There are signs that the stock market is already trading as if a bottom is in, according to Goldman Sachs.
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“Specifically, we note that currently unprofitable stocks (on a Net Income basis) where GS analyst estimates imply an inflection either this year or next have generated a 14% absolute return and have outperformed the S&P (SP500) (NYSEARCA:SPY) (IVV) (VOO) (SPXU) (UPRO) by 8 percentage points (on a median basis),” James Covello, co-head of single stock research, wrote in a note.
“Similarly, stocks with upcoming Free Cash Flow inflections have generated a similar 14% absolute return and have outperformed the S&P by 7 percentage points (on a median basis),” Covello said.
“For those investors who believe we are at or approaching a sustainable market rally, we highlight stocks with upcoming profitability inflections where GS analysts have a bullish view (i.e. Buy ratings and at least 5% upside to Price Target),” he added.
We “provide a brief investment case for 7 stocks with upcoming inflections, and note that their shares have lagged the S&P 500 by at least 10% since the start of 2022, and offer at least 20% upside to price target.”
The stocks are:
- ANGI Homeservices (ANGI) – “We are encouraged by the progress on initiatives supporting forward profitability for ANGI and the focus on smaller but more repeatable Services while framing 2023 as a year of investment in marketing and cost discipline in areas such as corporate overhead and product development, and expect FCF as well as net income to inflect positively in 2024E.”
- CrowdStrike (CRWD) – “Over the medium-term, we expect stable growth in endpoint (80%+ of ARR) and outsized growth in cloud for the company with its competitive technology (core competencies in data collection and monitoring), supported by its strong FCF generation, and we model a positive GAAP net income inflection in CY2024E.”
- Flywire (FLYW) – “Despite the tough macro backdrop, we remain constructive given its defensive vertical exposure (e.g. education) and its software-based go-to-market, which we expect will help the company meeting its 30% topline growth target and deliver on margin expansion.”
- IHS Holding (IHS) – “The company’s Project Green is expected to drive significant cost savings (by reducing diesel exposure across its African sites) and an attractive return on investment (management expects a 30% IRR).”
- Monday.com (MNDY) – “While we acknowledge the surfacing of softer spending trends (tickdown in NRR for customers >$50K in ARR during 4Q) we see the company driving a healthy balance between growth (given large underappreciated TAM), and profitability.”
- Wolfspeed (WOLF) – “Given the focus on adoption of SiC power semiconductor technology in the EV ecosystem, we believe WOLF’s long term ability to achieve >50% gross margins remains intact and will drive a strong inflection in earnings growth with net income turning positive in FY2024E.”
- Xometry (XMTR) – The company dynamic “will produce a runway for growth and margin expansion in the coming years, with FCF and Net Income turning positive in 2024E.”
For the more defensively minded, check out this list from SA’s Steve Cress of his favorite dividend yield stocks.