3 Stocks the Smartest Investors are Buying Right Now

By Sean Williams, Daniel Miller, and Steve Symington Markets Fool.com


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The stock market can be a tricky place for both seasoned and novice investors from time to time. Sometimes stock valuations head lower for perfectly valid reasons, such as a series of poor earnings reports, a delayed product launch, or growing competition within an industry. However, not all bad news is necessarily understood well. Occasionally, surface knowledge and emotions can get the better of investors and send perfectly good companies with solid outlooks lower. That's when the smartest investors step in to buy.

What stocks might the market's smartest investors be buying up right now? According to our Foolish contributors, Teva Pharmaceutical Industries (NYSE: TEVA), Stericycle, Inc (NASDAQ: SRCL), and Hertz Global Holdings (NYSE: HTZ) are three that come to mind.

Smart investors love highly profitable drug companies

Sean Williams (Teva Pharmaceutical Industries): Though some investors have been running for the exit when it comes to branded and generic drugmaker Teva Pharmaceutical Industries, I believe the smartest investors have been loading up on shares of a highly profitable drugmaker at a cheap price.

To state the obvious, Teva has some near-term issues. The closing of its deal to buy Actavis (Allergan'sgeneric drug unit) took longer than expected, and more recently Teva had to sell some of its generic assets to appease regulators in select countries. During its third-quarter report, Teva also lowered its full-year sales and profit outlook slightly to account for slower-than-expected sales from new product launches.

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However, what Teva also mentioned during its Q3 report that continues to be overlooked is that its weaker-than-expected new product sales are from delayed launches and not competition. Teva still anticipates recognizing every cent in revenue as expected; it merely pushed the revenue growth curve out about a year.


Image source: Getty Images.

Teva should also benefit in a big way from its Actavis acquisition. The deal will improve margins via cost synergies, expand Teva's already massive generic drug portfolio, and could pull operating margins higher from a pricing perspective. With so many compounds being manufactured, Teva may be able to use its clout as leverage to increase its generic drug prices.

Another key point is that Teva managed its patent expiration on multiple sclerosis blockbuster drug Copaxone splendidly. It used legal finagling to keep generic drugmakers from entering the space long enough to introduce a reformulated version of Copaxone that could be taken less frequently. This less-frequently used formulation provides patients and physicians with a brand-name MS drug, and it has a clear benefit over the generic competition. In other words, Copaxone should continue to deliver strong sales for Teva.

If we keep our eyes on the long-term prize, we'd see a drug developer valued at roughly seven times forward earnings and sporting a dividend yield north of 3%. Those are numbers that smart investors are probably going to like.

One company's trash is another's treasure

Daniel Miller(Stericycle): Stericycleis a stock smart investors would be wise to take a second look at. It began as a start-up business to help hospitals manage medical waste and keep abreast of stringent and ever-changing regulations, and it's thrived over the past 25 years.

Despite its success, 2016 was unforgiving for the stock price, and it now offers investors one of the best entry points in years.

SRCL data by YCharts.

Stericycle generates about 66% of its revenue from domestic regulated waste and compliance services, which beyond hazardous and medical waste includes document and hard drive destruction. It also offers domestic communication-related service that generate about 8% of revenue, including product recall and automated communication services. Lastly, its international operations generate about 26% of its total revenue.

The company's international presence offers a great deal of growth in the years ahead, but the intriguing part of Stericycle's growth story comes from cross-selling. In fact, at Stericycle's investor day in November, management noted that only 18% of its customers have more than one of its services, which offers a long runway for cross-selling and incremental revenue from existing customer relationships.

Beyond cross-selling and international growth, an aging population and increased regulation will help drive continued demand for Stericycle's services. As costs continue to rise in the healthcare industry, large waste generators -- think hospitals, clinics, and dentists, to name a few -- will rely on Stericycle's expertise and scale to help minimize costs.Ultimately, Stericycle appears well positioned to take advantage of an aging population and rising healthcare costs, and smart investors would be wise to take a deeper dive into the company.

Hertz so good?

Steve Symington(Hertz Global Holdings): While the rest of the market was panicking after Hertz Global Holdingsturned in weaker-than-expected quarterly results last month, sending shares down as much as 52% on November 8, 2016, as a result, activist investor Carl Icahn was busy doubling his stake in the car rental company.

More specifically, SEC filings show that, shortly after that report, Icahn added more than 15 million shares of Hertz to his portfolio, bringing his total stake to just under 29.3 million shares -- or roughly a third of the entire company.


Image source: Dhub.com, Flickr.

To be fair, Hertz stock fell for good reason; revenue during the quarter fell 1% year over year to $2.5 billion, adjusted net income declined 26.4% to $134 million, and adjusted net income per share dropped 21% to $1.58. By comparison, Wall Street was modeling quarterly revenue of $2.6 billion, and significantly higher adjusted earnings of $2.75 per share.

Management blamed a combination of a "customary vehicle depreciation rate review" near the close of the quarter which resulted in a large depreciation adjustment, lower-than-expected rental volume, and higher net operating and administrative expenses for the bottom-line shortfall.

"While we remain on pace to deliver$350 millionof cost reduction in 2016," explained CEO John Tague, "we fell short from a timing perspective on our internal stretch target for cost reduction. Considering this and the potential for an additional depreciation rate adjustment in the fourth quarter, we are updating our 2016 outlook and taking incremental actions to reduce costs and drive revenue."

More specifically, Hertz reduced its full-year guidance to call for adjusted earnings per share of $0.51 to $0.88, far below its previous full-year EPS forecast of $2.75 to $3.50.

But then, in addition to Icahn's big stake increase, Hertz shares poppeda few days ago amid fresh rumors that Icahn is considering making an offer to acquire Hertz outright -- a move that would represent a massive vote of confidence in the company's long-term story despite its recent struggles. Curiously, the rumors coincided with Hertz announcing thatMr. Tague will retire as CEO on January 2, 2017, to be replaced by industry veteran and former General Electricexecutive Kathryn Marinello. Hertz's press release incidentally included a quote from Icahn, who voiced his excitement "about Hertz and its prospects with Kathy at the helm."

In the end, I'll reiterate that investors should consider Hertz's actual business -- and not the possibility of an acquisition -- when putting together a buy thesis for the company. But if Hertz stages the comeback Icahn obviously expects it to, investors should be poised to enjoy market-beating gains from here.

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Daniel Miller has no position in any stocks mentioned. Sean Williams owns shares of Teva Pharmaceutical Industries. Steve Symington has no position in any stocks mentioned.

The Motley Fool owns shares of General Electric and Hertz Global Holdings. It also recommends Stericycle and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.