Approaching mid-year, we can see a clear shape developing for the markets in 2022, one based on increased volatility. The economy as a whole is facing challenges, in the form of inflation, a Fed policy shift, and continuing ripple effects from Russia’s Ukraine war and lingering COVID outbreaks, and investors are looking for pathways through it all.
One clear path is to find the beaten-down stocks with potential for near- to mid-term outperformance. These are equities that have underperformed recently, leaving them with attractive valuations compared to the main market indexes – but Wall Street’s analysts still see strong fundamentals. It’s the picture of stocks that are too cheap for investors to ignore.
Using the TipRanks database, we’ve pulled up details on two stocks that meet this profile. Both are Strong Buy-rated, both feature large upside potential, and both are down sharply in recent months. Let’s take a closer look.
Morphic Holding (MORF)
We’ll start with Morphic, an early clinical-stage biopharmaceutical company focused on developing new therapeutic agents based on integrins. These are a wide family of proteins, deeply involved in multiple human biological processes. The company is working on orally deliverable small-molecule designed to target integrin functions. This approach has, in preclinical stages, shown some promise in the treatment of a range of conditions, including cardiovascular and metabolic diseases, autoimmune disorders, fibrosis, and several cancers. Morphic develops its drug candidate pipeline through its proprietary MInT platform.
While most of Morphic’s pipeline tracks are still in preclinical stages, the company does have one drug candidate, MORF-057, in human clinical testing. This drug is a potential candidate for inflammatory bowel disease (IBD). In March, Morphic initiated the Phase 2a EMERALD-1 clinical trial, testing the drug candidate in the treatment of moderate to severe ulcerative colitis, an IBD condition that causes inflammation in the digestive tract. The trial will enroll up to 35 patients, and is supported by positive Phase 1 data that indicated a dosing profile of twice-daily oral dosing. A Phase 2b trial is scheduled for initiation in the middle of this year.
Furthermore, the company showed some important supportive factors in its recent 4Q21 earnings release. First, the company has an advantage over most early-stage biopharmas: a revenue stream. The company has partnership agreements with larger pharma companies, and in Q4 it derived $9.5 million in revenue from them. For the full-year 2021, revenues came to $19.8 million. In another major advantage for Morphic, the company reported having $408.1 million in cash on hand at the end of 2021. This was up 78% year-over-year, and represents a solid ‘war chest’ for the company.
Despite these positive signs for the company, Morphic shares tumbled 48% over the past 12 months.
Covering Morphic for investment firm Canaccord, 5-star analyst Edward Nash reminds investors that there are strong gains in store for MORF in 2022. Nash rates the stock a Buy, and his $68 price target implies an upside of 131% on the one-year time horizon. (To watch Nash’s track record, click here)
Backing his bullish stance, Nash writes: "We view Morphic as a compelling investment opportunity for the following reasons: (1) Integrin targeting is a proven success in IBD, and MORF-057 is differentiated from the $3.9B Entyvio. (2) Morphic is the scientific leader in integrin biology with the MInT platform to fuel partnerships and a pipeline. (3) MORF-057's ability to be administered orally allows the drug to be used much earlier in the IBD treatment paradigm. (4) MORF can learn from Entyvio's success in IBD, which created a model for integrin trial execution in both UC and CD and developed a sizable market for integrins in IBD."
It’s clear from the Wall Street view that Nash is no outlier. MORF shares have 5 recent analyst reviews on record – and all are positive, for a Strong Buy consensus rating. The stock is selling for $30 and its $74.40 average target indicates room for a 148% upside in the next 12 months. (See MORF stock forecast on TipRanks)
Now we’ll shift our focus, from biotech to the telecom industry. Ooma, based in Silicon Valley, offers telecom solutions for businesses and individuals. Services include VoIP, messaging, virtual attendants, and video conferencing; services for individual consumers include residential phone and integration with mobile devices. The company was founded in 2004, and boasts that its business services are flexible, customizable, and scalable.
In the telecom industry, POTS – the plain old telephone systems, or copper-wire networks – are being phased out, and earlier this month Ooma announced a turn-key solution for POTS replacement. Ooma’s Remote Device Manager was unveiled as a web portal manager for AirDial, the company’s wireless POTS alternative. The system is compatible with analog phone service and wireless networked data connections.
Ooma has been consistently beating its earnings forecasts, and in March of this year it releases financial results for Q4 and full-year fiscal 2022, with ended on January 31. The company reported EPS of 13 cents, which was well above the 10 cents expected, and was up slightly from the 12 cents reported in the year-ago quarter. At the top line, revenue came in at $50.5 million, for a 14% year-over-year gain. Of the total revenue, 91% was derived from subscription and services, which grew from $41.1 million in fiscal Q421 to $45.8 million in the current report. The Q4 results were consistent with the full-year results; for fiscal 2022, the top line of $192.3 million was up 14% from fiscal 2021.
All of this sounds like a solid foundation for a tech-based comm provider in today’s digital economy – but Ooma’s shares are down 34% so far this year.
B. Riley analyst Josh Nichols believes that the current low stock price is an opportunity for investors, writing: “OOMA shares currently trade at just 1.6x FY23 EV/sales (peer group median of 3.4x FY23 EV/sales), valuation levels not seen since the onset of the pandemic in 2020, which we believe creates an attractive entry point given the number of irons in the fire…”
Key among those ‘irons,’ in Nichols’ view, is the AirDial, as he explains: “Currently, there are ~30M POTS lines in the U.S., many of which will be phased out or completely decommissions over the next five years and will require a replacement solution... Management confirmed that AirDial is seeing overwhelming initial demand, and we believe the opportunity is only marginally reflected in the company’s FY23 revenue guidance given that every 10k AirDial units (assuming 2 lines per unit) equate to $6M in ARR…”
In line with these bullish comments, Nichols rates OOMA shares a Buy, and sets a $27.50 target price, indicating confidence in a 104% one-year upside potential. (To watch Nichols’ track record, click here)
Other analysts don’t beg to differ. With 4 Buy ratings and no Holds or Sells, the word on the Street is that OOMA is a Strong Buy. The shares have an average price target of $23.67, suggesting a 12-month upside of 71% from the current trading price of $13.82. (See OOMA stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.