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Inflation is on everyone’s minds these days, and for good reason. Annualized price increases are at their highest level in 41 years, and are evoking memories of the Carter Administration. Carter’s failed attempts to curb inflation killed his chances in the 1980 election, and Reagan’s Administration only beat inflation at the cost of double-digit interest rates. With an election coming up, an Administration flailing, and the Federal Reserve on course this week to bump up rates again, the parallels are coming clear.
So it’s only natural that the major investment banks are analyzing inflation in the context of current conditions, attempting to chart its course and effect on the markets. Weighing in for J.P. Morgan, global market strategist Marko Kolanovic noted, "The move in markets prices in more than enough recession risk, and we believe a near-term recession will ultimately be avoided thanks to consumer strength, COVID reopening/recovery, and policy stimulus in China."
Kolanovic doesn’t necessarily advice against moving into stocks, but he does advise caution: “While we expect markets to recover YTD losses in H2 to finish roughly flat, we don’t advocate indiscriminate buying of broad risk markets.”
So what does Kolanovic recommend? Getting into some specifics, he writes, “Within equities we favor segments that sold off strongly and are trading near record low relative valuations, while underweighting crowded/expensive segments such as defensives.”
Now we can follow the stock analysts from JPMorgan, and see where they’re taking their own firm’s strategic advisory. Using the TipRanks platform, we’ve pulled up the data on two recent JPM stock picks. The firm sees these stocks with more than 40% upside possible in the next year. Let's take a closer look.
Take-Two Interactive (TTWO)
We will start with Take-Two, a company in the online gaming industry, a sector whose value is estimated near $200 billion this year. Take-Two, through its subsidiaries, owns several high-profile game franchises, including the ‘Civilization’ series and the long-running ‘Grand Theft Auto.’ The company’s gaming products are available in both desktop and mobile versions.
In January of this year, Take-Two made a major move to expand its mobile offerings, through the purchase of the mobile and social game company Zynga. The acquisition was approved by shareholders in May, and that month the transaction was completed.
Also last month, Take-Two reported its results for Q4 and fiscal year 2022, which ended on March 31. The company showed a quarterly revenue gain of 11% year-over-year, as the top line rose from $839 million to $930 million. Earnings for the quarter were down from the prior year, falling from $1.88 per diluted share to $0.95. Quarterly net bookings, a forward-looking metric, were up 8% to $845.8 million.
For the full year, Take-Two’s top line was up 4% by GAAP measures, to $3.5 billion. Annualized income, also by GAAP measures, came in at $3.58 per diluted share. The company’s unrestricted operating cash flow for the year was reported at $424.9 million.
The market downturn has pushed TTWO shares down 32% so far this year. That opens up a chance for investors to get in at a discount, according to J.P. Morgan analyst David Karnovsky.
“Take-Two’s valuation we think reflects depressed sentiment toward mobile gaming generally, with the sector still navigating platform privacy changes and comping some pandemic benefit. We expect these headwinds to ease in the coming quarters, and further we see the post-IDFA landscape favoring scaled operators that can leverage a large player database and UA/advertising resources. The company is also well positioned to add to its mobile portfolio amid a less competitive environment for M&A,” Karnovsky opined.
In Karnovsky’s view, Take-Two is worth an Overweight (i.e. Buy) rating, and his $175 price target suggests ~43% upside for the next `12 months. (To watch Karnovsky’s track record, click here)
No fewer than 20 Wall Street analysts have weighed in on Take-Two in recent weeks, and their takes tilt 18 to 2 in favor of Buys over Holds to give the stock its Strong Buy analyst consensus rating. The shares are currently priced at $123.14 with an average price target of $179.70, indicating a one-year upside potential of 46%. (See TTWO stock forecast on TipRanks)
Bausch Health Companies (BHC)
Next up on our list of JPM picks is Bausch Health, the modern incarnation of Valeant, a long-standing name in the pharmaceutical industry. Bausch took its name change when it acquired the eye health firm Bausch & Lomb several years ago. Bausch now holds a diversified portfolio of products, including pharmaceuticals and medical devices, in the gastrointestinal, dermatological, dental, and vision fields. Ironically, Bausch has recently been divesting its ownership stake in Bausch & Lomb, and in April of this year announced new conditions for the transfer of that stake to a newly independent Bausch & Lomb.
In May of this year, the company announced that it is looking into new indications for its best-selling gastrointestinal drug Xifaxan. This product brought in $294 million in total sales during Q1, and Bausch is looking to capitalize on its status as an FDA approved drug and its commercial success. The company is initiating new clinical trials for Xifaxan, with the most prominent being a Phase 2/3 trial in the treatment of Crohn’s disease.
Bausch’s wide-ranging business brought in $1.92 billion in total revenues during 1Q22, the lowest top line in the past 7 quarters. Earnings, which came in at a 19-cent loss on a GAAP basis, were much improved from the $1.71 net loss reported in the year-ago quarter. The company reported having $2.46 billion in cash and other liquid assets as of the end of Q1.
Bausch shares are down 73% this year, and are trading near 12-month lows. However, J.P. Morgan analyst Chris Schott sees the company in a sound position to effect positive changes going forward, noting that Bausch’s product line, spin-off of its eye-care division, and recovery from its Valeant-era legal issues makes for a difficult tale to follow.
“While several challenges have emerged in the story in 2022 (Xifaxan patent challenge, B&L separation pathway, etc.), these concerns appear well reflected in valuation, creating a favorable upside/downside for shares from current level for investors willing to look at a complex story,” Schott noted.
To this end, Schott is willing to put an Overweight (i.e. Buy) rating on BHC shares, along with a $12 price target that implies ~57% one-year upside potential. (To watch Schott’s track record, click here)
Overall, this pharma stock has picked up 5 recent reviews from the Street’s analysts, who line up 3 to 2 in Buys over Holds. This gives the stock a Moderate Buy analyst consensus rating, while the $14.80 average price target suggests a 94% upside potential from the current trading price of $7.64. (See Bausch stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
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.