading at attractive valuations, visit Investing Insights.