Wow, it’s been a week in the stock market hasn’t it? Thursday marked the fourth session in a row of daily losses, with that particular hit coming after the Fed instituted its fourth consecutive 75-basis point rate hike. That hike, however, was expected; what really roiled the markets was Fed chair Powell’s indications that the central bank will not be cutting back, or even slowing down, on the rate hikes anytime soon. Inflation is currently running at 8.2% annualized, and the core CPI is up to 6.6% annually.
These numbers are bad enough, but the today’s unemployment numbers show that the Fed still has a long way to go to get inflation down. The October jobs report showed strong hiring leading to 261,000 new jobs in the month, beating the expectations and throwing a monkey wrench into efforts to fight inflation – which will require higher unemployment. The Fed is raising rates to discourage the spending that fuels inflation; a higher unemployment rate will help in that, by reducing consumer outlays. Clearly, we’re not there yet.
So how do you find the next hot stock to buy in this environment? One sound strategy, for the retail investor, may be to follow a major investment bank, and pick up the stocks tapped by the bank’s professional analysts.
Goldman-Sachs is a staple of the Street, and its analysts have been busy, scouring the trading markets for stocks that are poised to weather the current uncertainties. We’ve pulled the details on three of the Goldman picks, using the TipRanks platform; on two of these stocks, Goldman’s analysts see over 60% upside potential. Let’s take a closer look.
Remitly Global (RELY)
We’ll start with Remitly, a financial services company operating in the international transfer payments niche. The company offers customers a secure platform to both send and receive cash transfer payments across international borders. Users access the service through a mobile app, and benefit from lower fees than are offered by banks. Remitly’s niche is popular with immigrant communities around the world, and the company operates in 170 countries.
This company has been on the public markets for slightly over one year – it held its IPO in September of last year. Since the IPO, Remitly has seen its share price fall by 79%; during 2022 alone, the stock is down 51%.
Remitly’s share losses have come even as the firm has been successful in expanding business and growing revenues. Remitly saw a top line of $169.3 million in the recently reported 3Q22, for a year-over-year increase of 40%. The revenue gain was supported by a 49% y/y increase in active customers, from 2.6 million to 3.8 million, and a 44% y/y jump in send volume, to a total of $7.5 billion for the quarter. Remitly is guiding toward 2022 y/y revenue growth of 38% to 40%, and is on track to achieve that.
At the same time, however, the company’s quarterly net loss remains high. The Q3 loss was reported as $33.1 million, compare to $12.9 million in the year-ago quarter.
Covering Remitly for Goldman Sachs, analyst Will Nance takes note of the risks – and goes on to explain why this company is likely to beat them.
“Taking a step back, the bear thesis on RELY since they went public has been a generalized remittance bear thesis around competition, price compression, and poor unit economics; against that backdrop, RELY has maintained 50% customer growth, expanded transaction margins, and reduced CAC by 20%,” Nance explained.
“While in past quarters, the market has been unwilling to reward RELY’s outperformance on these generalized concerns, we believe the market should begin to reward the company for their solid execution and the secular cash-to-digital tailwinds behind their business as the company maintains healthy growth rates and scales into profitability in the coming quarters,” the Goldman analyst added.
Quantifying his prediction, Nance gives RELY stock a Buy rating with a $16 price target to suggest ~65% upside in the coming year. (To watch Nance’s track record, click here)
Overall, there are 4 recent analyst reviews on record for Remitly, and they’re all positive – giving the stock its Strong Buy analyst consensus rating. The shares are selling for $9.71 and the $14 average price target implies a 12-month gain of 44%. (See RELY stock analysis on TipRanks)
TE Connectivity, Ltd. (TEL)
Now we’ll turn from financial services to tech, where TE Connectivity works on the hardware side. The company designs and manufactures sensors and connectors for a variety of industries, including data communications, 5G networking, aerospace defense, automotive, industrial equipment and tools, consumer electronics, and smart homes. TE boasts of a major footprint in the tech world, with $675 million cumulatively invested in R&D work, over 247 billion individual products manufactured annually, and more than $16.3 billion in total sales for fiscal year 2022. This is a company that has clearly found profit in the digital world.
Early this month, TE announced its financial results from fourth quarter of its 2022 fiscal year, which ended on September 30. The company reported a 14% year-over-year increase in quarterly revenues, to $4.4 billion, and an 11% increase in the GAAP diluted EPS, to $2.21 per share. In addition, TE showed company-record cash flows, with $944 million in cash from operating activities, and $745 million in free cash flow.
Looking at the full fiscal year of 2022, the total sales revenue of $16.3 billion was up 9% y/y, and the fiscal year’s adjusted EPS of $7.33 was up 13%. Annualized cash from operations was $2.5 billion, with $1.8 billion in free cash flow. TE returned $2.1 billion to shareholders during the fiscal year.
The capital return was accomplished through a combination of share repurchases and a modest dividend. In June of this year, the company’s Board approved increasing the repurchase authorization by $1.5 billion, and the fiscal Q1 dividend has been declared for 56 cents per common share, payable in March of next year. At the declared payment, the dividend annualizes to $2.24 per common share and give a yield of 2%, matching the average yield found among S&P-listed firms.
This tech company has attracted the attention of Goldman Sachs’ 5-star analyst Mark Delaney, who lays out just why he thinks TE will do well going forward: “We continue to see TE as well positioned for long-term growth given both its exposure to key secular growth markets (including EVs and charging/renewables), rising content per device (including about 2X the content on an EV vs. ICE vehicle), and its exposure to markets that are either relatively stable and/or cyclically below normalized levels (e.g. auto, A&D, and medical that in total are about half of its total revenue). Finally, TE’s FCF generation remains strong, allowing the company to return cash and augment growth via tuck-in M&A.”
To this end, Delaney rates TEL shares a Buy, and sets a price target of $160 to indicate his confidence in an upside of 38% going into next year. (To watch Delaney’s track record, click here)
Wall Street’s analysts like to follow tech firms, and TE has 10 recent reviews on file. These include 6 Buy ratings and 4 Holds (i.e. Neutral), for a Moderate Buy consensus rating. Shares are priced at $115.46 and the $134.50 average price target suggests ~16% one-year upside potential. (See TA stock analysis on TipRanks)
Dynatrace, Inc. (DT)
The last ‘Goldman Pick’ we’ll look at is another tech firm. Dyantrace offers an AI-powered, cloud-based platform giving customers an intelligent automation system for network management and cloud monitoring. Dynatrace’s platform is billed as ‘cloud done right,’ and customers can use it for a wide range of applications, including business analytics, digital security, app automation, microservices, and infrastructure monitoring. It’s big business, as shown by some basic numbers: Dynatrace has over 3,300 enterprise customers, and sees a total addressable market exceeding $50 billion.
Dynatrace is well into its fiscal year 2023, and reported Q2 results, for the quarter ending on September 30, this past November 2. The company’s financial results beat the forecasts at both the top and bottom lines, with total revenue growing 30% year-over-year to reach $279 million and the non-GAAP EPS coming in at 22 cents, up 22% from the year-ago period. The company’s subscription revenue was up 29% y/y, to $261 million, and the annual recurring revenue, an indicator of future business, was up 33% to $1.065 billion. Dynatrace has seen its revenue grow sequentially for the past 8 quarters.
In a metric of particular interest, Dynatrace reported over $25 million in free cash flow for the fiscal Q2. This was nearly double the $13.63 million reported in fiscal 2Q22. The company is guiding toward $308 million to $321 million in free cash flow for the full fiscal year. Dynatrace reported having more than $563 million in total cash and liquid assets as of September 30.
Kash Rangan, one of Goldman Sachs’ tech experts, covers Dynatrace, and believes it’s a sound addition to a defensive portfolio.
“We believe Dynatrace remains attractive in light of the current macro backdrop. A recurring subscription revenue model, coupled with a strong margin profile both on profitability and FCF makes for a defensive software company. The de-risked FY23 guidance and re-set in expectations around their growth algorithm makes the stock well positioned to navigate the current downturn,” Rangan opined.
Following from this, the analyst puts a Buy rating on DT shares, with a $54 price target implying a robust 68% upside on the one-year time horizon. (To watch Rangan’s track record, click here)
No fewer than 18 of Wall Street’s analysts have sounded off on Dynatrace and their reviews break to 14 Buys and 4 Holds, for a Strong Buy consensus rating. The stock is currently priced at $32.30 and the $44.31 average price target suggests it has room for 37% growth by the end of next year. (See DT 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.