Marko Kolanovic, JPMorgan’s quant expert, sees equities as both expensive and cheap at the same time. Yes, he acknowledges stocks are priced at or near their all-time highs in absolute terms, and compared to earnings – but in relation to bonds, stocks are undervalued. And with that comparison tied directly to bond yields, which are historically low and unlikely to see gains any time soon, Kolanovic believes that stocks will act as cash magnets in 2H20.
He notes that the mega-cap growth stocks are hitting new record highs again – see Apple for a prime example – and that they are benefitting from fears of a second wave of the coronavirus. But Kolanovic adds that the market isn’t estimating the effect properly. While cases are rising sharply in the three of the largest states (California, Texas, Florida), death rates are remaining low. This suggests that the virus is becoming less dangerous – and that when the market’s collective wisdom realizes this, value stocks are going to surge.
In fact, in Kolanovic’s view, a late summer surge “could result in a rapid momentum sell-off and value rally.” The trick now will be finding the value stocks that are primed for that gain.
Fortunately, Kolanovic’s colleagues in JPM are on the case. They have pinpointed three stocks showing signs of great value – relatively low cost now, with serious upside potential for the coming year.
We’ve used the TipRanks database to pull up the details, and find out what makes JPM’s picks so compelling.
JOYY, Inc. (YY)
We’ll start in China, with JOYY, a major social media and online digital streaming platform. It’s easy to overlook China, from the West, as the country is highly insular by both government policy and cultural history, but we shouldn’t forget that China, with population near 1.4 billion, has an ‘online population’ of almost 800 million. That’s double the population of Europe, and more than double the population of the United States – and that is only China’s domestic market. Add in China’s moves toward the global stage, and the possibilities are staggering.
That can be seen from YY’s share growth. The stock is up 50% year-to-date; a look at the share price chart shows that YY simply shrugged off the ‘corona quarter.’
First quarter net revenue reached $1.01 billion, a 49% year-over-year gain. Strong growth across the company’s online subsidiaries powered the gains, as monthly average users (MAU) hit 520.1 million.
A major part of JOYY’s growth in recent months has come from Singapore’s Bigo live streaming platform. The Chinese company bought Bigo in May of last year, in a move valued at $2.1 billion. Since then, Bigo has become the world’s fifth largest site for streaming apps.
Bigo was on JPMorgan’s Alex Yao’s mind when he reviewed JOYY stock. The 5-star analyst noted, “[W]e believe the current share price hasn’t fully factored in Bigo’s growth potential and we expect strong Bigo revenue growth in 2Q20 and turning profitable in 4Q20 will be near term share price catalysts…”
To this end, Yao rates the stock a Buy, and supports that by raising his price target to $125. That new target implies a strong upside potential of 57% for the year ahead. (To watch Yao’s track record, click here)
It’s clear that Wall Street agrees with JPM’s analysts about the quality of YY stock. The shares have a unanimous Strong Buy consensus rating, based on 7 Buy reviews. The stock is selling for $81.45, and the average target of $104.17 suggests a 28% upside potential. (See YY stock analysis on TipRanks)
Cloudflare, Inc. (NET)
Next up is Cloudflare, a multi-billion-dollar online network operator. The company offers content delivery network services, web infrastructure and website security, and domain name server services. Cloudflare say revenues rise to $287 million last year, and 1H20 saw its EPS net loss narrow. The current business environment, with more people working remotely from home, and with businesses relying more than ever on teleconferencing, have put Cloudflare’s products and services in high demand.
The Q1 earnings report shows that, as far as possible. NET’s revenues surged 48%, reaching $91.3 million and beating the forecasts. Cloudflare reported some 250,000 new customers in the quarter, putting the company’s total customer count at 2.8 million. Sales grew 44% year-over-year in the US – and an even more impressive 58% in Europe. US sales are 40% of the company’s total.
Covering the stock for JPM, 5-star analyst Sterling Auty describes the company’s portfolio of products as ‘gaining traction’ in current conditions. He writes of the stock, “[We] expect the company to convert its free Teams offering over to a paid solution in the coming quarters and that has the potential of generating additional revenue tailwinds… we believe that there is ample upside opportunity to the revenue results over the next several years to generate an attractive free cash flow profile…”
Auty’s $52 price target implies a 48% one-year upside, and fully supports his bullish outlook. (To watch Auty’s track record, click here)
Like many upwardly mobile tech companies, Cloudflare’s stock has pushed past its average price target in recent trading. The stock is currently priced at $36.75; Auty’s outlook suggests that Wall Street’s analysts may have to readjust their targets here. In the meantime, NET has a Moderate Buy rating from the analyst consensus, based on 8 Buys and 4 Holds. (See Cloudflare stock analysis on TipRanks)
Ormat Technologies (ORA)
Not all tech is digital tech. The last company on our list, Ormat Technologies, is an alternative and renewable energy provider, based in Nevada and operating around the world. The company boasts over 150 power plants generating more than 2,000 megawatts of power in 30 countries. Ormat is a major provider of geothermal energy in Guatemala, Honduras, Kenya, and the US.
No matter how the economy goes, we all need power – and Ormat used that fact to keep earnings up during the corona crisis. The company’s Q1 results beat the forecasts, coming in at 51 cents per share. Revenues, however, slipped year-over-year by 3.5%, to $192.1 million.
That slip is reflected in the share value, which is down 17% year-to-date. ORA has underperformed the broader markets, which ironically increases the value potential of the stock. The company’s electricity segment – about half of the total business – features high margins, giving the company a strong foundation for future income.
JPM’s 5-star analyst Mark Strouse has this in mind when he writes, “We view ORA as one of the higher-quality stocks in our Alt Energy coverage universe, based on relative balance sheet strength, earnings power and visibility that originates in the shift toward ownership and operation of a diverse portfolio of geothermal projects.”
Strouse upgrades his stance on ORA shares, raising them from Neutral to Buy. His price target, at $82, indicates room for a 32% upside. (To watch Strouse’s track record, click here)
ORA has two recent analyst reviews, one Buy and one Hold, making the consensus view a Moderate Buy. (See ORA stock analysis on TipRanks)
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