Three Stocks I’m Buying on Upgrades

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Analysts were hard at work on Monday – upgrading countless stocks – but these are the ones that I find most attractive. These three upgrades are well reasoned, and are stocks that I believe have a significant amount of upside potential.

Don’t fight the trend!

In 2011/2012, I hated Micron Technology (NASDAQ: MU) – but after seeing a 100% rise in DRAM prices and boosts in NAND – I am very optimistic. Moreover, Citibank is also optimistic, boosting the stock’s price target from $13.50 to $19 ahead of its fiscal third quarter report on Wednesday.

The firm believes that the Elpida deal will add $0.88 to annual EPS, which is actually conservative compared to some estimates. Simply put, this is a rapidly changing company. It is not the Micron of old. It is acquiring the bankrupt Elpida, which creates great synergy, and the company continues to benefit from macro improvements.

In 2013, Micron has rallied 110%, including almost 4% on Monday. In my opinion, this is a very good company with a bright future ahead. Thus, I wouldn’t assume that large YTD gains indicate limited upside, it still operates in a large market with a great deal of promise.

Expensive looks may be deceiving

Lumber Liquidators (NYSE: LL) lost most of its early gains on Monday, but still traded higher by almost 2% after Piper Jaffray raised its price target from $90 to $97. The firm notes that channel checks indicate “accelerated market share gains, improvements in operational efficiency, and a compelling new store format.”

Piper Jaffray is estimating that Lumber Liquidators will earn $3.22 per share in 2014, far above expectations of $2.88. This would put the company trading at 30 times earnings. While this might sound expensive, it is just twice as expensive as The Home Depot, yet Lumber Liquidators is growing about 10 times faster. To me, this is a favorable ratio for Lumber Liquidators, indicating that it might be cheap in a space that is expensive. Thus, I agree with Jaffray and I am buying the stock!

The quintessential example of efficiency

My last pick, but certainly not least is Dollar Tree (NASDAQ: DLTR). The stock ticked higher by 2% on Monday after an Overweight rating was issued by JPMorgan, and a $55 price target. The firm believes that Dollar Tree will see a stable gross margin due to increased traffic and sales per square footage.

What Dollar Tree has been able to accomplish is absolutely incredible. The company has an operating margin of 12.59%, yet sells everything in its store for only $1. Not only does it have general costs associated with building and maintaining stores, but also has the same business costs as every other company and finds quality products to sell for $1!

The company is the quintessential example of operational efficiency, yet continues to grow in the high single digits annually. In terms of valuation, it trades at 18 times earnings with a price/sales of 1.45 (consistent with S&P 500). Personally, I think Dollar Tree is a “must-have” in anyone’s portfolio, and a company that will outperform regardless of the economy because of its value pricing. Thus, I couldn’t agree more with JPMorgan and believe that Dollar Tree is a “buy.”

Final thoughts

What I really like about these three stocks is that you get a little bit of everything as a collection. You get technology, retail, and construction/home improvement. You also get a turnaround story combined with growth and consistency. Personally, I don’t like one more than the other, as I believe that each stock serves a different purpose within your portfolio; which is the goal of investing in a new age market. As a result, I suggest assessing what each stock, or stocks alike, add to your portfolio and then determining if it’s an investment need.

Brian Nichols is long DLTR. The Motley Fool recommends Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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