Let’s talk about quality stocks. Of course, this is the direction that every investor wants to go; but the question is, how to recognize them? Do we go all-in on the big-value, big-name giants? Or do we dig a little deeper, and find the high-end nuggets that are hiding in the sandheap?
Weighing in from investment bank Morgan Stanley, chief investment officer Lisa Shalett recommends the latter. She recommends investors to look for beaten-down stocks, equities that have lost value recently – but that retain their fundamental soundness, and are ‘likely to beat profit forecasts.’ In her view, this is where the market value lies.
She bases her stance on some curious facts of the market structure right now: “If you look underneath the surface of the indices, 85% to 90% of the stocks in the market have actually corrected from 52-week highs, and many have corrected as much as 10% or 20%. We think that this is an opportunistic stock-picker’s market.”
Following up on Shalett’s advice, the stock analysts from Morgan Stanley are doing the stock picking. They found several stocks with 40% or better upside potential – and, interestingly, all are down at least 20% from their recent peak values. After running the tickers through TipRanks’ database, it’s clear the rest of the Street is in agreement, with each earning a “Strong Buy” consensus rating.
We’ll start with Smartsheet, a software company offering a set of cloud-based workspace management and collaboration products through the popular as-a-Service subscription model. The company’s products can handle a wide range of tasks, including admin, content collaboration, resource management, online forms, custom email domains, integrations, multiple views – it’s a long list. Smartsheet got its start in 2006, and has since come to be relied on by 80% of the Fortune 500 companies.
Getting to the numbers that investors want to follow, in its most recent quarter (Q3 or fiscal 2022, reported in December), Smartsheet showed 46% year-over-year revenue growth, to $144.6 million. Drilling down a bit, subscription revenue came in at $132.6 million, matching the overall 46% growth, while professional services rose 50% yoy to reach $12 million.
Despite the positive results, and an upbeat outlook for the full fiscal year, Smartsheet’s stock is down 23% from its recent high point, reached in September last year.
Covering Smartsheet for Morgan Stanley, 5-star analyst Stan Zlotsky says simply, “We are bullish on Smartsheet’s ability to achieve $1B of revenue in FY24 and sustain 30% growth into FY25. Both results are ahead of our estimates…”
Zlotsky goes on to elaborate, pointing out Smartsheet’s smart move into the government vertical: “Smartsheet began investing in their government and international segments before the pandemic began, and we are starting to see green shoots of those efforts. On the government side, Smartsheet’s early mover advantage towards FedRAMP certification has been important to winning new logos. Considering the efforts across all levels of government to automate more of their processes, and Smartsheet’s ease in solving those challenges, we see this vertical becoming a more meaningful driver of growth moving forward, especially as the early adopters from last year begin to scale usage and become reference customers.”
All of the above makes it clear why Zlotsky is now standing with the bulls. The 5-star analyst rates SMAR an Overweight (i.e. Buy) while his $105 price target implies an upside of 67% for the year ahead. (To watch Zlotsky’s track record, click here)
"We remain OW SMAR and see it as one of our top three ideas into 2022," Zlotsky summed up.
Overall, there are 11 recent analyst reviews on record for Smartsheet, and they include 9 Buys against just 2 Holds, for a Strong Buy consensus view. The shares are selling for $62.70 and their $91.45 average price target implies an upside of ~46% for the coming year. (See SMAR stock forecast on TipRanks)
Endava, Ltd. (DAVA)
For the next stock we’ll look at Endava. This company offers tech services, including digital advisory, IT strategies, business analysis, program management, digital product strategy, machine learning and AI, product design, and UX – and all of that is only part of their service list. London-based Endava got its start in 2000, and serves enterprise customers in the retail, healthcare, and consumer product sectors across Europe, North America, and Latin America.
This company’s stock has been both strong and weak recently. For its strength, DAVA is up 65% year-over-year, and both revenues and earnings are on a rising trend. On the weak side, shares have fallen recently, and the stock is down 23% from its late-December peak. That slide coincides with the lower-magnitude slips in the major indexes.
Endava has seen five consecutive quarters of sequential gains in revenue and earnings, and the most recent report, for Q1 of fiscal 2022, showed a top line of 147.5 million GBP, or US$201 million. EPS came in at 67 cents US. These results were up 55% and 88% year-over-year (growth rate adjusted for constant currency).
The company caught the attention of Morgan Stanley analyst James Faucette, rated 5-star rating by TipRanks, who saw fit to upgrade his stance on Endava, raising his view from Neutral to Overweight (i.e. Buy).
Faucette writes, “Demand for cloud-related projects continues to be robust, as companies look to execute on digital transformation initiatives. DAVA's 100% digital engineering exposure with nearshore development teams have driven new client additions and expansion of small proof-of-concept engagements, allowing for increased spend at larger clients… Similar to other pure-play peers, competitive supply dynamics has allowed for pricing power and the ability for DAVA to be selective in the engagements it chooses to pursue. Taken together, we see DAVA as a core beneficiary of secular digital transformation themes.”
Everything that DAVA has going for it prompted Faucette to rate the stock an Overweight (i.e. Buy). The cherry on top? His $185 price target implies ~43% upside from current levels. (To watch Faucette’s track record, click here)
Judging by the consensus breakdown, other analysts also like what they’re seeing. 3 Buys and a single Hold add up to a Strong Buy consensus rating. The $185.50 average target is practically the same as Faucette's objective. (See DAVA stock forecast on TipRanks)
EPAM Systems (EPAM)
Last but not least is EPAM, a custom software and consulting company, offering a combination of innovation, out-of-the-box design thinking, and physical-digital capabilities for truly unique solutions. The company boasts a customer base exceeding 280 Forbes Global 2000 companies, in more than 40 countries – and also boasts a work force of more than 52,000 sharp minds to bring to bear on customer needs. EPAM is based in both the US and Belarus, became a public entity in 2012, and exceeded $2.6 billion in annual revenue in 2020.
The company has kept up its solid financial performance. Revenues have shown a distinct rising trend, with 4 quarters in a row of sequential gains. In the last reported, 3Q21, EPAM showed $988.5 million in total revenue, up ~52% year-over-year. Earnings have also been rising, although with a bit more volatility in the results. EPS has shown sequential gains in the last two quarters reported, with the 3Q21 result coming in at $2.42, or a 46% increase from 3Q20. Looking ahead to the 2021 full year results, EPAM expects 40% full-year revenue growth.
While’s EPAM’s shares are up 56% year-over-year, the stock peaked in early November, and is down 24% from that level.
For a deeper look at EPAM’s prospects, we can check in again with Morgan Stanley’s James Faucette, who writes, “The company’s robust recruiting framework allows the company to recruit highly skilled engineering talent in nearshore geographies, driving revenue per employee of approximately $70k, a meaningful premium to more diversified IT Services peers with legacy exposure. Quality of EPAM’s delivery and execution, as well as the scarcity of established pure-play digital IT Services providers, underpin the company’s ability to drive consistent 20%+ revenue growth, which should allow the company to double its revenue approximately every three years. Its 85% exposure to time-and-material-based contract structures allow it to pass on wage inflation to end customers, particularly given the scarcity of highly-skilled engineering talent.”
To this end, Faucette gives EPAM stock an Overweight (i.e. Buy) rating, along with a price target of $830. If everything goes as planned, EPAM will soar about 53% over the next 12 months.
Wall Street is clearly interested in EPAM, as shown by the 9 analyst reviews the stock has picked up in recent weeks. These break down to 8 Buys and 1 Hold, for a Strong Buy consensus, and have an average price target of $788 suggesting an upside of 45% from the current share price of $543.06. (See EPAM stock forecast 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.