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5 Top Stocks to Buy in February

Matthew Frankel, CFP, Chris Neiger, Brian Feroldi, Todd Campbell, and Timothy Green, The Motley Fool

January has been a strong month for the stock market, with most major indices rebounding sharply from their late 2018 slump. However, there are still some compelling bargains to be found.

Here's why five of our contributors think Synchrony Financial (NYSE: SYF), Hess (NYSE: HES), IBM (NYSE: IBM), Amazon.com (NASDAQ: AMZN), and Booking Holdings (NASDAQ: BKNG) are some of the best stocks to buy in February.

Sale sign in storefront window.

Image source: Getty Images.

Two big wins for this highly profitable bank

Matt Frankel, CFP (Synchrony Financial): Synchrony Financial is a leader in both store credit cards and high-yield online savings accounts, and its business is firing on all cylinders. Loan balances grew by 14% over the past year, and the bank's efficiency and 16% net interest margin would make most financial institutions jealous.

In addition, Synchrony investors just got answers to two big lingering questions stemming from the loss of Walmart as a co-branding partner in mid-2018.

First, it was just revealed that Sam's Club will continue to be a Synchrony partner. That makes the loss of Walmart a bit more palatable, as it's certainly easier to replace lost revenue from one major partner instead of two. Second, and perhaps more significantly, Walmart agreed to drop the $800 million lawsuit it had filed against Synchrony, which was alleging mismanagement of the co-branded credit card product.

As a result of these two developments, and because it's selling its Walmart loan portfolio to Capital One, Synchrony is releasing about $500 million in loss reserves, which can now be used to help grow the business.

The best part is that even after the post-news pop, Synchrony trades for just 6.8 times forward earnings, so this highly profitable financial institution is still a compelling bargain.

An oil company worth owning

Todd Campbell (Hess): Oil prices nosedived in the final months of 2018, thanks to greater supply that resulted from allowing countries to import crude from Iran, and oil stocks crashed as a result. There's no telling where oil prices are heading from here, but some of these energy stocks are offering investors an intriguing opportunity to buy, including Hess.

This company is a few years into a major restructuring that's included ditching mature, slow-growing fields in places like the North Sea, spinning off infrastructure assets, paying down debt, cutting costs, and ramping up production in the Bakken Shale.

A decision to increase the number of rigs operating in the profit-friendly Bakken helped production there to increase to an average 118,000 barrels of oil equivalent per day (boepd) in Q3 from 103,000 in the same quarter in 2017. Hess thinks Bakken production will exceed 135,000 boepd in 2019 and that it could reach 200,000 by 2021. If that happens, it would translate into $1 billion in free cash flow annually for the company beyond 2020, at $60-per-barrel West Texas Intermediate prices.

An even bigger opportunity for Hess may exist offshore from Guyana, where it owns 30% of the Stabroek block, a massive field with 5 billion discovered barrels of oil equivalent that should enter production in 2020. Production there and in the Bakken has Hess thinking it can grow production by over 10% compounded annually through 2025.

The increasing production and cost controls that are expected to lower Hess' breakeven point to $40 per barrel (Brent) has the company forecasting compounded annual cash flow growth of 20% through 2025. 

Overall, Hess has a shot at seeing its financials improve significantly over the next few years, and given that its shares have tumbled 28% from its peak last October, I'm thinking now's a great time to pick up some shares.

A tech turnaround story

Tim Green (IBM): Shares of IBM surged after the century-old tech company reported its fourth-quarter results in January. IBM is still dealing with slumping revenue as it invests in cloud computing, artificial intelligence, blockchain, and other growth areas. But the stock was and still is priced for disaster, and the company's 2019 guidance shows that IBM is more resilient than the market seems to believe.

IBM expects to produce at least $13.90 in adjusted earnings per share in 2019, up from $13.81 in 2018, and around $12 billion of free cash flow. That guidance excludes the impact of the Red Hat acquisition, since the timing of the $34 billion deal set to close in the second half will have a meaningful impact on the company's results. IBM is able to grow earnings and produce solid free cash flow because of its key competitive advantages, including decades-long customer relationships, a broad portfolio of products and services, and a deeply embedded position in certain industries.

Shares of IBM trade for less than 10 times the company's earnings guidance, a multiple that bakes in a level of pessimism that just doesn't make any sense. The stock also sports a dividend yield of about 4.7%, and the company plans to keep growing the dividend after it closes on the Red Hat deal.

IBM has been a frustrating stock to own over the past few years. But the foundation is in place for the company to exit this era of revenue declines and return to sustainable growth. At less than 10 times earnings, the stock is a steal.

Amazon's ever-expanding opportunities

Chris Neiger (Amazon.com): Amazon's soaring share price over the past few years has probably kept some investors away from this stellar company. But now that the share price has dropped about 8% over the past three months, a fantastic buying opportunity has opened up for those who've been waiting on the sidelines.

Not only are the company's shares trading at somewhat of a discount to the stock's high four months ago, but Amazon's core businesses also continue to fire on all cylinders, and its expansion into new markets, including advertising, could bring the company even more sales growth.

Amazon's business has benefited from its dominance in the e-commerce market. Nearly 49% of all online sales in the U.S. are made on the company's platform, and its online dominance continues to grow. Consider that Amazon now has more than 100 million Prime members, and it's estimated that more than half of all U.S. households will have a Prime membership by the end of this year. The significance of Amazon's Prime memberships is best understood when you know that these members spend, on average, about $800 more on the company's platform each year than non-Prime members do.

But Amazon's opportunities are expanding beyond e-commerce, of course. Amazon has wisely found a new way to turn its retail prowess into an entirely new business by benefiting from ad sales on its platform. Last year, Amazon became the third largest U.S. digital advertising platform in the U.S., with 4% of the market. Amazon's share is expected to reach 7% by the end of 2020, and about three years from now the company's advertising sales have the potential to top $22 billion, up from just $4 billion in 2017.

Amazon's booming advertising business shows just how well the company can take one success -- a dominant e-commerce platform -- and turn it into another big win. The company has proved over and over again that it can't be boxed into traditional markets, and with Amazon's shares now cheaper than they've been in months, it might be the right time to invest in this massive disrupter.

A proven winner at a value price

Brian Feroldi (Booking Holdings): The name "Booking Holdings" might not ring a bell, but the odds are good that you know this company's brands. This online travel giant owns a number of leading properties that include Priceline.com, RentalCars.com, Kayak.com, Agoda.com, OpenTable, Booking.com, and more.

Booking Holdings has been a huge beneficiary of the gradual shift away from travel agents over the past couple of decades. The company's brands have become a trusted resource for millions of travelers from around the world who want to book a great vacation for an affordable price. That has driven outsize revenue and profit growth for many years. Better yet, the increased scale has allowed the company's margins to steadily increase, and long-term shareholders have been hugely rewarded. The stock is up 2,450% since 2009. 

The company's massive success has allowed it to grow into an $80 billion giant. However, even with its gargantuan size, Booking's sales and earnings are still growing at a brisk pace. Last quarter these numbers were 14% and 19%, respectively. Better yet, the company's strong growth rates should persist for years to come, since the online travel market is still growing and represents only a fraction of the total travel spending.

Wall Street believes Booking Holdings' profits will grow by more than 15% annually over the next five years. That's a blazing fast number for a business currently trading for less than 17 times forward earnings. That's why I'd be a happy buyer of Booking's stock today if it wasn't already one of my largest personal holdings.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon and Booking Holdings and has the following options: short January 2021 $180 puts on IBM, short January 2021 $175 puts on IBM, long January 2020 $170 calls on IBM, and short January 2020 $170 puts on IBM. Chris Neiger has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. Timothy Green owns shares of IBM. Todd Campbell owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Booking Holdings. The Motley Fool has a disclosure policy.