Morgan Stanley Says It’s Time to Look at Beaten-Down Quality Stocks; Suggests 3 Names to Buy
Jan 18, 2022
Let's discuss quality stocks. There is no question that many investors are interested in taking this route, but how can we identify them? Is it better to invest in well-known, high-value equities? Can we dig further and uncover some genuine gems buried under the sand?
Morgan Stanley's chief investment officer, Lisa Shalett, supports the second choice. Investors, in her view, should look for beaten-down stocks or equity shares that have lost value in recent years but still have excellent fundamentals and are expected to outperform profit estimates. She feels that this is where the value is.
"If you dig under the surface of the indices, you will discover that 85% to 90% of stocks have corrected from their 52-week highs, with many having corrected as much as 10% or 20%," she notes based on some fascinating market characteristics. "This is a good market for stockpickers."
In line with Shalett's advice, Morgan Stanley is picking stocks based on its analysts. Many companies have at least a 40% upside potential, and even more intriguing, that all are presently down at least 20% from their high prices. The Street seems to agree with the analyst, as each stock was rated "Strong Buy."
Smartsheet, which delivers workspace management and collaboration tools through the popular as-a-Service concept, is our first destination. The company's solutions can handle a wide variety of operations, including admin, content collaboration, resource management, online forms, custom email domains, and integrations. Smartsheet, which debuted in 2006 and has since grown in popularity, is used by 80% of Fortune 500 organizations.
Smartsheet's sales increased 46% year over year to $144.6 million in the most recent fiscal quarter (Q3 or fiscal 2022). Subscription revenues were 132.6 million, mirroring the overall growth rate of 46%, while professional services totaled $12 million, a 50% increase year over year.
Despite excellent year-end results and an optimistic forecast for the whole fiscal year, Smartsheet's stock is down 23% from its latest high point, set in September last year.
"We are confident in the company's capacity to achieve $1 billion in sales in FY24 and continue 30% growth into FY25," says Stan Zlotsky of Morgan Stanley, who covers Smartsheet. " On both counts, the outcomes surpassed our expectations..."
Smartsheet, according to Zlotsky, has made strong inroads into the government market. Smartsheet began investing in its government and international sectors before the COVID-19 outbreak, and these efforts are beginning to bear fruit." Smartsheet has been able to gain additional federal contracts due to its early-mover advantage in FedRAMP certification. As the government attempts to automate more of its procedures, and Smartsheet is a simple solution that enables them to do so, this vertical will become a significant driver of growth, particularly as last year's early adopters expand their use and become reference customers.
Given all of the above, Zlotsky stands with the bulls. The analyst rates SMAR as Overweight (Buy), and the $105 price target represents a 67% year-to-date gain. "Overweight SMAR will remain one of the top three ideas in 2022," Zlotsky concludes.
Smartsheet has received 11 recent analyst reports on average, and with 9 Buys and just 2 Holds, Smartsheet has a Strong Buy consensus. The shares are now priced at $62.70, and their average price target is $91.45 for the following year, implying a 46% rise.
Endava, Ltd. (DAVA)
Endava will be our next stock to examine. Digital consulting, IT strategies, business analysis, program management, digital product strategy, machine learning, artificial intelligence, design, and UX are just a few of the services offered by the organization. Endava was founded in 2000 and serves business clients in Europe, North America, and Latin America. Customers are served by the firm in the retail, healthcare, and consumer goods sectors.
This company's stock price has lately varied. Endava's sales and profitability both increased 65% year over year, demonstrating the company's competitiveness. Despite recent increases, shares have dropped dramatically in the last month, and the price has dropped by 23% from its high in late December. These moves correspond to a drop in the main indexes.
Endava has witnessed sequential gains in sales and profitability for five consecutive quarters since its debut in 2010. The most current quarterly report for fiscal 2022, for the first quarter, was 147.5 million GBP, or US$201 million. Earnings per share for the corporation were 67 cents. In terms of growth rates (adjusted for constant currency), these statistics climbed by 55% and 88%, respectively.
Morgan Stanley analyst James Faucette updated his perspective on Endava from Neutral to Overweight (Buy).
"As businesses pursue digital transformation strategies, cloud-related initiatives remain in high demand," says Faucette. The complete exposure that DAVA's digital engineering teams have had to nearshore development has helped them add new customers and grow modest proof-of-concept engagements, enabling them to spend more time with bigger clients. As with other pure-play challengers, competition has allowed DAVA to build pricing power and be choosy in the contracts it accepts. DAVA, in our opinion, is one of the primary benefactors of long-term digital transformation trends."
Because of DAVA's many good characteristics, Faucette classified the stock as Overweight (a Buy). But what's the icing on the cake? With a price target of $185, the stock has a 43% upside from its current position.
Given the consensus breakdown, it indicates that other experts are similarly pleased with what they're witnessing. The stock has an average recommendation of Strong Buy, with three Buys and one Hold. In reality, Faucette's target is almost comparable to the average of $185.50.
EPAM Systems (EPAM)
EPAM provides software and consulting services that integrate innovation, physical-digital capabilities, and creative thinking. With clients in over 40 countries, the firm supports 280 Forbes Global 2000 corporations and employs over 52,000 workers to satisfy customer demands. EPAM, which has offices in the United States and Belarus, went public in 2012 and had annual sales of more than $2.6 billion in 2020.
The corporation has made it a priority to maintain a solid financial performance. The company's revenue has shown a noteworthy growth tendency, with sequential rises in four consecutive quarters. According to the most recent quarterly report, 3Q21, EPAM recorded revenues of $988.5 million, a 52% increase over the previous year. Earnings at the corporation have also been improving, but more volatile than they used to be. Sequential gains have been recorded in the past two quarters, with the 3Q21 number coming in at $2.42, a 46% rise over the 3Q20 figure. According to EPAM's projections for fiscal 2021, sales will increase by 40%.
However, although EPAM shares are up 56% year on year, the stock peaked in November and has since declined 24%.
According to Morgan Stanley's James Faucette, who wrote an in-depth report on EPAM's prospects, the company's robust recruiting framework facilitates recruiting highly skilled engineering talent nearshore, resulting in revenue per employee of around $70k, a significant premium over diversified peers with more legacy exposure to IT Services. Because of EPAM's quality delivery and execution and the lack of established pure-play digital IT service providers, the firm has been able to achieve steady 20%+ revenue growth, allowing it to double its revenue nearly every three years. Given the scarcity of highly experienced engineers, the company's 85% exposure to time-and-materials contracts allows it to pass pay increases on to end consumers.
Consequently, the analyst grades EPAM's shares as Overweight (Buy) and sets a price target of $830. If all goes as planned, EPAM will rise by nearly 53% during the following year.
As seen by the nine analyst evaluations it has gotten in the last week, EPAM is undoubtedly gaining traction on Wall Street. Eight analysts have given the company a Buy recommendation, while one has given it a Hold rating, resulting in a Strong Buy average rating. Experts anticipate that the company's average price target will be $788, reflecting a 45% rise from its current share price of $543.06.