Did the stock market’s epic rally just need a little breather? The last few weeks have seen stocks experience their first meaningful correction since the bull market kicked off in March. Now, the question swirling around the Street is, will the rally pick back up again, or is more downside on the way?
According to Morgan Stanley’s chief U.S. equity strategist Mike Wilson, uncertainty regarding the presidential election and stalemate on the next stimulus package could lead to declines in September and October. “On the correction, there's still downside as markets digest the risk of congressional gridlock on the next fiscal deal. While we think something will ultimately get done, it will likely take another few weeks to get it over the goal line,” he noted.
However, Wilson argues the recent volatility in no way signals the end of the current bull market.
“We think this correction is just that, a correction in a new bull market. It's normal for markets to pullback after such an incredible run like we've experienced since March. Furthermore, when a new bull market coincides with a new economic cycle, the bull market usually runs for years, not months,” the strategist explained.
Taking Wilson’s outlook to heart, our focus shifted to three stocks getting a thumbs up from Morgan Stanley. As the firm’s analysts see over 50% upside potential in store for each, we used TipRanks’ database to get the full scoop.
Akero Therapeutics (AKRO)
With its innovative medicines designed to restore metabolic balance and halt the progression of NASH, a severe form of nonalcoholic fatty liver disease, Akero Therapeutics wants to address the unmet medical needs of patients from all over the world. Based on the strength of its lead candidate, Morgan Stanley is pounding the table.
Representing the firm, 5-star analyst Matthew Harrison tells clients that AKRO’s treatment for NASH, efruxifermin (EFX), has a “best-in-class profile.” EFX is the company’s lead asset and was designed to mimic the biological activity of fibroblast growth factor 21 (FGF21), which regulates multiple metabolic pathways and cellular processes, to reduce liver fat and inflammation, reverse fibrosis, increase insulin sensitivity and improve lipoproteins.
According to Harrison, NASH is a complex disease, with patients usually having multiple co-morbidities like obesity, type-2 diabetes, increased triglycerides, increased LDL cholesterol and low HDL cholesterol. “A promising therapeutic solution would not only treat the multiple components of NASH but would also have an acceptable side effect profile given the potential co-morbidities,” the analyst explained.
That’s where AKRO’s therapy comes in. “In June, Akero presented best-in-class data from its Phase 2a study. This data indicates that EFX improved the two liver histological endpoints recommended by the FDA along with resulting in weight loss, improving cardiovascular health (increasing good HDL cholesterol, decreasing triglycerides, not raising bad LDL cholesterol), and improving factors related to controlling blood glucose levels. This benefit/risk profile beats the competition,” Harrison stated.
Looking at the indication as a whole, Harrison views NASH as a very large opportunity given that roughly 20 million people in the U.S. suffer from the condition.
The analyst, however, acknowledges there are commercial hurdles. One of these is the fact that “NASH is currently undiagnosed in all but a very small percentage of the prevalent pool since diagnosis currently requires an invasive liver biopsy.” Therefore, along with demonstrating a positive benefit/risk profile, AKRO will need to find patients and secure payer support should the candidate receive FDA approval, in Harrison’s opinion.
That said, Harrison believes AKRO is up for the task. “We believe that given EFX’s clean safety profile and broad-based effects, Akero will likely largely overcome these commercial hurdles,” he commented.
Harrison added, “Importantly, since Akero’s treatment is injectable, we only assume the drug will penetrate into the population of the most sick patients where there are currently at least 400,000 patients diagnosed and seeking treatment in the U.S.” To this end, he assigns a 60% probability of success, and estimates unadjusted peak sales for the U.S. and the EU will land at $4.5 billion.
Based on all of the above, Harrison rates AKRO an Overweight (i.e. Buy) along with a $70 price target. Should his thesis play out, a potential twelve-month gain of 93% could be in the cards. (To watch Harrison’s track record, click here)
Are other analysts in agreement? They are. Only Buy ratings, 6, in fact, have been issued in the last three months. Therefore, the message is clear: AKRO is a Strong Buy. Given the $58.50 average price target, shares could rise 61% in the next year. (See AKRO stock analysis on TipRanks)
TransDigm Group (TDG)
Next up we have TransDigm Group, which is one of the top producers, designers and suppliers of highly engineered aerospace components, systems and subsystems. Its products are used on nearly all commercial and military aircrafts in service today. Given its ability to weather the COVID-19 storm, Morgan Stanley sees a bright future ahead.
Morgan Stanley analyst Kristine Liwag stated, “We view TransDigm as the most defensible business model in commercial aerospace.” However, this is not to say the company hasn’t been confronted with serious challenges.
Over the past few years, management has had to grapple with how to price its defense business, the sustainability of its pricing strategy in aerospace, the durability of its levered balance sheet and the ability to weather a downturn. That said, Liwag remains optimistic going forward. “TDG has overcome short thesis after short thesis in the past few years and we do not expect these concerns to repeat,” she noted.
According to Liwag, TDG’s “ability to hold on to margins during a global pandemic” conveys its operating strength. To this end, her estimate for EBITDA margins is well above the rest of the Street’s. The analyst also points out that the company cut its SG&A expense by $89 million year-over-year in fiscal Q3 2020. “We assume the company will retain at least half of those savings, with the remainder returning in the form of variable selling expenses,” she said.
Liwag added, “We are positive on TransDigm, particularly as recovery in global air traffic would be favorable for TransDigm’s core profit maker, the aftermarket. Additionally, we view it positively that TDG has the means to acquire weaker players.”
Back in April, management raised $1.5 billion of additional debt to trim liquidity risks and provide an extra cushion. “A large debt load is part of management’s strategy to provide private equity like return for its shareholders. Historically, the company has used debt to acquire businesses with similar attributes to TDG’s portfolio of 90% proprietary products and 75% sole sourced. If passenger air traffic continues to normalize, we would expect TDG to use its incremental capital to acquire struggling businesses that fit its strategy,” Liwag commented.
All of this prompted Liwag to leave her bullish call and $772 price target unchanged. This target conveys her confidence in TDG’s ability to climb 48% higher in the next year. (To watch Liwag’s track record, click here)
Looking at the consensus breakdown, 7 Buys and 5 Holds have been published in the last three months. Therefore, TDG gets a Moderate Buy consensus rating. Based on the $500.58 average price target, shares are poised to stay range-bound for now. (See TDG stock analysis on TipRanks)
Cemex SAB (CX)
Cemex counts itself as one of the leading players in the building materials industry, with the company manufacturing and distributing cement, ready-mix concrete and aggregates. As its risk/reward profile has just gotten more positive, now could be the time to snap up shares, so says Morgan Stanley.
Covering the stock for Morgan Stanley, analyst Nikolaj Lippmann believes that CX’s bullish guidance for the third quarter and FY20, which was significantly ahead of consensus, was “the catalyst that builds a bridge to a favorable risk-reward shift.” On top of this, the stock is trading at 6.4 2020e EV/EBITDA, which is cheap compared to its historical performance and its peers, according to the analyst.
That being said, Lippmann argues “CX is mainly a good, strong deleveraging story with a call option on what could be an exceptional U.S. cement market if the U.S. Congress approves an infrastructure package in 2021... If we get a U.S. infrastructure package beyond 2020, it would add icing to the cake, we think, and take the market from good to possibly great.”
Although a large multi-year package is dependent upon the outcomes of the U.S. presidential and congressional elections, even in the base case, Lippmann expects cement to show pricing power in the U.S.
It should be noted that Lippmann thinks it’s possible the next year will be relatively uneventful, but in that case, he expects the industry to pause at 90% capacity utilization and grow from there. On top of this, pricing in Mexico has been holding up. This “limits the downside risk materially and helps skew the risk-reward positively,” in Lippmann’s opinion.
What else is working in CX’s favor? The cement demand year-to-date has pleasantly surprised Lippmann, with upside seen during the first stage of the pandemic. He points to DIY and Department of Transportation maintenance work during periods of low traffic, and strong residential construction as the drivers of this demand.
Everything that CX has going for it convinced Lippmann to rate the stock an Overweight (i.e. Buy). Along with the call, he attached a $6 price target, suggesting 50% upside potential. (To watch Lippmann’s track record, click here)
Turning to the rest of the analyst community, opinions are split almost evenly. 6 Buys and 5 Holds add up to a Moderate Buy consensus rating. At $4.16, the average price target implies 4% upside potential. (See Cemex stock analysis 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.