Investment bank Stifel predicts a worrisome 2023. Still, it recommended OrthoPediatrics (NYSE:KIDS) and Masimo (NASDAQ:MASI) shares right after expressing grave concerns.
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Stifel and Goldman Sachs Have Different Predictions for 2023
This week, two major research firms, Stifel and Goldman Sachs (NYSE:GS), revealed slightly contradictory outlooks for the economy. Stifel predicted a sharp decline in inflation in the first half of the year (1H23), graced with a pause in the Federal Reserve’s ongoing monetary tightening campaign. This phase is likely to cause lower yields for the 10-year Treasury note and market gains to be led by cyclical value stocks and cyclical growth stocks. But that’s as good as it gets. Later in the year, Stifel says that the economy is likely to see a recession for U.S. industrial production that the Fed might not be able to catch up with. Also, inflation might trend back up, followed by another bout of monetary tightening by the Fed.
Meanwhile, Goldman Sachs predicted U.S. and European equities to be the “best-performing asset classes in 2023, with total returns in local currency of about 13% in our base case scenario.” Despite the high chances of a recession occurring this year, U.S. stocks are likely to end the year with gains, according to Goldman Sachs.
While both firms see a recession at some point in the year, there is one stark difference in their investment return predictions. Goldman Sachs analysts predict the S&P 500 (SPX) to rally between 9% and 12%, marking a huge jump from last year’s loss of almost 20%. On the other hand, Stifel sees the S&P 500 diving 15% to 3,300 in 2H23, representing a new low. “Either way, the S&P 500 in late 2023 may give back some or all of 2023 gains,” said Stifel.
However, despite raising these concerns, even Stifel believes that there are stocks that can outperform the market. Two such stocks are OrthoPediatrics and Masimo.
OrthoPediatrics (KIDS)
OrthoPediatrics designs, manufactures, and commercializes products that are used in the treatment of orthopedic conditions in children. The company dabbles in the niche market of pediatric orthopedics, which is relatively underserved. OrthoPediatrics has a dominant position in this market, giving it an edge in the intensely-competitive medical equipment industry.
Though the company’s preliminary Q4-2022 results showed that respiratory issues disrupting surgical schedules hurt commercial execution, management believes it to be a transitory issue. Management also emphasized that the company’s long-term potential is underpinned by a growing user base, a solid product portfolio, and an expanding international foothold.
The company, unfortunately, hasn’t been profitable in the past few years, as we see from KIDS’ income statements. In such cases, investors expect robust revenues to support the company’s journey to profitability. Notably, between 2017 and 2021, OrthoPediatrics’ revenues have grown at a CAGR of 16.54%, which is considered high growth. This makes me think that the company has better and more profitable days ahead.
Moreover, on Wall Street, OrthoPediatrics stock is a Strong Buy with six unanimous Buys. The average KIDS stock price target of $53.50 indicates 19.55% upside potential.
Among the bulls is Stifel analyst Rick Wise, who recently reiterated a Buy rating on the stock despite lowering the price target to $50 from $52.
Masimo (MASI)
Stifel has its hopes pinned on another healthcare stock, Masimo. The company develops, manufactures, and commercializes non-invasive patient monitoring technologies, medical devices, and sensors. A recent U.S. court win against Apple (NASDAQ:AAPL) over infringement on two of Masimo’s patented technologies has kept the company in the limelight lately.
For context, Apple, which uses Masimo’s pulse oximeters in its watches, was dragged to court by the company for not respecting the patent protection of the technology. Apple expects to sell about 59 million watches in 2023, using Masimo’s technology unethically. If the case is settled, it might open the door to a new revenue stream for Masimo in the form of royalties from Apple.
Buoyed by the possibilities, Stifel analyst Rick Wise raised the price target on Masimo to $170 from $164 while reiterating a Buy rating. Wise believes that the ruling by the International Trade Commission in favor of Masimo is “the first of three critical steps toward final dispute resolution.”
Wise sees the possibility of an import ban on the Apple Watch if Masimo wins the case. While more steps are yet to be fulfilled before the final verdict, Wise believes the decision to be favorable for Masimo’s litigation strategy.
Is MASI a Good Stock to Buy?
Three Buys and one Hold give MASI stock a Strong Buy consensus rating. The average MASI stock price target is $164.50, indicating upside potential of 5.3% from the current price.
The Takeaway
As worrisome as Stifel’s predictions are for the latter half of the year, its clear and logical substantiation behind the theory has made it a little easier to make portfolio decisions. Despite the possibility of the S&P 500 ending 2023 in the red, the firm recommends OrthoPediatrics and Masimo, and this is what keeps me encouraged about the stocks.
