After slipping through September, markets have been trending up again in October. One possible reason: better-than-expected results from the Q3 earnings reports so far. With results in from 41 companies listed on the S&P 500, aggregate earnings are up more than 40% year-over-year. These solid results come even as revenues are down 13% yoy. Of the companies that have reported so far, 85% beat the anticipated EPS, while 70% beat on revenues.
With these results, it should come as no surprise to see the S&P up 4% so far this month. At least for now, this is definitely a return to the bullish gains seen in the first half of the year, despite rough economic headwinds and recent market volatility.
So how do you find the next hot stock to buy in this environment? One way might be to screen for stocks that have been endorsed by analysts at major investment banks in particular, such as Wall Street banking giant Morgan Stanley.
The firm’s stock analysts are showing their upbeat outlook by selecting the stocks they see as winners for the coming year – and winners with substantial upside, on the order of 80% or better. Using the TipRanks database, we’ve looked up two of these Morgan Stanley picks, to see what makes them stand out.
Joby Aviation (JOBY)
We’ll start with a California-based aerospace venture company, Joby. This aviation company is working to produce a commercially viable, electrically powered, vertical takeoff and landing (eVTOL) aircraft, one suitable for use as an air taxi in urban environments. The company was founded in 2009, and now boasts offices and workshops in California, Washington DC, and Munich, Germany. Joby’s engineering team has worked on collaborations with NASA, and has produced several remotely controlled drone prototypes of proposed eVTOL commuter models.
The aim of Joby’s aircraft development is to ease urban congestion, facilitate the shift from fossil fuels to renewable energy sources, and provide a more sustainable means of transit. The company’s proposed eVTOL taxi will carry a pilot and four passenger at airspeeds up to 200 miles per hour, and have a range of 150 miles on a single charge.
To raise funds for this development, the company completed a SPAC transaction this past August, entering the public markets on August 11 after completing a merger with Reinvent Technology Partners. The transaction created a combined entity worth $4.5 billion. After the business merger, the company had $1.6 billion in total liquidity, counting merger proceeds and previous cash holdings.
Covering Joby for Morgan Stanley, analyst Kristine Liwag sees plenty of potential in the company based on its work to date.
“Joby has completed over 1,000 test flights to date across various prototypes. Joby achieved the world’s first transition flight of a full-scale, vectored thrust, eVTOL in 2017. The majority of test flights have been remotely piloted from the ground, although short piloted hover flights of the aircraft were completed in 2020. The company anticipates it will initially certify the aircraft for day and night visual flight rules (VFR) operations in 2023 and amend the design to include instrument flight rules (IFR) capabilities thereafter,” Liwag wrote.
Looking ahead, the Morgan Stanley analyst adds, “FAA certification of the Joby aircraft is the most important gating factor for operations. Therefore, receiving FAA certification is the most meaningful positive catalyst for the stock as it would prove out the technology concept. The company expects to receive FAA certification in 2023.”
These comments support Liwag's Overweight (i.e. Buy) rating, and his $16 price target indicates room for ~85% growth over the year ahead. (To watch Liwag’s track record, click here)
JOBY appears to be flying under the Street’s radar and currently Liwag's is the sole analyst review on record. (See JOBY stock analysis on TipRanks)
Prelude Therapeutics (PRLD)
The second Morgan Stanley pick we’ll look at is Prelude Therapeutics, a precision oncology company working on the discovery and development of novel small-molecule therapies specially optimized to target key causes of cancer cell growth and resistance. The company was founded in 2016 and has since set up a new research track, eschewing the class or tech platform approaches of other companies. Instead, Prelude focuses on identifying the optimal targets to intervene in cancer signaling pathways, in order to create new drug treatments with a highly precise mode of action.
Prelude has three clinical trials actively ongoing, for several drug candidates. The first of these, for PRT543, is a dose escalation study testing the drug in patients with various advanced cancers – and who have already exhausted traditional modes of treatment. PRT543 is a PRMT5 inhibitor.
The second Phase 1 study under enrollment is for PRT811. This is another PRMT5 inhibitor, that is described as a potent and selective brain penetrant for use against central nervous system lymphomas and glioblastoma multiforme.
Prelude, on October 7, announced new data, described as encouraging, from both of these clinical programs. The company reported that both drug candidates demonstrated a ‘favorable safety profile,’ along with indications of efficacious primary clinical activity, including durable responses to treatment and ‘high levels’ of inhibition of the target PRMT5.
Investors, however, thought otherwise. Since the presentation of data from the company's two programs, PRLD shares are down 45%. Investors were apparently disappointed by "a lack of broader activity in an unselected patient population," according to Morgan Stanley's Jeffrey Hung.
However, Hung believes that PRLD's low share price represents a buying opportunity. The 5-star analyst rates the stock an Overweight (i.e. Buy) along with a $35 price target. Investors stand to take home ~123% gain, should the target be met over the next 12 months. (To watch Hung’s track record, click here)
Backing this stance, the Morgan Stanley analyst noted, "Even with added caution, we think the sell-off is overdone [as] we continue to believe in the potential of PRT543 and PRT81... We are encouraged by evidence of durable and deepening responses over a year. The previously reported PRT543 complete response patient with HRD+ high grade serous ovarian cancer remains on study after 18 months of treatment. Meanwhile, the previously reported GBM patient in the PRT811 study became a confirmed complete response in August 2021, and their clinical status remains stable."
Are other analysts in agreement? They are. Only Buy ratings, 4, in fact, have been issued in the last three months, so the consensus rating is a Strong Buy. Given the $47.50 average price target, shares could skyrocket 202% in the next year. (See PRLD 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.