As we enter the second half year, market sentiment is increasing. First, there is a sense that the 1H collapse may be bottoming out – or at least falling to a plateau and a pause before further drops. A second consensus is growing that a recession is imminent, possibly within a year. A minority opinion holds that a true downturn is already on us; but we won’t know for certain until the Q2 growth numbers are released later this month.
What does this all mean for investors? In the view of MKM Partners’ chief economist Michael Darda, the gloomy sentiment may have some upside. Darda sees it as an indicator that hard times are already getting baked into current conditions – he estimates that current prices are already two-thirds of the way to taking a recession into account.
Putting his view into advice for investors, Darda says, “Our point here is that markets have already priced in a significant risk of recession/earnings declines and there may not be a recession this year. Even if there is a recession, markets move first and investors are highly unlikely to be able to time the bottom.”
This is why we use TipRanks database to pinpoint 3 stocks that are too cheap to ignore. Essentially, we looked for 1) stocks with a ‘Strong Buy’ analyst consensus; 2) solid upside potential (i.e. Over 30% Each stock is also trading at low valuations. Let’s take a closer look.
Capri Holdings (CPRI)
Capri Holdings is the first, a fashion retail and holding company with a global reach. Capri operates over 1,200 retail stores, both stand-along and in-store boutiques. It sells high-end brand items such as shoes and apparel under the names Versace, Jimmy Choo and Michael Kors.
Capri has shown strong sales growth in recent months, and in the company’s financial report for Q4 of fiscal year 202 – the quarter ending on April 2 – it showed a top line result of $1.49 billion. This was 24% more than the year before and was a record according to management. At 64.1%, gross margins also reached a new company record. Capri’s adjusted net income for the quarter was $152 million, or a $1.02 in diluted EPS. This was more that 2.5x the year-ago result.
At the end of fiscal 2022, Capri held more than $1.09 billion in inventory, an increase of almost 49% year-over-year, and in-line with the company’s stated goals of both holding more core inventory on a regular basis and receiving seasonal inventory earlier in the cycle.
Capri has an active share purchase program. The company purchased back 5.1 million shares in the quarter. It spent $300 million on this, The company Board has now revamped its share repurchase plan, replacing the $500 million authorization by a $1 billion authorization over the next two-year.
Despite all of this, Capri’s share price has been falling. This year, the stock has fallen by approximately 34%.
These severe losses have left luxury retailer with a very low share price. This position has attracted 5-star analyst attention. Robert Drbul.
Drbul wrote that CPRI still has the potential to generate $7Billion in revenue and 20% operating margins over the long-term. CPRI trades at only 7.1x our FY23 earnings estimate. This is because we believe CPRI represents one of the most affordable and attractive ways of investing in the ongoing (but not linear) reopening global economy. With an expectation of higher demand for occasion-based categories handbags and footwear as well as apparel for social occasions, travel, and return to the office, CPRI will be more competitive.
Drbul responds to these comments by giving the stock a Buy rating with a $90 target price. This indicates his confidence in the stock’s upside potential of 109%. (To watch Drbul’s track record, Click here)
This is hardly the only upbeat take on Capri from Wall Street, as is clear from the breakdown in the stock’s 14 recent analyst reviews. There are 12 Buys and 2 Holds for a Strong Buy consensus rating. They are currently selling at $43.04 and have an average price target $73.21, which gives them a 70% year-over. (TipRanks offers CPRI stock forecasts)
ArcBest Corporation (ARCB)
With the second stock on our list, we’ll shift gears into the transportation sector. ArcBest is another holding firm, but this one is in the transportation sector. Its subsidiaries include trucking firms that operate in the LTL segment of the shipping industry. LTL companies can move freight loads too large to be shipped by parcels but small enough to fill a semitrailer.
One quick glance at the numbers shows how crucial ArcBest is to its niche. The company employs 14,000 people and has more than 80,000 freight carriers. It also earned over $4 billion in revenue for 2021. The company spent $150 million on tech and innovation in order to invest more heavily in strategic projects.
ArcBest was able to make a strong start in 2022 with Q1 revenues totalling $1.34 billion. This is a 61% increase year-over-year. High revenues drove earnings up. The net income for 1Q22 was $79.8million, with a diluted PE of $3.08. Both the total revenue and the diluted EPS were the best in more than two years, and ArcBest’s gains were broad based, reflected in all of the company’s operating segments.
Despite this, ArcBest stock lost 36% in the past year. What this comes down to, is a stock that investors need to pay more attention to – in the view of Credit Suisse analyst Ariel Rosa.
“ARCB is the cheapest stock in our coverage… It boasts a attractive 12% yield on cash flow (the highest in our coverage). Although the company has shown strong performance in the last few years, its current multiple shows significant doubt about the sustainability of these results. If it can sustain these results as demand normalizes, particularly an LTL operating ratio below 90%, it could see considerable upside to its share price,” Rosa opined.
Rosa rates ARCB an outperform (i.e. Rosa rates ARCB an Outperform (i.e. Buy) and gives the stock a $102 target price that implies a 33% upside over one year. (To watch Rosa’s track record, Click here)
Rosa’s bullish views are supported by the unanimous Strong Buy consensus rating, which is supported 4 recent analyst reviews. Rosa’s average price target, $129.50, suggests an upside of around 70% from the current trading price, $76.23. (TipRanks has the ARCB stock forecast)
Open Lending Corporation (LPRO)
The automotive sector has received significant support from customers financing in recent years. This has allowed for increased sales of new and used cars, as well as a decrease in prices. Looking forward, that support is only going to become more important – but also more complicated as interest rates rise. Open Lending is our next stock.
Open Lending, a Texas-based company, offers a variety of services to financial institutions and lenders. These include automated loan analytics, risk pricing and modeling, as well as automated decision technology for auto lenders. Open Lending has been operating in the US since 2013. In 2020, the company was listed on the stock exchange.
Since entering the public markets, Open Lending’s shares rose fast to peak above $40. The stock held at that level until 2021, but began to decline in September 2017. LPRO shares have fallen 57% year-to-date.
A look at the numbers may help to explain Open Lending’s share decline. The company faces headwinds from inflation and higher interest rate, which make it more costly for customers to purchase vehicles. However, 1Q22 saw a top line of $50.1million. This was an 13% increase year-over-year. Business remained strong in Q1, with the company certifying 43,944 loans compared to 33,318 in the year-ago quarter – for a gain of almost 32%. Net income rose by 79% from $12.9 million up to $23.2million, or more than 79%.
JMP analyst John M. Perkins has written a note on Open Lending. David Scharf, who holds a 5-star rating, writes: “The company delivered a very strong first quarter, with both top- and bottom-line upside, as well as better-than-forecast loan certification volumes (certs). Furthermore, our belief is that the reiteration of full-year revenue, EBITDA, and cert guidance will be viewed positively in light of investor sentiment that was painting a more dire portrait of auto loan demand during 2022… We believe that the unprecedented supply chain headwinds that have weighed on dealer inventory and lending volumes, as well as the effects of credit normalization on carrier profit-sharing, are priced into LPRO shares.”
Scharf ranks LPRO as an Outperform, indicating that he is in the bull market. Buy and his $28 price target suggest a robust upside potential of 189% over 12 months. (To watch Scharf’s track record, Click here)
The stock has been given a Strong Buy consensus rating by 9 analysts who recently reviewed it. The stock’s current price of $9.69 is averaging $26.22, which suggests that there is a 171% upside. (TipRanks has a stock forecast for LPRO)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks To Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: This article does not reflect the opinions of the featured analysts. This content is meant to be used only for informational purposes. Before you make any investment, it’s important to do your analysis.
