Three cheap stocks that just got upgraded

The analysts upgrade three cheap stocks with double-digit potential

Now that the S&P 500 (NYSEARCA: SPY) has corrected about 20% the stock market is starting to look cheap again. While we think the broad market still has a ways to go before hitting bottom there are some stocks and sectors garnering attention from the analyst. The three we’re highlighting today have corrected far more than the broad market, are supported by secular trends, and have at least a high-double-digit potential for capital gains and so are very interesting to us. If you’re looking for a place to park some money for the 2nd quarter reporting period and the summer of 2022 these are certainly worth a look.

A.O. Smith is a play on housing

A.O. Smith (NYSE: AOS) manufactures and markets a wide range of construction products that include water heaters, heat pumps, and water treatment equipment. The stock corrected along with the broader market but outpaced it by nearly 2 points to 1. The stock is now down about 35% from the high and offering an entry too good for at least one analyst to pass up. Longbow Research issued an upgrade from Neutral to Buy with a price target of $71. This is the first shout-out in nearly two months and reverses a trend put in place in the wake of the last earnings report.

The last earnings report was better than expected and came with favorable guidance but the slowdown in housing expectations weighed on the minds of analysts and resulted in a downgrade (to Market Perform from Outperform) and two price target reductions that have the Marketbeat.com consensus rating trending sideways over the last 3 months. The takeaway, however, is the stock price is down about 15% since the last earnings report and the company’s business is strong.

In regard to the price target, the analysts are expecting the stock to trade in the range of $78 which is about 35% above the current price action. The company is expected to report earnings in the last week of July and deliver a sequential downtick in results. Based on our view of the market, the company should easily outpace the consensus estimate but might indicate a slowing within the industry. A.O. Smith is also a long-time dividend grower with a yield near 2.0% and an expectation for another 15% (roughly) distribution increase later this year.

Mercer International, a diversified play for the times

Mercer International (NASDAQ: MERC) is a wood and wood products company operating in segments that include lumber, wood pulp (for paper and biomass), and wood products. This gives it exposure to construction, green energy, and paper/packaging products which are all supported by secular trends, government policy, or both. Credit Suisse just issued an upgrade for the stock-based in part on the deep value of only 3.5X its earnings. The upgrade is to Outperform from Neutral with a price target of $19 which is the new Wall Street high. This target implies about 40% of upside not counting the 2.5% dividing yield.

Rocket Companies is ready to launch higher

Wells Fargo analyst Donald Fandetti upgraded Rocket Companies (NYSE: RKT) to Overweight from Equal Weight citing the company's position and potential benefit from residential mortgage dislocation. In his view, negative sentiment has peaked and margins should begin to stabilize and even grow as capacity comes out of the origination market. He assigned a price target of $10 compared to the Marketbeat.com consensus of $11.35 which implies about 40% of upside for the stock.