Harley Finkelstein, COO, Shopify
Scott Mlyn | CNBC
Investors should take note when an analyst becomes bullish on a stock after standing on the sidelines. It could signal the name is undervalued and poised for long-term growth.
The stocks highlighted below have just been upgraded to Buy. As for the analysts handing out these upgrades, they boast a proven track record of success.
TipRanks’ analyst forecasting service works to identify the best-performing analysts on Wall Street, or the analysts with the highest success rate and average return per rating. These metrics factor in the number of ratings published by each analyst.
Here are five stocks that were recently upgraded by Wall Street’s best-performing analysts:
Based on operating margin catalysts as well as its valuation, ON Semiconductor just scored an upgrade from Baird analyst Tristan Gerra. Now rating the stock a Buy, the top analyst also increased the price target from $38 to $48 (29% upside potential).
While management guided for revenue that is less than the seasonal norm, Gerra remains unfazed.
Expounding on this, the analyst stated, “The company’s aggressive inventory shift… along with a very significant rebound in utilization rates enabled them to gain share in 2Q by outshipping competitors, in our view. We do not view management’s preliminary 3Q below-seasonal revenue outlook as the sign of a coming downcycle, but rather a capacity limitation with the potential for the company to exceed second-half expectations on better supply availability.”
On top of this, the semiconductor company has been working to improve its mix. These efforts will be bolstered thanks to the current “tight supply environment,” in Gerra’s opinion, rather than if ON was operating in an over-supply environment.
All of this prompted the analyst to note, “Investors for the medium-term should be rewarded with significant upside both from an ongoing upcycle and likely the most significant turnaround in the company’s history. Cost initiatives, mix and pricing should catalyze further gross margin expansion in both 2H and 2022 as product repositioning initiatives gain momentum.”
Gerra is currently tracking a 62% success rate and 20.4% average return per rating, according to recent data provided by TipRanks.
In a research report entitled “The Retail ‘Shift’ Appears Here to Stay,” Roth Capital analyst Darren Aftahi makes the case for e-commerce name Shopify. In addition to upgrading the stock to Buy, he also set a $1,530 price target, suggesting 37% upside potential.
Looking at the company’s 1Q results, the numbers “once again” beat Aftahi’s raised and above consensus expectations “as growth accelerated across all key segments and metrics.” Total revenue growth reached 110%, and total gross merchandise value or GMV came in at $37.3 billion, reflecting 114% year-over-year growth and besting the analyst’s call by 11%.
According to management, the strong result was driven by growing traction and integration across social media platforms, as well as additional international expansion. International GMV growth exceeded that of North America, which implies “SHOP’s growth was more than just a U.S. stimulus check dynamic,” in Aftahi’s opinion.
“While SHOP may not be able to outgrow its upcoming ~90%+ topline growth rates, it appears clear the company is continuing to gain market share and grow on the outskirts of the pandemic… International expansion acts as one of the major upside catalysts for SHOP where it will begin to invest more directly, and its portfolio of merchant solutions, internationally, has barely scratched the surface, beyond payments,” Aftahi commented.
With this in mind, the analyst bumped up his forecast for FY21 revenue by roughly 3%.
“When we look at multiple catalysts through international expansion and organic plan upgrades to Plus, alongside commentary April GMV has been on-par with 1Q trends, we see growth remaining quite healthy for this best-in-class e-commerce/tech name,” Aftahi said.
Landing among the top 66 analysts tracked by TipRanks, Aftahi boasts an impressive 44.5% average return per rating.
Following its 1Q21 earnings release, Oppenheimer’s Timothy Horan sees Cogent Communications as a compelling play within the internet, ethernet and colocation services space. As such, the five-star analyst upgraded the stock from Hold to Buy. In addition, he put a $90 price target on CCOI, which brings the upside potential to 16%.
In the first quarter, the company posted total revenue of $146.8 million, which reflected a slight beat. In addition, gross margin was up by 200 basis points compared to the prior-year quarter.
Looking ahead, management gave long-term, multi-year targets of 10% annualized revenue growth and 200 basis points of annual adjusted EBITDA margin expansion. As a result, post-earnings, Horan is “incrementally more positive on growth.”
When it comes to the netcentric business, it has bounced back to growth thanks to international expansion and retreating customers. What’s more, according to the Oppenheimer analyst, corporate customers have been forced to close branch offices due to the pandemic. However, after peaking in the middle of the fourth quarter, churn has seen a significant improvement, with corporate purchasing activity (DIA) also getting a boost. To this end, the analyst estimates corporate revenues will gain 2% to 3% quarter-over-quarter when stabilized.
It should also be noted that this stock trades at a 3.6% free cash flow yield, which is “attractive” in Horan’s opinion, for a name “growing free cash flow in the mid-20% range over the next two years.” The company is also making an effort to cut costs and increase unit growth, “supported by its low-cost positioning.”
Summing it all up, Horan stated, “Fundamentals are improving as we exit the pandemic and CCOI trades at an attractive valuation, which has created a buying opportunity. Long-term, we think the company is positioned to take share in both corporate (~20% market share today) and netcentric (~25% market share today) as the low-cost provider of internet services in a commoditized market.”
Supporting his position on TipRanks’ ranking of best-performing analysts, Horan has achieved a 67% success rate and 17.5% average return per rating.
Cirrus Logic’s high valuation and concentration of revenues from Apple had previously kept Needham’s Rajvindra Gill on the sidelines. That said, given that shares have taken a major fall since the middle of January and its price-earnings multiple has compressed 40%, the analyst has reconsidered his stance.
On May 4, Gill upgraded the fabless semiconductor supplier from Hold to Buy and put a $100 price target on the stock. This target suggests that shares could gain 31% in the year ahead.
Although Gill acknowledges that the recent earnings results and guidance were “disappointing,” he points out that “the numbers were attributed to revenue recognition timing, where the company is selling camera controllers for use in camera modules, where lead times are shorter than the rest of components, and thus are shipped earlier.”
Further explaining his bullish thesis, Gill noted, “New opportunities are emerging, including potential content gains at Apple with a new Power IC (with a $1 ASP). Net, we expect revenue growth to accelerate in FY22 and believe stock is compelling here.”
Looking at the analyst’s current iPhone dollar content estimates, they land at about $4.20 ($5.20 with an additional $1 ASP for the Power IC). This is set to be integrated into iPhones in Fall 2021.
Additionally, CRUS is working to expand beyond the audio domain with its high-performance mixed-signal chips. According to Gill, the “22nm chips could translate to either more digital processing closer to the analog or a radically smaller or more power efficient chip.”
What’s more, the company is making a significant effort to grab market share with Android-based phones with haptic controllers. It’s also growing the smart codec portfolio, working to deliver size and power improvements.
A top analyst covering names in the tech sector, Gill’s calls, on average, generate returns of 15.5%, with his success rate clocking in at 67%.
Operating as an aerospace and defense company, General Dynamics offers products like combat vehicles, weapons systems, munitions, shipbuilding services, as well as communication and information technology systems and solutions.
For Baird analyst Peter Arment, the company’s long-term prospects appear to be even stronger. As “order growth has returned at Gulfstream, providing a cyclical kicker to a defense business that continues to quench budget concerns,” Arment upgraded GD from Hold to Buy and gave the price target a lift, with the figure increasing from $180 to $243 (27% upside potential).
Specifically, Arment argues that a “flat” budget request and a “heightened threat environment” in important regions has been helping to calm investor fears. Highlighting Combat Systems in particular, it saw a 6% gain in the quarter. He added, “In addition, Marine’s long-term visibility on platforms such as the Virginia and Columbia class submarines, the defense business becomes an execution story in the medium-term.”
On top of this, the defense backlog is currently at more than $77 billion, which equates to roughly 2.6 years of related segment revenue. According to Arment, this will be supported by recurring submarine awards as well as a “growing pipeline” in Technologies, which closed out the quarter with $30 billion in proposals.
Although commercial aerospace demand recovery has been slower, bizjets are an entirely different story, with flight activity spiking. “As travel restrictions ease internationally, we expect activity to pick up further and aid out-year results,” Arment commented.
It should also be noted that even though aerospace profitability will be under pressure this year, Arment believes this will reverse in 2022, with higher volume expected.
“Paired with an improving top and bottom line at Aerospace, we see potential for GD to return to its premium stance amongst the primes,” the Baird analyst opined.
Overall, Arment has delivered a 64% success rate and 13.8% average return per rating.