It is time to take out the crystal ball and try to see what the stock market has in store this year. So far, it’s clear that stocks are recovering a bit from the 2022 trough, and one Wall Street insider says there’s more room for gains.
Writing about the 2023 market situation, Larry Adam, chief investment officer at Raymond James, notes that last year was the second straight year of multiple compression, but that situation rarely repeats itself for a third time. He predicts a multiple expansion to “boost stock market returns” in the future. Namely: “History suggests that our view of a mild recession ending by the end of the year, easing inflationary pressures, falling interest rates, and a less aggressive Federal Reserve suggest that the ‘bad news’ has included in the price of the multiple and set out the outlook for multiple expansion in 2023.”
Adam admits earnings are likely to slow this year, but he’s still aiming for a year-end S&P 500 at 4,400, or about 10% above current levels. Supporting this view, with multiple expansionary factors, Adam specifically cites the prospect of reduced inflation, with price increases moderating back to ~3%; a consequent slowdown in interest rates, since higher rates will not be needed to combat rising prices; and a change from the Fed to just two additional increases in the funds rate, set to cease in March. As Adam explains, “This timing of the final hike is important from a multiple perspective, as historically the multiple has bottomed out coinciding with the Fed’s final hike and then expanded 7-8% over the next 12 months, in average”.
So, in Raymond James’ view, we should be looking for a better investment environment that comes into play in the second half of this year, and the firm’s stock analyst Andrew Cooper selected two stocks he sees poised for gains, and recommend buying now. Let’s take a closer look.
Natera, Inc. (INTRA)
We’ll start with Natera, a biotech company that operates in the cell-free DNA, or cfDNA, testing niche. cfDNA tests are minimally invasive, based on a simple blood draw, and focus on naturally occurring DNA fragments that float freely in the bloodstream. Natera’s technology captures those fragments and uses them for genetic testing.
The company’s test platforms are based on novel molecular biology techniques and AI-powered bioinformatics software, and can detect individual DNA molecules in a blood sample tube. Natera uses this technology for accurate, non-invasive prenatal testing (the Panorama platform), tumor-specific assay tests for individualized cancer treatments (the Signatera platform), and best-in-class rejection screening tests prior to kidney transplantation (the Prospera platform).
DNA diagnostic testing is big business, and Natera is tapping into patients’ desire for a less invasive medical experience. The company’s revenues have shown steady growth over the past few years, and in the last reported quarter, 3Q22, Natera posted a top line of $210.6 million, up 33% from the prior year. The revenue gain came on top of a 27% increase in tests processed during 3Q22, from 407,300 to 517,500. Of that total, the oncology segment experienced the largest growth; the company processed 53,000 oncology tests in the quarter, for an increase of 153% YoY.
Natera revised its forward-looking guidance upward in the third-quarter report, projecting full-year 2022 revenue from $810 million to $830 million. This was an increase of $40 million on the midline of the previously published guidance. The company is expected to report 4Q22 results at the end of February and we’ll find out later how the guidance holds up.
Joining the bulls, Raymond James’ Andrew Cooper takes a bullish stance on this company and its stock.
“With each of its segments growing very well in the short to medium term and a catalyst-rich setup in 2023, particularly in oncology, we are upgrading shares to Outperform. Leadership in the burgeoning MRD space, where we think you can gain additional coverage and potentially the inclusion of guidelines at least for CRC, is generating excitement, while an increasingly profitable women’s health business has its own catalysts in the conversation. about 22q. All of this comes with a valuation that seems, at least in relative terms, reasonably accommodative all things considered,” the analyst opined.
Cooper’s Outperform (ie Buy) rating on NTRA comes with a $58 price target, implying 35% one-year upside potential. (To view Cooper’s history, Click here)
Overall, this exciting biotech has garnered 9 recent analyst reviews, including 8 Buys vs. a single Hold, for a Strong Buy consensus rating. The shares are trading at $42.94 and their average price target, at $63, suggests a ~47% upside over the next 12 months. (Watch NTRA Stock Forecast)
Fulgent Genetics, Inc. (FLGT)
Fulgent, the second Raymond James selection we’re reviewing, is a full-service genomics testing firm with a focus on improving patient care in the fields of oncology, infectious and rare diseases, and reproductive health. The company operates proprietary technology behind its testing platform and has created a testing menu that is broad, flexible, and capable of expanding with offerings enhanced with the growth of the genetic reference library.
This company was founded in 2011 and has since built a solid reputation for quality genomic testing. The company provides best-in-class support services for its testing platform, ensuring the best results for the best patient care and the best outcomes.
In 3Q22, the last quarter reported, the company had a top line of $105.7 million, less than half the $227.9 million reported in 3Q21. The drop in revenue shouldn’t be surprising, considering that billable tests fell year-over-year from 2.2 million to 952,000. On a positive note, core revenue, which excludes COVID-19 testing products and services, grew 110% year-over-year to reach $56 million, more than half of total revenue. The company’s non-GAAP income was 32 cents per share, compared to $4.05 in the prior-year quarter.
In short, Fulgent thrived during the pandemic period, when COVID testing requirements drove demand, and has seen demand drop dramatically as the pandemic has receded. While this has resulted in lower revenue, the company has two bright spots to fall back on: its expanding core revenue and its cash holdings, a legacy of the COVID boom days. Fulgent had $918 million in cash and liquid assets at the end of 3Q22.
Speaking again with analyst Cooper, we find that he sees the company in the midst of a transition, from its profitable pandemic-era COVID tests to an oncology testing base that will provide for future operations.
“With a strong underlying technology foundation in both the wet lab, dry lab, and broader operations, we believe the company can successfully cross-sell these capabilities, as well as add new customers for each. The ability to scale without compromising service (where the company has competitive, if not leading response times) will prove critical to the success of the company, but with the goal of what the company considers to be a total core test TAM of $ 105 billion, the clue is substantial,” Cooper wrote.
“From an investment perspective, the ~$26 net cash per share not only helps set a floor for the stock, but creates additional capital deployment option,” the analyst summarized.
Overall, Cooper believes this is a stock worth holding. The analyst rates FLGT’s stock an Outperform (ie, Buy), and his $45 price target suggests a solid 34% upside potential.
Only 3 analysts have weighed in on FLGT’s stock, and their reviews include 2 Buys to 1 Hold for a consensus rating of Moderate Buy. The stock’s $45 average price target matches Cooper’s. (Watch FLGT Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the noted 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.
