Is it time to run with the bulls? Writing from investment bank JPMorgan, quantitative strategist Marko Kolanovic says it is. You may remember Kolanovic, if you follow market news regularly; he was one of the few who correctly called the bottom back in March. Now he says that the near- to mid-term prospects remain bullish. He notes two points of particular importance for investors, economic support policies, and the ongoing COVID-19 epidemic.
Regarding policy support, Kolanovic is quick to connect recovery in liquidity with the massive fiscal and monetary support put in place by Congress and the Federal Reserve. He reminds investors that “liquidity has recovered meaningfully from the March lows.”
The second point is more subtle. Kolanovic writes, “Higher COVID-19 incidence in mainly impacting younger populations, [with] drastically lower mortality rates and likely reflects high testing rates, recent protests, backlogs of hospital visits, and increased economic activity.” In other words, as we return to normal life, more people are getting exposed to the virus – but the people getting exposed are more resistant to the disease, and the death rates are dropping. The coronavirus crisis is turning out less dangerous than was originally feared, and that is good news – especially for stock bulls.
Kolanovic’s colleagues at JPM have run with his bullish view, and are pinpointing stocks that have great upside potential. We’ve used the TipRanks database to pull the details on three of those stocks – the upsides start at 22%, but let’s see what else makes them compelling to JPM’s experts.
Warner Music Group (WMG)
After a nine-year run as a private company, Warner Music, the global music industry’s third largest recording company, completed a new IPO just last month. The stock sale raised almost $2 billion, and was considered a smashing success.
Music is a competitive industry, and Warner has some aces in the hole. The company owns recording rights to a slew of big-name artists, including Madonna, Prince, the Rolling Stones, and Metallica. This playbook is an enormous asset, and one that puts Warner on solid footing.
With just one month of market trading behind it, WMG hasn’t got a long history for analysts to review – but it does have that playbook, and JPM analyst Alexia Quadrani is suitably impressed.
Quadrani writes, “As the only pure play music content company, WMG is well-positioned to benefit from the ongoing growth in paid music streaming globally. We believe WMG shares will maintain a premium valuation over the average of our large-cap media universe due to its higher growth profile, and our outlook reflects our confidence in the growth of streaming and WMG’s execution.”
To this end, Quadrani rates WMG a Buy and suggests a $40 price target, which implies a robust upside of 36%. (To watch Quadrani’s track record, click here)
In its first month since the IPO, WMG shares have earned a Moderate Buy rating from the analyst consensus. Wall Street’s stock watchers are divided 7 to 8 on Buys and Holds, mainly reflecting caution during the coronavirus crisis. The stock’s $33.64 average price target indicates a one-year upside potential of 15% from the current share price of $33.64. (See WMG stock analysis on TipRanks)
Varonis Systems, Inc. (VRNS)
With so many people moving to remote work, data security is at a greater premium than ever. Varonis Systems, a security software company, offers a platform that is perfect for the times. Using digital behavior analysis techniques, Varonis’ platform allows businesses to identify cyberattacks based on abnormal user behavior. It’s an idea whose time has clearly come, and Varonis is running with it. The company’s newest platform features remote work security capability.
That doesn’t mean the company was able to fully dodge the corona bullet. The broad declines in Q1 – due to the social and economic lockdown policies – put a hurt on VRNS. The company reported steep losses in earnings, seeing the net loss drop sequentially from 47 cents to $1.05. Revenue performed better, beating the forecast at $54.18 million.
The stock, however, has performed better than the earnings, rising nearly 27% year-to-date.
Sterling Auty, 5-star analyst with JPM, lays out a clear case to explain Varonis’ strong share appreciation: “[We] believe Varonis represents one of those attractive situations as its subscription transition offers the opportunity for significant outperformance relative to revenue and margin estimates that we believe can deliver stock outperformance. This is aided by the growing need for data security solutions as cloud adoption increases and work-from-home setups drive usage of tools that create security challenges.”
Auty’s Buy rating on the stock is supported by his $130 price target, which indicates room for a potential 31% upside in the coming year. (To watch Auty’s track record, click here)
Overall, Varonis has a Strong Buy rating from the analyst consensus, based on 11 Buys versus just 2 Holds. The stock’s recent share gains, however, have pushed the price almost up to the average price target. VRNS currently trades at $98.58; the average target is $100.36. (See Varonis stock analysis on TipRanks)
Masonite International (DOOR)
Last on our list is a major name in the construction industry. Tampa-based Masonite, through its subsidiary companies, manufactures doors and their associated systems (frames, screens, windows, and locks) for both interiors and exteriors. It’s a niche product, but an important one; even a small house can have two exterior doors and 8 or 10 interior ones.
Masonite posted a strong Q1, despite the corona crisis. Net sales increased 4%, reaching $551 million. EPS rose sharply, too, to $1.24. These gains came even as the company withdrew its full-year 2020 guidance due to COVID-19 concerns.
JPM’s Michael Rehaut likes what he sees in Masonite, noting, “[Not] only did the company provide a positive sales update – pointing to June sales down only mid single-digits (with N. America Residential up modestly), following May down low teens – but importantly, DOOR also pointed to some positive margin trends as well,”
“[We] point to the company’s pricing strategy, strong execution and longer term margin optimization efforts as positive differentiators, along with its attractive relative valuation trading at only roughly 8.5x and 7.3x our 2020E and 2021E EBITDA, respectively,” the analyst concluded.
In line with his comments, Rehaut puts a $95 price target and a Buy rating on DOOR shares. His target implies an upside of 22% for the next 12 months. (To watch Rehaut’s track record, click here)
DOOR is another stock with a Strong Buy consensus rating, in this case based on 6 Buys and 2 Holds. Shares are currently trading at $77.54, and the average price target of $85.38 suggests a one-year upside of 10%. (See Masonite’s stock-price forecast on TipRanks)
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