As we round the corner on the current decade, investors are laser focused on the market, trying to determine what’s in the cards for stocks as we make our way into 2020. However, the U.S. presidential election as well as the slowing pace of buybacks and economic growth in the U.S. add up to expected volatility in the year ahead.
Against this backdrop, investing titan Howard Marks believes the economy isn’t in a bubble, but he advises that investors take some caution. “The economic expansion and the bull market are old. Valuations are above average. There’s a lot of uncertainty in the world and it strikes me that one should not have as much risk as one did three years ago or six years ago,” Marks told CNBC.
Bearing this in mind, we set out to find the names that remain poised to outperform the market given the uncertainty hanging over our heads as we ring in the new year. Looking to the analysts for guidance, we zeroed in on 3 stocks with stellar long-term growth prospects. After running the names through TipRanks’ Stock Screener tool, it appears that each has the support of Wall Street analysts as well, earning a “Strong Buy” consensus rating.
Flexion Therapeutics (FLXN)
Flexion is working to develop better treatments for patients with musculoskeletal conditions including osteoarthritis (OA), a condition that affects over 30 million people in the U.S. Even with shares already up 84% year-to-date, some members of the Street are betting that FLXN’s growth story is still heating up.
Part of the optimism surrounding FLXN is based on the strong performance of its Zilretta drug. In its most recent quarter, the company was able to post a 15% revenue beat. On top of this, its new rebate program caused the therapy’s sales to increase 29% quarter-over-quarter to reach $21.8 million, zipping past the $19 million consensus estimate.
While Wells Fargo analyst Jacob Hughes notes that the bears will say there has been a “collapse” in pricing, he doesn’t believe that this is the case. “We believe revenues were actually understated this quarter because of some distributor destocking. Based on the Q3 sales momentum, we think Q4 consensus numbers are too low and we raise our revenue estimates,” Hughes explained. To this end, the analyst decided to stay with the bulls, reiterating an Outperform rating alongside $26 price target. (To watch Hughes’ track record, click here)
Meanwhile, Needham’s Serge Belanger focuses on the discontinuation of its Zilretta Phase 3 trial for hip OA pain as a result of a non-safety issue that wasn’t resolved. He argues that this should have a relatively limited impact on Zilretta’s market opportunity as there are less than 500,000 annual hip OA injections compared to 8 million for knee OA and 1 million for shoulder OA. It should also be noted that Belanger believes that there’s a strong likelihood that FLXN’s label change request to include repeat-dosing will be approved based on Phase 3b trial data. This led him to keep the Buy rating and $36 price target as is. At this target, shares could be in for a 67% gain in the twelve months ahead. (To watch Belanger’s track record, click here)
How does the rest of the Street feel about FLXN? Based on the 5 Buys vs no Holds or Sells, the message is clear: the biopharma is a Strong Buy. In addition, the $29 average price target implies 32% upside potential from current levels. (See Flexion stock analysis on TipRanks)
Nuance Communications (NUAN)
This tech company uses conversational AI to revolutionize the way people interact with technology and each other. Its solutions are already being utilized throughout the healthcare, telecom, financial services and government sectors.
Looking at its performance during its fiscal 2019 fourth quarter, there’s no question as to why several analysts are getting excited. Revenue and EPS exceeded the consensus estimates, with the healthcare segment seeing a 9% year-over-year revenue increase. While revenue for its enterprise segment did slow, Oppenheimer analyst Shaul Eyal expects this area to stabilize in full year 2020. Eyal adds, “We applaud NUAN's team for delivering another solid quarter while navigating a series of strategic initiatives to enhance operational efficiency and profitability. We view favorably NUAN's current focus on two simplified segments, the low growth yet predictable healthcare business and the faster growing enterprise business.” This prompted the five-star analyst to maintain his bullish call and $23 price target. (To watch Eyal’s track record, click here)
Wedbush's Daniel Ives, echoing the view of Eyal, reiterated an the Outperform rating on NUAN alongside a $24 price target, which implies nearly 40% upside potential. (To watch Ives’ track record, click here)
Ives noted, “We believe the underlying visibility increasing in the model from the key healthcare initiatives along with healthy profitability/ cash flow lay the groundwork for a strategic organic growth reacceleration story over the coming years that should result in a re-rating of the stock as the Street recognizes the ‘new and improved Nuance’ story.”
In general, other Wall Street analysts are in agreement. 5 Buys and 1 Hold add up to a Strong Buy analyst consensus. Given the $21 average price target, shares could surge 18% in the coming twelve months. (See Nuance stock analysis on TipRanks)
Lumentum Holdings (LITE)
Last but not the least is Lumentum, which offers its customers a portfolio of innovative photonics solutions to accelerate the speed and scale of cloud, networking, 3D sensing and advanced manufacturing applications. Based on major trends in the optical space, some believe that LITE’s future looks bright.
Citing LITE as a top pick, Rosenblatt Securities analyst Jun Zhang argues that significant catalysts are in store. The company could see substantial growth in fronthaul, midhaul and backhaul optical modules, lasers and ROADMs thanks to 5G and stand-alone network deployments. As LITE is the key supplier for 25G and 56G laser chipsets, it also stands to benefit from Google and Amazon’s 400G optical module deployments as the focus on higher end lasers could lead to gross margin improvement.
Additionally, LITE is well-positioned to take advantage of the expanding augmented reality space. “We view LITE is the key beneficiary from growth in the AR market. We believe LITE has the best quality of VCSEL laser and we expect Huawei may use LITE again if Huawei tries to improve their 3D ToF solution for their flagship smartphones that support better AR experiences,” Zhang stated.
Overall, the four-star analyst thinks that these catalysts imply the Street’s estimates are too conservative. To this end, he stayed with the Buy recommendation while raising the price target from $80 to $90. This new target conveys Zhang’s confidence in LITE’s ability to jump 29% in the next twelve months. (To watch Zhang’s track record, click here)
Like Zhang, Wall Street has been impressed by LITE. With the ratio of Buys to Holds at 12 to 1, the word on the Street is that the stock is a Strong Buy. However, the $75.86 average price target indicates modest 3% upside potential. (See Lumentum stock analysis on TipRanks)