The conventional wisdom has been pointing toward a recession this year, and we’ve been seeing a year-over-year earnings decline in the Q2 results – but there’s more to it than that, according to Michael Arone, chief investment strategist from State Street. Arone sees more positive nuance in the markets, and believes that this earnings season backs it up.
To start with, Arone notes that expectations are down – and so are easier to beat. For example, of the S&P firms that have reported so far, 4 out of 5 are beating the earnings forecasts. In addition, if the volatile energy and materials stocks – that are expected to contract sharply year-over-year – are removed, the S&P is likely to show 1.5% earnings growth. Finally, Arone tags a singular fact that sometimes gets overlooked: the index is heavily biased toward mega-cap stocks, and investors don’t always see the opportunities presented in the wider field.
Put it all together, and the implication is clear, that there should be plenty of attractive entry points among the market’s smaller stocks, the small- to mid-cap stocks that make up the great ‘middle class’ of Wall Street equities. The Street’s analysts have been busy, digging into that wider potential, looking for names that deserve more attention from investors, and their search has been yielding results.
So, using the TipRanks database for a fuller picture, here’s the latest scoop on 3 stocks that certain analysts believe are showing just such attractive entry points, predicting higher-than-average upside for the year ahead. Let’s take a closer look.
Life Time Group Holdings (LTH)
The first stock to check out is Life Time Group Holdings, a company in the fitness and recreation niche, operating chains of fitness centers which are owned and managed by its subsidiaries. Life Time Group has been in business for over 30 years, and its network includes over 160 athletic resort destinations and country clubs in the US and Canada. In addition to its brick-and-mortar locations, the company offers a digital omnichannel approach to promote healthy living, aging, and entertainment.
Life Time has a strong focus on high-growth markets, as exemplified by its latest athletic country club opening. The new addition to the company’s network, Life Time Sienna, is located in Missouri City, Texas, and is the 30th such athletic country club in the state, the country’s second largest by GDP. The opening also marks the 12th in the Houston market, one of the nation’s fastest growing urban areas.
Over the past two years, Life Time has seen its quarterly top line gradually increase, while more recently, its earnings have switched from net losses to net profits. In the last quarter reported, 2Q23, the company showed total revenues of $561.7 million, up 21.8% year-over-year and beating the forecast by $5.36 million. The bottom line also showed a positive change; the diluted GAAP EPS of 8 cents marked a turnaround from the 1-cent net loss per share reported in the year-ago period although it missed the forecast by two pennies.
The company is also facing delays in new center openings, mainly attributed to issues with permitting and inspection, rather than delays in actual construction. Despite the growth on tap, investors focused on the less pleasing aspects of the report and LTH stock fell more than 11% after the earnings release.
Nevertheless, Deutsche Bank analyst Chris Woronka is impressed by this company’s ability to expand its network, and he likes its current share price. Laying out the case to buy in, Woronka writes, “We like the fact that LTH can pivot its unit expansion model to include a higher mix of conversion opportunities that require significantly less capital outlays up front and can be ready for operation much quicker than a ground-up new build. Tactically, we also believe the valuation reset could be an opportunity for long only investors to enter the stock at an attractive level and likely de-risked for the near to intermediate term.”
These comments support the analyst’s Buy rating on the shares, and his $25 price target implies a one-year upside potential of 34%. (To watch Woronka’s track record, click here.)
Life Time Group has attracted 7 recent analyst reviews, and these break down into 4 Buys, 2 Holds and 1 Sell, for a Moderate Buy consensus rating. Shares are priced at $17.16 and the $21.43 average price target suggests that a one-year gain of 25% lies in store for the stock. (See LTH’s stock forecast.)
Cellebrite DI (CLBT)
Next up is Cellebrite, a company involved in digital intelligence (DI) for law enforcement and forensic investigations.
These days, some 67% of major crimes involve a digital component, while at the same time, more than 30 states have passed laws mandating increased oversight and/or reform of local police. Cellebrite aims to take advantage of these two factors, giving law enforcement greater resources to collect and analyze digital evidence, while creating and maintaining an electronic trail for regulatory overseers.
Cellebrite gives law enforcement a range of products, designed to give cops the tools they need for proper collection, review, analysis, and management of digital evidence across the investigative life cycle. The company’s offerings can be scaled for agencies at all levels, from small local police departments to state agencies, and can be adapted for public defenders, legal and corporate security, and even the armed forces. Cellebrite boasts that its software platforms and tools will help promote public trust in law enforcement by allowing both greater transparency and a higher case clearance rate.
The company last reported earnings in May, for 1Q23, and posted some mixed results. The top line revenue, of $71.2 million, was up 14% y/y and was almost $1.8 million better than had been anticipated. The bottom line showed a split; the GAAP result, a net loss per share of 21 cents, was 14 cents per share deeper than the forecast, but the non-GAAP result, a 3-cent positive EPS, was 1 cent better than the estimates. The company will report its Q2 results on August 8, and analysts are looking for $72.5 million in revenue, break-even GAAP earnings, and a non-GAAP EPS profit of 2 cents.
In a notable highlight from the first quarter, Cellebrite closed 21 large deals in the first three months of this year – that is, deals worth $500K or better. These included a ‘large national agency’ in Latin America, a ‘specialist intelligence agency’ in Western Europe, and police departments in two mid-sized US cities.
Watching Cellebrite from Craig-Hallum, Jeff Van Rhee sees Cellebrite taking advantage of a new business niche, and benefiting from a real need among law enforcement and investigative agencies. The 5-star analyst also thinks the shares look tasty at current levels.
He writes, “We see a path to a much higher share price for CLBT as the business contains a compelling moat, distribution, TAM, growth rates and current valuation of only 22x EV/’24 EBITDA. Technological barriers to entry are considerable, with CLBT engineering talent representing a truly unique collection of skills and a product set that is a culmination of an incredible number of cumulative hours of effort.”
“With peer Magnet taken out at 14x revenues, software peers trading at ~6.2x and CLBT trading at 4.0x, we see a lot of multiple expansion and sustained strong growth going forward,” Van Rhee goes on to add.
Looking ahead, Van Rhee sees fit to set a Buy rating here, with an $11 price target to indicate potential for 42% share appreciation on the one-year horizon. (To watch Van Rhee’s track record, click here.)
On Wall Street, the stock has only picked up 2 additional recent reviews – 1 Buy and Hold, each, all adding up to a Moderate Buy consensus view. Van Rhee is the bullish of all 3; the average price target of $8.25 implies a modest 6% upside potential in the next 12 months. (See Cellebrite’s stock forecast.)
Victory Capital Holdings (VCTR)
Last on our list is Victory Capital Holdings, which operates a network of subsidiaries in the asset and investment management field. Victory’s clients can access a broad range of services, including general asset management, fund administration, and investment advice. The company represents itself as the next generation of asset management, promoting a business model that combines the ‘boutique’ qualities of traditional asset managers with a modern, digital, fully integrated and centralized operating and distribution platform.
It’s a differentiated model that Victory uses to set itself apart from the competition. The company has a network of 12 autonomous investment franchises, and each sets up its own culture for an independent investment approach – offering something for investors of all stripes.
At the end of Q1 this year, Victory had a total of $158.6 billion in assets under management. By the end of June, that number was up to $161.6 billion, an increase of 1.9% in three months.
The June AUM report followed the 1Q23 financial release. The company had a top line total revenue of $201.3 million, which was down from $230 million in 1Q22 and relatively flat compared to the $201.5 million generated in 4Q22. Adj. EPS came in at $1.08, 2 cents above expectations. Where Victory’s top and bottom lines showed an upward slope in 2021, both have been trending downward since 2022. Victory will report 2Q23 earnings tomorrow (Thursday, Aug 3) after the close.
Even though its results have been showing a slide, the company still declared a 32-cent per common share dividend payment for Q1, which was paid out on June 26. The dividend annualizes to $1.28 per share, and the 3.85% yield is well above the market average – and beats the last annualized inflation figure, 3% for this past June.
Analyst Étienne Ricard, of BMO Capital, weighs in on Victory, and sees the shares trading at a current discount that should lure investors. Explaining the “attractive return potential,” Ricard writes, “We believe VCTR’s discounted valuation is disconnected from earnings potential and capital deployment optionality. We value management’s track record in diversifying AUM, maintaining fee rates/margins, and pursuing acquisitions. Looking forward, potential catalysts include: i) the return to positive net flows; ii) the deployment of capital for targeted acquisitions; and iii) continued private equity sell-down.”
Ricard goes on to rate VCTR as Outperform (a Buy), and his price target of $46 suggests a one-year potential upside of 39%. (To watch Ricard’s track record, click here.)
This is another stock with a Moderate Buy consensus rating from the Street, based on 4 Buys, 1 Hold, and 1 Sell set in recent weeks. The stock is selling for $33.15 and the average price target, at $36.67, implies an 11% one-year increase from that level. (See Victory Capital’s stock forecast.)
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: The opinions expressed in this article are solely those of the featured 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.
