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Goldman Sachs: 2 Stocks That Could Climb Over 60%

Goldman Sachs: 2 Stocks That Could Climb Over 60%

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When it comes to the current economic landscape, you can either look at the glass half empty or half full. Driven by positive developments in the re-opening of the global economy, U.S. stock futures pointed to opening gains on Monday, but this follows the market’s first week-to-date decline in three weeks thanks to a historic drop in oil prices.

This same philosophy applies to the narrowing of market breadth, or how many stocks are participating in a given move in an index. According to Goldman Sachs US equity strategist David Kostin, the S&P 500 is 17% below its February record, but the median stock trades 28% lower than at its peak. On top of this, 20% of the index’s market capitalization is made up by the five biggest names, surpassing the 18% mark hit in March 2000. Hammond argues that historically, narrow breadth has signaled a substantial market downturn.

Other Goldman Sachs strategists, however, see this trend in a more positive light. Goldman Sachs' Ryan Hammond believes that the dispersion of stocks is only going to intensify.

“We expect return dispersion will remain elevated in the near term as investors continue to assess the relative 'winners' and 'losers' in the current environment. History shows that correlations typically fall and dispersion rises further as the equity market rebounds out of a bear market,” Hammond explained. As a result, investors have been presented with the greatest opportunity to find outperformers in over ten years, in Hammond’s opinion.

With this in mind, we wanted to take a closer look at two stocks Goldman Sachs recently added to its coverage universe. Using TipRanks’ database, we discovered that both Buy-rated tickers boast over 60% upside potential, which could be reason enough to look at the glass half full. Let’s jump right in.   

Applied Therapeutics (APLT)

First up we have Applied Therapeutics, which focuses on cutting down the drug development process by developing assets with increased selectivity and potency, and by utilizing previous research that validates the targeted molecules and pathways. With several promising candidates capable of driving some serious growth, Goldman Sachs believes its long-term growth narrative is strong.

Writing for Goldman Sachs, analyst Paul Choi highlights the company's lead candidate, AT-007, whose NDA should be submitted in the second half of 2020, as being a significant component of his bullish thesis. The candidate was designed for use in galactosemia, a rare inherited disorder with 2,800 patients in the U.S., and could see peak sales hit $315 million in the U.S. and $320 million in the EU. “... we think upcoming clinical and regulatory catalysts will further de-risk the asset in 2020 with a likely launch by 2021,” Choi commented.

Having said that, Choi thinks investor focus will shift to its AT-001 candidate in diabetic cardiomyopathy (DbCM) with the acceleration of the Phase 3 registrational trial, the results of which are expected to be published in 2021, given the large market opportunity and limited competition. As AT-001 achieved robust efficacy results in the Phase 1/2 trial in type 2 diabetic patients (T2DM), Choi believes there’s a high likelihood of approval, with his estimates putting peak sales at $700 million in the U.S. and $440 million in the EU.

Commenting on both assets, Choi stated, “APLT is positioned well to capture share in both therapeutic areas given there are currently no approved therapies for either disease and patients face a high unmet need. Positive data for AT-001 in DbCM could also validate the company’s earlier stage research to address large populations of high unmet need with this asset.”

If that’s not enough, Choi cites the AT-003 Phase 1 initiation for diabetic retinopathy in 2020 and the AT-004 Phase 1 initiation for lymphomas in 2020 as being other potential catalysts.

To this end, Choi initiated his coverage of this biotech with a Buy rating and $60 price target. Should this target be met, a twelve-month gain of 60% could be in store. (To watch Choi’s track record, click here)

Turning now to the rest of the Street, other analysts also take a bullish stance. With 100% Street support, or 4 Buy ratings to be exact, the message is clear: APLT is a Strong Buy. At $63, the average price target is a bit more aggressive than Choi’s and implies 68% upside potential. (See APLT stock analysis on TipRanks)

Relmada Therapeutics (RLMD)

Another biotech name, Relmada Therapeutics is primarily focused on developing REL-1017, an oral N-methyl-D-aspartate (NMDA) receptor antagonist, for the treatment of major depressive disorder (MDD). Following a positive Phase 2a data readout, Goldman Sachs is onboard.

Representing the firm, analyst Ross Weinreb points out that the candidate demonstrated strong efficacy results, with it producing a Montgomery-Asberg Depression Rating Scale (MADRS) delta (placebo-subtracted difference) at Day 14 of -9.4/-10.4, which surpasses what’s witnessed in approved atypical anti-psychotics in adjunct MDD. Additionally, REL-1017 was found to be safe and well tolerated, and didn’t exhibit opioid activity or ketamine-like toxicities that have been seen at the therapeutic doses.

As half of depression patients don’t respond to initial anti-depressant therapy, Weinreb sees a large market opportunity, with his estimate for 2032 unadjusted peak sales landing at $2 billion in MDD. “Thus, we see a significant opportunity for a novel therapy with an enhanced clinical profile, such a REL-1017, to enter the market. While we are cognizant of the many players developing therapies in depression, we do not view this as a winner takes all market and note various opportunities exist for multiple therapies across different lines of treatment and settings (i.e monotherapy/acute MDD, TRD),” he explained.

To top it all off, the company’s product pipeline includes several other strong assets and REL-1017 could also be used to treat other conditions later down the line. As a result,

Weinreb kicked off his RLMD coverage by putting a Buy rating and $63 price target on the stock. This conveys his confidence in RLMD’s ability to climb 75% higher in the next year.

Over the past 3 months, only two other analysts have thrown the hat in with a view on the promising drug maker. The two additional Buy ratings provide Relmada with a Strong Buy consensus rating. With an average price target of $59, investors stand to take home a 64% gain, should the target be met over the next 12 months. (See Relmada stock analysis on TipRanks)

To find good ideas for biotech stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

The post Goldman Sachs: 2 Stocks That Could Climb Over 60% appeared first on TipRanks Financial Blog.

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Will Powell Pivot? Don’t Count On It

Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For…

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Stocks are rallying on hopes that Jerome Powell and the Fed will stop increasing interest rates this fall, pivot, and start reducing them next year. For fear of missing out on the next great bull run, many investors are blindly buying into this new Powell pivot narrative.

What these investors fail to realize is the Fed has a problem. Inflation is raging, the likes of which the Fed hasn’t dealt with since Jerome Powell earned his law degree from Georgetown University in 1979.  

Despite inflation, markets seem to assume that today’s Fed has the same mindset as the 1990-2021 Fed. The old Fed would have stopped raising rates when stocks fell 20% and certainly on the second consecutive negative GDP print. The current Fed seems to want to keep raising rates and reducing its balance sheet (QT).

The market-friendly Fed we grew accustomed to over the last few decades may not be driving the ship anymore. Yesterday’s investment strategies may prove flawed if a new inflation-minded Fed is at the wheel.

Of course, you can ignore the realities of today’s high inflation and take Jim Cramer’s ever-bullish advice.

When the Fed gets out of the way, you have a real window and you’ve got to jump through it. … When a recession comes, the Fed has the good sense to stop raising rates,” the “Mad Money” host said. “And that pause means you’ve got to buy stocks.

Shifting Market Expectations

On June 10, 2022, the Fed Funds Futures markets implied the Fed would raise the Fed Funds rate to 3.20% in January 2023 and to 3.65% by July 2023. Such suggests the Fed would raise rates by almost 50bps between January and July.

Now the market implies Fed Funds will be 3.59% in January, up .40% in the last two months. However, the market implies July Fed Funds will be 3.52%, or .13% less than its January expectations. The market is pricing in a rate reduction between January and July.

The graph below highlights the recent shift in market expectations over the last two months.

The graph below from the Daily Shot shows compares the market’s implied expectations for Fed Funds (black) versus the Fed’s expectations. Each blue dot represents where each Fed member thinks Fed Funds will be at each year-end. The market underestimates the Fed’s resolve to increase interest rates by about 1%.

Short Term Inflation Projections

The biggest flaw with pricing in predicting a stall and Powell pivot in the near term is the possible trajectory of inflation. The graph below shows annual CPI rates based on three conservative monthly inflation data assumptions.

If monthly inflation is zero for the remainder of 2022, which is highly unlikely, CPI will only fall to 5.43%. Yes, that is much better than today’s 9.1%, but it is still well above the Fed’s 2.0% target. The other more likely scenarios are too high to allow the Fed to halt its fight against inflation.

cpi inflation

Inflation on its own, even in a rosy scenario, is not likely to get Powell to pivot. However, economic weakness, deteriorating labor markets, or financial instability could change his mind.

Recession, Labor, and Financial Instability

GDP just printed two negative quarters in a row. Some economists call that a recession. The NBER, the official determiner of recessions, also considers the health of the labor markets in their recession decision-making. 

The graph below shows the unemployment rate (blue), recessions (gray), and the number of months the unemployment rate troughed (red) before each recession. Since 1950 there have been eleven recessions. On average, the unemployment rate bottoms 2.5 months before an official recession declaration by the NBER. In seven of the eleven instances, the unemployment rate started rising one or two months before a recession.

unemployment and recession

The unemployment rate may start ticking up shortly, but consider it is presently at a historically low level. At 3.5%, it is well below the 6.2% average of the last 50 years. Of the 630 monthly jobs reports since 1970, there are only three other instances where the unemployment rate dipped to 3.5%. There are zero instances since 1970 below 3.5%!

Despite some recent signs of weakness, the labor market is historically tight. For example, job openings slipped from 11.85 million in March to 10.70 in June. However, as we show below, it remains well above historical norms.

jobs employment recession

A tight labor market that can lead to higher inflation via a price-wage spiral is of concern for the Fed. Such fear gives the Fed ample reason to keep tightening rates even if the labor markets weaken. For more on price-wage spirals, please read our article Persistent Inflation Scares the Fed.

Financial Stability

Besides economic deterioration or labor market troubles, financial instability might cause Jerome Powell to pivot. While there were some growing signs of financial instability in the spring, those warnings have dissipated.  

For example, the Fed pays close attention to the yield spread between corporate bonds and Treasury bonds (OAS) for signs of instability. They pay particular attention to yield spreads of junk-rated corporate debt as they are more volatile than investment-grade paper and often are the first assets to show signs of problems.

The graph below plots the daily intersections of investment grade (BBB) OAS and junk (BB) OAS since 1996. As shown, the OAS on junk-rated debt is almost 3% below what should be expected based on the robust correlation between the two yield spreads. Corporate debt markets are showing no signs of instability!

corporate bonds financial stability

Stocks, on the other hand, are lower this year. The S&P 500 is down about 15% year to date. However, it is still up about 25% since the pandemic started. More importantly, valuations have fallen but are still well above historical averages. So, while stock prices are down, there are few signs of equity market instability. In fact, the recent rally is starting to elicit FOMO behaviors so often seen in speculative bullish runs.

Declining yields, tightening yield spreads, and rising asset prices are inflationary. If anything, recent market stability gives the Fed a reason to keep raising rates. Ex-New York Fed President Bill Dudley recently commented that market speculation about a Fed pivot is overdone and counterproductive to the Fed’s efforts to bring down inflation.

What Does the Fed Think?

The following quotes and headlines have all come out since the late July 2022 Fed meeting. They all point to a Fed with no intent to stall or pivot despite its effect on jobs and the economy.

  • *KASHKARI: 2023 RATE CUTS SEEM LIKE `VERY UNLIKELY SCENARIO’
  • Fed’s Kashkari: concerning inflation is spreading; we need to act with urgency
  • *BOWMAN: SEES RISK FOMC ACTIONS TO SLOW JOB GAINS, EVEN CUT JOBS
  • *DALY: MARKETS ARE AHEAD OF THEMSELVES ON FED CUTTING RATES
  • St. Louis Fed President James Bullard says he favors a strategy of “front-loading” big interest-rate hikes, repeating that he wants to end the year at 3.75% to 4% – Bloomberg
  • FED’S BULLARD: TO GET INFLATION COMING DOWN IN A CONVINCING WAY, WE’LL HAVE TO BE HIGHER FOR LONGER.
  • “If you have to cut off the tail of a dog, don’t do it one inch at a time.”- Fed President Bullard
  • “There is a path to getting inflation under control,” Barkin said, “but a recession could happen in the process” – MarketWatch
  • The Fed is “nowhere near” being done in its fight against inflation, said Mary Daly, the San Francisco Federal Reserve Bank president, in a CNBC interview Tuesday.  –MarketWatch
  • “We think it’s necessary to have growth slow down,” Powell said last week. “We actually think we need a period of growth below potential, to create some slack so that the supply side can catch up. We also think that there will be, in all likelihood, some softening in labor market conditions. And those are things that we expect…to get inflation back down on the path to 2 percent.”

Summary

We are highly doubtful that Powell will pivot anytime soon. Supporting our view is the recent action of the Bank of England. On August 4th they raised interest rates by 50bps despite forecasting a recession starting this year and lasting through 2023. Central bankers understand this inflation outbreak is unique and are caught off guard by its persistence.

The economy and markets may test their resolve, but the threat of a long-lasting price-wage spiral will keep the Fed and other banks from taking their foot off the brakes too soon.

We close by reminding you that inflation will start falling in the months ahead, but it hasn’t even officially peaked yet.

The post Will Powell Pivot? Don’t Count On It appeared first on RIA.

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Why You Should Not Worry About Disney and Netflix Stock

The two streaming giants have struggled but investors should not be too concerned.

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The two streaming giants have struggled but investors should not be too concerned.

During the lockdown/quarantine days of the pandemic, we all apparently rode our Peloton (PTON) - Get Peloton Interactive Inc. Report bikes while binge-watching streaming videos. As soon as we finished that, we headed onto a Zoom Video  (ZM) - Get Zoom Video Communications Inc. Report call, presumably before ordering food delivery and later having a Teladoc (TDOC) - Get Teladoc Health Inc. Report appointment

That may not have actually been your direct experience, but it's how the stock market performed. People bought so-called "stay-at-home" stocks because we all were, well, stuck at home. Of course, at some point we weren't stuck at home, and sentiment on those stocks changed.

The challenge for investors is sorting out the real narrative from the false one. 

At-home-exercise bikes were never going to replace gyms once people could go out again, and the audience for a premium-priced product was limited when gym memberships can cost as little as $10 a month.

Telemedicine has a bright future, but it has limits and it may prove an area where the brand name does not matter.

Streaming video is different, however, and while Netflix (NFLX) - Get Netflix Inc. Report and Walt Disney (DIS) - Get The Walt Disney Company Report stock are down roughly 40% and 55% respectively over the past 12 months, there are a lot of reasons shareholders need not be concerned.

Netflix/TS

Netflix Has a Correctible Problem  

While Netflix grew steadily for a long time, no product has an endless upward trajectory. The company lost subscribers in its most recent quarter, but that comes after it added more than 36 million customers in 2020 and another 18 million in 2021. Even with its Q2 2022 drop of about a million subscribers, the company still has 220 million paying customers.

That's a huge number and it's not likely to get all that much bigger or all that much smaller over the next few years. The reality is that Netflix has left its growth phase and has moved into its fiscal responsibility phase.

Now, instead of producing $200 million movies and throwing them at the wall, the company has to be smarter about its content investments.

"So our content expense will continue to grow, but it's more moderated as we adjusted for the growth in our revenue," Chief Financial Officer Spence Neumann said during the company's second-quarter-earnings call.

"And we think we've gotten a lot smarter over the last decade or so being in the originals business as to where we can direct our spend for most impact, highest impact, and highest satisfaction for our members." 

Nobody at Netflix wants to say "we're going to make fewer shows and focus on having hits," but Netflix has reached the retention stage of its business. It needs to have enough content its customers want to see coming up to keep people from quitting.

That may not be an easy transition, but it's one the company is likely to make, where it can be comfortably profitable around its current customer base. 

Disney Has Nothing to Worry About     

Disney is obviously much more than a streaming company, but Disney+ has been a massive driver for the company. Its growth was accelerated by the pandemic, but every family and any adults who like Marvel and Star Wars were always going to subscribe.

Fans of the company's huge franchises are simply not going to skip the biggest shows coming out of those universes. 

Disney, unlike Netflix, does not have a too-much-content problem. It knows its customer base and understands that while "Falcon and the Winter Soldier" might draw a bigger audience than "Ms. Marvel," both drive audience to the service.

Disney may struggle with what's a theatrical release and what goes to streaming, but it has hit franchises that have stood the test of time. That's not going to change just because lockdowns have ended and we have other entertainment choices.

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Bed Bath & Beyond stock should be worth $4 only: Baird

Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says…

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Bed Bath & Beyond Inc (NASDAQ: BBBY) has been on fire over the past couple of weeks, but that “frenzy” is unlikely to last for very long, says Justin Kleber. He’s a Senior Equity Research Analyst at Baird.

Bed Bath & Beyond stock could tank 55% from here

On Tuesday, he downgraded the Bed Bath & Beyond stock to “underperform” and reiterated his price target of $4.0 a share that represents about a 55% downside from here. In a note to clients, Kleber said:

This frenzied move has been driven by non-fundamentally focused market participants. With market share losses accelerating and BBBY burning cash, fundamental risk/reward looks unattractive.

The meme stock, he added, has to sharply improve its EBITDA to justify its current $2.30 billion enterprise value – but that’s unlikely to happen in this macroeconomic environment.

Versus its year-to-date low, Bed bath & Beyond stock is currently up more than 100%.

Why else does he dislike Bed Bath & Beyond Inc?

In its latest reported quarter, the American chain of domestic merchandise retail stores lost $2.83 a share (adjusted) – more than double the $1.39 that analysts had expected. Kleber is also bearish on the Bed Bath & Beyond stock because:

Supply chain disruptions have exposed BBBY’s antiquated infrastructure and wreaked havoc on the business at the same time the company’s pivot toward owned brands has not resonated with customers.

The retailer will likely remain challenged as demand for home goods continues to normalise following two years of pandemic-driven boost, he concluded.

In June, the Union-headquartered company named Sue Gove its new CEO (interim) tasked with fixing the liquidity concerns. Most recently, Bed Bath & Beyond was reported considering private loans to optimise its balance sheet.

The post Bed Bath & Beyond stock should be worth $4 only: Baird appeared first on Invezz.

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