CREDIT SUISSE: Buy these 8 stocks now because they're set to benefit from a powerful combination of strong returns and low expectations

  • Equity analysts for Credit Suisse just released a list of top-rated stocks that appear to face unusually low expectations from Wall Street.
  • Andrew St. Pierre and Arbin Sherchan identified stocks that have high price targets and profit estimates relative to consensus, making them high-conviction ideas.
  • The companies also have a history of bringing much stronger returns on their investments than Wall Street is currently giving them credit for.
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The only thing better than a stock you're very confident in is a stock you're very confident in that everyone else has doubts about — because that can leave you with much more upside.

A Credit Suisse equity research team led by analysts Andrew St. Pierre and Arbin Sherchan is using a calculated, hard-numbers approach to find companies that can do both. They've assembled a list of "Outperform"-rated stocks that they say represent the firm's highest-conviction ideas, and that are underappreciated by others.

The analysts assessed Credit Suisse's own conviction levels by comparing both the second-year earnings estimates and rolling 12-month price targets to the Wall Street consensus. They reasoned that when the firm's estimates diverged from consensus, that represented greater conviction.

The other major component in their work involved identifying companies where other analysts have very low expectations, which makes it easier for the companies to exceed them, setting off a rally in their stocks.

Those expectations were evaluated by digging into the companies' cash flow returns on investment, or CFROI, a measurement of cash the company generates relative to its cost of capital. The analysts evaluated the companies'  CFROI over the past five years to Credit Suisse's estimates, the returns analysts have forecast, and those implied by the market.

Companies with a wide gap, in other words, are facing low expectations relative to their own track records.

The eight companies St. Pierre and Sherchan identified are listed below and are ranked from lowest to highest based on the upside that's implied by Credit Suisse's current price targets on each stock.

The "expectation gap" on each slide is the difference between the companies' median CFROI and the return implied by their current market valuations.

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8. Carlisle Cos.

Ticker: CSL

Sector: Industrials

Market cap: $7.8 billion

Expectation gap: 2.7%

Price target: $155

Upside to target: 9.4%

Source: Credit Suisse

7. D.R. Horton

Ticker: DHI

Sector: Consumer discretionary

Market cap: $25.9 billion

Expectation gap: 7.9%

Price target: $84

Upside to target: 15.3%

Source: Credit Suisse

6. Cummins

Ticker: CMI

Sector: Industrials

Market cap: $34.7 billion

Expectation gap: 3.5%

Price target: $273

Upside to target: 16.2%

Source: Credit Suisse

5. Constellation Brands

Ticker: STZ

Sector: Consumer staples

Market cap: $38.5 billion

Expectation gap: 6.6%

Price target: $234

Upside to target: 20.3%

Source: Credit Suisse

4. Edwards Lifesciences

Ticker: EW

Sector: Healthcare

Market cap: $50.8 billion

Expectation gap: 3.1%

Price target: $97

Upside to target: 21.2%

Source: Credit Suisse

3. Regeneron Pharmaceuticals

Ticker: REGN

Sector: Healthcare

Market cap: $59.9 billion

Expectation gap: 18.1%

Price target: $737

Upside to target: 29.8%

Source: Credit Suisse

2. KBR

Ticker: KBR

Sector: Information technology

Market cap: $3.8 billion

Expectation gap: 1.7%

Price target: $35

Upside to target: 33.8%

Source: Credit Suisse

1. IBM

Ticker: IBM

Sector: Information technology

Market cap: $105.4 billion

Expectation gap: 9.0%

Price target: $160

Upside to target: 36.5%

Source: Credit Suisse

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