Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns

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  • Strategist Steven DeSanctis of Jefferies says companies with lower returns on equity have done shockingly well in the last few months, but he says the trend is about to break.
  • He notes that those low returners have gotten expensive, and recent earnings and economic trends are good news for higher-returning stocks.
  • Rounding up a series of key market trends, he’s created a list of 14 buy-rated small-company stocks that are high returners, look inexpensive compared to their future earnings, and are financially healthy.
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  • Visit Business Insider’s homepage for more stories.

Jefferies Strategist Steven DeSanctis is probably speaking for a lot of people when he says stock performance “has been very odd during this rebound.”

One odd but well-known issue is that ultra-low interest rates unleashed huge returns from stocks that were in bad financial shape, since the easy financial conditions helped them the most. But he adds that stocks with low returns on equity are actually outperforming stocks that are more efficient at returning money to investors.

In a recent note to clients, he explains that a big rally in health care stocks, which are generally lower returners, is one key reason for that strange result. The lower returners are much more expensive than usual while higher returners look cheap compared to their own histories.

DeSanctis, a small- and mid-cap strategist, says the market is coming to a turning point and it might be time to look elsewhere.

“The lowest ROE names held up better in the downturn but the gap with the highest ROE names is now above the one-standard deviation line,” he wrote. “When we touched this level in the past, High ROE outperforms by an average of 5.5% over the subsequent three months, by 11.1% over the next six months, and a whopping 43.4% for the full year.”

DeSanctis thinks smaller and less expensive companies are likely to stay on top, as easy money and an economic rebound are very good news for both of those groups of companies.

“Cheap stocks are still very cheap on an absolute basis despite rising 50+% from the market lows,” he said. “The Fed has the credit markets’ back and this really helps small caps more than large caps.”

To bring those trends together, DeSanctis offers this list of high-returning small-company stocks that are financially healthy and fairly inexpensive based on their projected earnings.

Specifically, the companies have market capitalizations between $1 billion and $30 billion and returns on equity of 10% or more. Their debt-to-capital ratios are either falling or have risen by less than 5%, which shows that their financial health is stable or improving.

Lastly, they’re all cheaper than at least 60% of stocks based on their expected earnings for next year. All 14 have “Buy” ratings from Jefferies analysts.

Read more:

SEE ALSO: A high-growth fund manager is tripling her peers’ returns in 2020 while targeting nontech industries like beer and restaurants. She breaks down how she picked out 5 of the most innovative companies.

1. Lithia Motors

Ticker: LAD

Sector: Consumer discretionary

Market cap: $3.1 billion

Price-to-earnings ratio: 11.7

Return on equity: 19.3

Source: Jefferies Group

2. Core-Mark

Ticker: CORE

Sector: Consumer discretionary

Market cap: $1.1 billion

Price-to-earnings ratio: 13.5

Return on equity: 10.6

Source: Jefferies Group

3. LKQ

Ticker: LKQ

Sector: Consumer discretionary

Market cap: $7.4 billion

Price-to-earnings ratio: 11.6

Return on equity: 12.0

Source: Jefferies Group

4. BorgWarner

Ticker: BWA

Sector: Consumer discretionary

Market cap: $6.8 billion

Price-to-earnings ratio: 10.4

Return on equity: 15.9

Source: Jefferies Group

5. Signature Bank

Ticker: SBNY

Sector: Financials

Market cap: $5.4 billion

Price-to-earnings ratio: 9.9

Return on equity: 11.6

Source: Jefferies Group

6. Synchrony Financial

Ticker: SYF

Sector: Financials

Market cap: $13.5 billion

Price-to-earnings ratio: 8.1

Return on equity: 21.9

Source: Jefferies Group

7. LPL Financial Holdings

Ticker: LPLA

Sector: Financials

Market cap: $5.9 billion

Price-to-earnings ratio: 13.7

Return on equity: 55.4

Source: Jefferies Group

8. Virtu Financial

Ticker: VIRT

Sector: Financials

Market cap: $2.8 billion

Price-to-earnings ratio: 11.2

Return on equity: 15.1

Source: Jefferies Group

9. McKesson

Ticker: MCK

Sector: Healthcare

Market cap: $24.4 billion

Price-to-earnings ratio: 9.2

Return on equity: 13.7

Source: Jefferies Group

10. Oshkosh Truck

Ticker: OSK

Sector: Industrials

Market cap: $4.7 billion

Price-to-earnings ratio: 13.0

Return on equity: 18.7

Source: Jefferies Group

11. HD Supply

Ticker: HDS

Sector: Industrials

Market cap: $5.3 billion

Price-to-earnings ratio: 11.9

Return on equity: 29.8

Source: Jefferies Group

12. Alliance Data Systems

Ticker: ADS

Sector: Information technology

Market cap: $2.1 billion

Price-to-earnings ratio: 3.7

Return on equity: 25.1

Source: Jefferies Group

13. Eastman Chemicals

Ticker: EMN

Sector: Materials

Market cap: $9 billion

Price-to-earnings ratio: 10.1

Return on equity: 13.5

Source: Jefferies Group

14. Celanese

Ticker: CE

Sector: Materials

Market cap: $9.8 billion

Price-to-earnings ratio: 9.6

Return on equity: 27.1

Source: Jefferies Group

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