Opinion - Investing

Top Wall Street analysts say these stocks are poised to deliver significant gains

Maya Sasson, Tipranks.com
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Johnson & Johnson products on a shelf in a store in New York.
Lucas Jackson | Reuters

The S&P 500 notched new records this past week, but future gains are anything but a guarantee.

Investors are still weighing the implications of a potential change in monetary policy from the Federal Reserve, as well as supply chain-related issues.

With this in mind, what strategy can investors use to identify compelling opportunities? One approach is to look for stocks that appear undervalued and are poised to deliver significant gains. The names highlighted below fall into this category and have the backing of experts with a proven track record of success.

TipRanks analyst forecasting service works to pinpoint Wall Street's best-performing analysts. These are the analysts with the highest success rate and average return per rating, factoring in the number of ratings assigned by each analyst.

Here are the best-performing analysts' top stock picks right now.

nCino

nCino, which offers a cloud-based operating system for banks, is still one of Needham analyst Mayank Tandon's top picks for 2021. In line with this optimistic approach, Tandon kept a Buy rating on the fintech name. Although he trimmed the price target from $85 to $80 to reflect "lower market valuations for [software as a service] stocks," this target still implies 31% upside potential.

Looking at the overall fintech sector, Tandon said, "Activity in FinTech remains hectic as we approach the midway point of 2021, with the growth in digital payments, banking, and insurtech leading to a steady cadence of new product offerings and companies exploring the public markets to capitalize on the strong secular trends that we expect to continue to drive outsized growth over the next several years."

When it comes to NCNO stock specifically, the company exceeded the Street's expectations due to "robust growth within the existing client base and a strong cadence of new logo wins and go-lives." In the fiscal first quarter of 2022, international revenue surged 113% year over year as global demand ramped up. It also expanded its relationship with two $20 billion-plus asset U.S. farm credit institutions.

The outlook also impressed, with NCNO's guidance for the second quarter surpassing consensus estimates. Additionally, the company bumped up its outlook for fiscal year 2022. Management is now guiding for revenue of $258 million to $260 million, versus the previous guidance of $253 million to $255 million. Earnings per share are expected to land between negative 21 cents and negative 23 cents, up from the prior negative 24 cents and negative 26 cents estimate.

What does all of this mean for nCino's long-term growth story? Tandon said, "We view the company as one of the leading providers of modern cloud-based digital banking solutions. Based on the strong new business wins, building international momentum, and ability to up-sell its continually expanding product suite, we believe the bias to both our and Street estimates is to the upside."

With a 65% success rate and 22.9% average return per rating, Tandon earns a #124 ranking on TipRanks' list of best-performing analysts.

Broadcom

In line with Susquehanna analyst Christopher Rolland's estimates, semiconductor player Broadcom reported a modest beat-and-raise quarter. In response, he maintained a Buy rating on the stock. In addition, the five-star analyst kept the price target at $540, suggesting 16% upside potential.

It should be noted that Broadcom's CEO Hock Tan is optimistic about the robust booking trends "despite a flattening in the company's lead-time trends." Expounding on this, Rolland stated, "In other words, he does not believe that over-ordering (i.e., inventory building) is a major concern for the company."

When it comes to the Networking segment, revenue was "better-than-expected" thanks to cloud, hyperscale, and telco demand for Trident and Tomahawk 3.

"Interestingly, Hock believes that enterprise demand (traditionally half the market) is starting to come back now, as bookings may layer on top of the already strong hyperscale/telco demand. Broadband revenue (+28% year-over-year; 18% of semis revenue) was described as "going through somewhat of a renaissance as work from home continued to drive Wi-Fi 6, PON (10G) and DOCSIS 3.1," Rolland said.  

Although Wireless trends were muted during the most recent quarter, management did acquire more supply than originally expected.

"Storage trends appear about in-line with our prior estimate, but management suggested an improving demand trajectory (we believe Chia/Filecoin may also help here). Industrial also appears in-line, driven by a recovery in auto and China, and may sustain as channel inventories remain depleted," Rolland said.

Although the CEO is known to rein in operating expenses, R&D expenses grew during the quarter, with the company implying "increased investment in Silicon Photonics/optical, 25G PON, and converged home gateways, as they double down on these franchises."

Rolland is one of the top 52 analysts on the Street, sporting a 75% success rate and 22.9% average return per rating.

Johnson & Johnson

Johnson & Johnson has found itself in the spotlight due to the talcum powder litigation. The Supreme Court recently ruled that it will not hear the company's appeal of the $2.1 billion talcum powder verdict in the Ingham case, which is already down from the initial $4.7 billion verdict.

With this in mind, JNJ will need to pay the $2.5 billion (including interest) in the second quarter. It should be noted that this expense was already reserved last year.

According to Wells Fargo analyst Larry Biegelsen, "this verdict implies a payout of $95 million per claimant," but "precedent from other large class-action settlements suggests that possible settlement in the multi-district litigation is more likely in the $50,000 to $200,000 range." So, if the number of cases reaches 60,000 and the average payout is $150,000 each, the analyst estimates a total future settlement of $9 billion, on top of the $2.5 billion.

Despite this, Biegelsen remains optimistic about JNJ's long-term prospects. "While this is a sizable figure even for a company of JNJ's size, we believe the amount is manageable, especially as it will likely be paid out over time," he commented.

This prompted the analyst to reiterate a Buy rating and $190 price target, which brings the upside potential to 15%.

Biegelsen highlights the fact that 85% of the outstanding talcum cases are consolidated in the multi-district litigation, and that the first trial is set to take place in the first half of 2022. After a consultant weighed in, the analyst doesn't believe that the Supreme Court's decision will impact the multi-district litigation.

When it comes to settlement options, Biegelsen said, "Although JNJ has publicly stated its intention to pursue the talc cases rather than settlement, we continue to view this as a possibility once some bellwether trials have progressed. Feedback from our consultant points to a few possible settlement scenarios based on precedent."

While one approach would require that 90% to 95% of claimants agree to settle, JNJ can also settle individual cases or settle with individual law firms. "JNJ may choose any of these settlement structures or even a mix of these down the road," Biegelsen stated.

Based on data from TipRanks, Biegelsen is tracking a 69% success rate and 21.3% average return per rating. 

Autodesk

After strategic partnership talks failed, Autodesk revealed that it has submitted a proposal to acquire Altium, which provides printed circuit board software, for AUD $38.50 per share. This would reflect a 47% premium to the one-month volume-weighted average price and suggest a total consideration of $3.8 billion.

For RBC Capital analyst Matthew Hedberg, the deal could mean big things for Autodesk. Bearing this in mind, the five-star analyst maintained a Buy rating and $340 price target. This target puts the upside potential at 23%.

"The proposal had followed strategic partnership talks between the two companies and was rejected by Altium's board at the offered price, which it viewed as 'significantly' undervalued, but noted it would continue to engage with interested parties at 'appropriate' valuations," Hedberg said.

According to the RBC analyst, this potential deal is a good move on Autodesk's part. "We believe a combination makes sense supported by several potential synergies, and that Autodesk could likely deleverage quickly… we see the initial offer as attractive/fair," Hedberg said.

What are these possible synergies? A deeper mid-market focus as Altium (ECAD) could be a complement to Fusion (MCAD), in Hedberg's opinion, could "represent a combined offering that could accelerate growth and margin expansion of the combined company." The analyst argues that the new entity would be well-positioned up market.

Hedberg also points to the increase in horizontal opportunities as Altium shifts to the cloud and leverage through one cloud data repository as other potential synergies.

As for the likelihood that the deal will ultimately be completed, Hedberg thinks it "comes down to either what Altium shareholders want, and/or a higher price given Altium's board's posture."

He added, "According to our math, the offer implies ~3.4x LTM proforma net debt/EBITDA, which could be pushing the limit of what the Autodesk board would do to retain their credit status. That said, we believe Autodesk is in front of significant free cash flow generation ($2.3 billion in FY/23 per RBCe), which could enable a higher debt-load/price assuming rapid deleveraging."

Among the top 115 best-performing analysts tracked by TipRanks, Hedberg has delivered a 68% success rate and 27% average return per rating.  

Seagate Technology

On account of strong broad-based demand in the mass capacity market and distribution channel, Seagate Technology just bumped up its guidance for revenue and earnings in the fiscal fourth quarter of 2021.

Analyst Kevin Cassidy of Rosenblatt Securities is even more optimistic about the data storage products provider. To this end, the top analyst increased the price target from $95 to $110 in addition to reiterating a Buy rating. Based on current levels, this price target indicates 11% upside potential.

Management now expects revenue to come in at around $2.95 billion at the midpoint, up from the original guidance of $2.85 billion. Additionally, the forecast for non-GAAP earnings per share, which was previously pegged at $1.60 at the midpoint, was lifted to $1.85.

Weighing in on the improved outlook, Cassidy said, "Upside in mass capacity production and unforecasted demand from Chia cryptocurrency networks likely absorbing distribution channel inventory… We believe the company is benefiting from the need for storage as management discussed during our Age of AI Scaling Conference held last week."    

With this in mind, Cassidy is now calling for fiscal year 2021 revenue and earnings per share of $10.62 billion and $5.55, respectively, up from $10.52 billion and $5.29. As for fiscal year 2022, he increased his revenue forecast from $10.85 billion to $11.45 billion.

"Following management's upward revision to the June quarter guidance and CFO Gianluca Romano's comments around increasing prices and utilization, we are further convinced that Seagate is well positioned to grow revenue, expand gross margin and profitability over the next several quarters. Importantly, Seagate's board of directors has targeted 70%-plus of free cash flow as capital returns," Cassidy said.  

To support his #106 ranking, Cassidy has achieved a 71% success rate and 26.5% average return per rating.