Brean Capital's Top Ideas for 2015

By Carly Forster

After an eventful 2014, the Brean Capital team came together to pick 28 stocks within each of the firm’s four coverage verticals, Consumer, Healthcare, Natural Resources, and Technology, to pay attention to in 2015. Below are four of the highlighted stocks, with one stock from each vertical.

Urban Outfitters:

Urban Outfitters (URBN, Financial) is a specialty retailer that owns and operates over 400 locations around the world across five retail brands: Urban Outfitters, Anthropologie, Free People, Terrain, and BHLDN. While Anthropologie and Free People have consistently performed well over the past year, the company’s name brand, Urban Outfitters, has not seen the same positive results.

In addition, Urban Outfitters was the topic of controversy earlier this year that hurt its public reputation when it featured a Kent State University sweatshirt with what seemed to be fake bloodstains for sale on its website, which for many elicited instant associations with the tragic Kent State massacre of 1970. Urban Outfitters denied it had intentionally referenced the shootings and immediately took the sweater off its website after the public backlash.

However, Urban Outfitters has been diligently working to improve its in-store sales, with retail sales growing by 0.7% in November over the year-ago period. Brean Capital’s Elizabeth Pierce sees the potential in Urban Outfitters, giving the stock a Buy rating with a $40 price target. She believes Urban Outfitters “is a quintessential example of a “Best-of-Breed” retailer given its diversified, omni-channel platform, its ability to understand and connect with customers on an emotional level and its global growth potential.” She continued, “Whilst merchandise execution issues at Urban Outfitters brand have adversely affected recent results, based on our recent channel checks, and considering this management team’s track record of ‘righting the ship’, we remain confident that a turn is underway.”

Pierce has rated Urban Outfitters 7 times since March 2009, earnings a 71% success rate recommending the stock and a +38.5% average return per recommendation.

Rockwell Medical:

Rockwell Medical (RMTI, Financial) is best known for the development of ancillary hemodialysis products, for treatment against diseases such as end-stage renal disease, iron deficiency, and chronic kidney disease. Earlier this year, the FDA recommended that the Phase 3 Triferic, a treatment that replaces iron that is lost during every dialysis treatment for people with kidney disease, supports a positive benefit/risk to treat iron loss.

Despite the positive vote, Brean Capital’s Jonathan Aschoff gave Rockwell Medican a Sell rating with a $4 price target, reasoning “Even if Triferic could eliminate the need for IV iron, we believe it would still fail to improve dialysis center economics, and dialysis centers have already shown that their choice of drugs under bundled reimbursement is in part driven by economics and Triferic has no clinical benefit over SOC.”

Aschoff has rated Rockwell Medical 5 times in the last year, earning a 100% success rate recommending the stock and a +26.9% average return per recommendation.

American Water Works:

American Water Works (AWK, Financial) provides solutions to improve public health, protect the environment, and strengthen the economy by managing and treating water. American Water Works has been known to acquire its smaller, weaker rivals. Most recently, Illinois American Water, one of AWK's many state-based subsidiaries, acquired Hardin County Water Company on December 1 of this year, a company that only serves 500 customers.

Brean Capital’s Michael Gaugler gave American Water Works a Buy rating with a $62 price target, explaining “American Water Works has executed well on earnings growth through acquisitions, improved efficiency, and expansion of market based services, all of which strengthen our investment thesis.” He continued, “Now that rate case activity has slowed, AWK can recoup investment through surcharge mechanisms.”

Gaugler has rated American Water Works 3 other times since 2013, earning a 100% success rate recommending the stock and a +18.1% average return per recommendation.

Seagate Technology, Inc:

Seagate Technology (STX, Financial) is known for developing data storage solutions for people and businesses. Lately, there has been a growing demand for data storage, benefitting Seagate’s continued sales programs. As a result, Seagate will likely see a decent increase in revenue over the next few quarters.

Brean Capital’s Ananda Baruah gave Seagate a Buy rating with an $83 price target, noting “Our broader bullish framework is driven by: 1) EV/FCF valuation, and 2) potential for L-T Industry Gross Margin expansion (at least 100-200 bps over the next few years from both favorable mix and Cap U increases, and perhaps 400-500 bps during the next 5-7 years).” In addition, the analyst notes, “that core business Gross Margins have trended up Y/Y (ex-impact of recent acquisitions) – which is core to our L-T thesis, and we anticipate continued expansion.”

Baruah has rated Seagate 11 other times since October 2009, earning an 89% success rate recommending the stock with a +33.0% average return per recommendation.

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