Morgan Stanley Bets on These 3 Stocks; Sees Over 40% Upside
Did the stock market’s epic rally just need a little breather? The last few weeks have seen stocks experience their first meaningful correction since the bull market kicked off in March. Now, the question swirling around the Street is, will the rally pick back up again, or is more downside on the way?According to Morgan Stanley’s chief U.S. equity strategist Mike Wilson, uncertainty regarding the presidential election and stalemate on the next stimulus package could lead to declines in September and October. “On the correction, there’s still downside as markets digest the risk of congressional gridlock on the next fiscal deal. While we think something will ultimately get done, it will likely take another few weeks to get it over the goal line,” he noted.However, Wilson argues the recent volatility in no way signals the end of the current bull market. “We think this correction is just that, a correction in a new bull market. It’s normal for markets to pullback after such an incredible run like we’ve experienced since March. Furthermore, when a new bull market coincides with a new economic cycle, the bull market usually runs for years, not months,” the strategist explained.Taking Wilson’s outlook to heart, our focus shifted to three stocks getting a thumbs up from Morgan Stanley. As the firm’s analysts see over 50% upside potential in store for each, we used TipRanks’ database to get the full scoop.Akero Therapeutics (AKRO)With its innovative medicines designed to restore metabolic balance and halt the progression of NASH, a severe form of nonalcoholic fatty liver disease, Akero Therapeutics wants to address the unmet medical needs of patients from all over the world. Based on the strength of its lead candidate, Morgan Stanley is pounding the table.Representing the firm, 5-star analyst Matthew Harrison tells clients that AKRO’s treatment for NASH, efruxifermin (EFX), has a “best-in-class profile.” EFX is the company’s lead asset and was designed to mimic the biological activity of fibroblast growth factor 21 (FGF21), which regulates multiple metabolic pathways and cellular processes, to reduce liver fat and inflammation, reverse fibrosis, increase insulin sensitivity and improve lipoproteins.According to Harrison, NASH is a complex disease, with patients usually having multiple co-morbidities like obesity, type-2 diabetes, increased triglycerides, increased LDL cholesterol and low HDL cholesterol. “A promising therapeutic solution would not only treat the multiple components of NASH but would also have an acceptable side effect profile given the potential co-morbidities,” the analyst explained.That’s where AKRO’s therapy comes in. “In June, Akero presented best-in-class data from its Phase 2a study. This data indicates that EFX improved the two liver histological endpoints recommended by the FDA along with resulting in weight loss, improving cardiovascular health (increasing good HDL cholesterol, decreasing triglycerides, not raising bad LDL cholesterol), and improving factors related to controlling blood glucose levels. This benefit/risk profile beats the competition,” Harrison stated.Looking at the indication as a whole, Harrison views NASH as a very large opportunity given that roughly 20 million people in the U.S. suffer from the condition.The analyst, however, acknowledges there are commercial hurdles. One of these is the fact that “NASH is currently undiagnosed in all but a very small percentage of the prevalent pool since diagnosis currently requires an invasive liver biopsy.” Therefore, along with demonstrating a positive benefit/risk profile, AKRO will need to find patients and secure payer support should the candidate receive FDA approval, in Harrison’s opinion.That said, Harrison believes AKRO is up for the task. “We believe that given EFX’s clean safety profile and broad-based effects, Akero will likely largely overcome these commercial hurdles,” he commented.Harrison added, “Importantly, since Akero’s treatment is injectable, we only assume the drug will penetrate into the population of the most sick patients where there are currently at least 400,000 patients diagnosed and seeking treatment in the U.S.” To this end, he assigns a 60% probability of success, and estimates unadjusted peak sales for the U.S. and the EU will land at $4.5 billion.Based on all of the above, Harrison rates AKRO an Overweight (i.e. Buy) along with a $70 price target. Should his thesis play out, a potential twelve-month gain of 93% could be in the cards. (To watch Harrison’s track record, click here)Are other analysts in agreement? They are. Only Buy ratings, 6, in fact, have been issued in the last three months. Therefore, the message is clear: AKRO is a Strong Buy. Given the $58.50 average price target, shares could rise 61% in the next year. (See AKRO stock analysis on TipRanks)TransDigm Group (TDG)Next up we have TransDigm Group, which is one of the top producers, designers and suppliers of highly engineered aerospace components, systems and subsystems. Its products are used on nearly all commercial and military aircrafts in service today. Given its ability to weather the COVID-19 storm, Morgan Stanley sees a bright future ahead.Morgan Stanley analyst Kristine Liwag stated, “We view TransDigm as the most defensible business model in commercial aerospace.” However, this is not to say the company hasn’t been confronted with serious challenges.Over the past few years, management has had to grapple with how to price its defense business, the sustainability of its pricing strategy in aerospace, the durability of its levered balance sheet and the ability to weather a downturn. That said, Liwag remains optimistic going forward. “TDG has overcome short thesis after short thesis in the past few years and we do not expect these concerns to repeat,” she noted.According to Liwag, TDG’s “ability to hold on to margins during a global pandemic” conveys its operating strength. To this end, her estimate for EBITDA margins is well above the rest of the Street’s. The analyst also points out that the company cut its SG&A expense by $89 million year-over-year in fiscal Q3 2020. “We assume the company will retain at least half of those savings, with the remainder returning in the form of variable selling expenses,” she said.Liwag added, “We are positive on TransDigm, particularly as recovery in global air traffic would be favorable for TransDigm’s core profit maker, the aftermarket. Additionally, we view it positively that TDG has the means to acquire weaker players.”Back in April, management raised $1.5 billion of additional debt to trim liquidity risks and provide an extra cushion. “A large debt load is part of management’s strategy to provide private equity like return for its shareholders. Historically, the company has used debt to acquire businesses with similar attributes to TDG’s portfolio of 90% proprietary products and 75% sole sourced. If passenger air traffic continues to normalize, we would expect TDG to use its incremental capital to acquire struggling businesses that fit its strategy,” Liwag commented.All of this prompted Liwag to leave her bullish call and $772 price target unchanged. This target conveys her confidence in TDG’s ability to climb 48% higher in the next year. (To watch Liwag’s track record, click here)Looking at the consensus breakdown, 7 Buys and 5 Holds have been published in the last three months. Therefore, TDG gets a Moderate Buy consensus rating. Based on the $500.58 average price target, shares are poised to stay range-bound for now. (See TDG stock analysis on TipRanks)Cemex SAB (CX)Cemex counts itself as one of the leading players in the building materials industry, with the company manufacturing and distributing cement, ready-mix concrete and aggregates. As its risk/reward profile has just gotten more positive, now could be the time to snap up shares, so says Morgan Stanley.Covering the stock for Morgan Stanley, analyst Nikolaj Lippmann believes that CX’s bullish guidance for the third quarter and FY20, which was significantly ahead of consensus, was “the catalyst that builds a bridge to a favorable risk-reward shift.” On top of this, the stock is trading at 6.4 2020e EV/EBITDA, which is cheap compared to its historical performance and its peers, according to the analyst.That being said, Lippmann argues “CX is mainly a good, strong deleveraging story with a call option on what could be an exceptional U.S. cement market if the U.S. Congress approves an infrastructure package in 2021… If we get a U.S. infrastructure package beyond 2020, it would add icing to the cake, we think, and take the market from good to possibly great.”Although a large multi-year package is dependent upon the outcomes of the U.S. presidential and congressional elections, even in the base case, Lippmann expects cement to show pricing power in the U.S.It should be noted that Lippmann thinks it’s possible the next year will be relatively uneventful, but in that case, he expects the industry to pause at 90% capacity utilization and grow from there. On top of this, pricing in Mexico has been holding up. This “limits the downside risk materially and helps skew the risk-reward positively,” in Lippmann’s opinion.What else is working in CX’s favor? The cement demand year-to-date has pleasantly surprised Lippmann, with upside seen during the first stage of the pandemic. He points to DIY and Department of Transportation maintenance work during periods of low traffic, and strong residential construction as the drivers of this demand.Everything that CX has going for it convinced Lippmann to rate the stock an Overweight (i.e. Buy). Along with the call, he attached a $6 price target, suggesting 50% upside potential. (To watch Lippmann’s track record, click here)Turning to the rest of the analyst community, opinions are split almost evenly. 6 Buys and 5 Holds add up to a Moderate Buy consensus rating. At $4.16, the average price target implies 4% upside potential. (See Cemex stock analysis on TipRanks)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.
10 things you need to know today: September 19, 2020
Supreme Court Justice Ruth Bader Ginsburg died on Friday at age 87, the court announced. She died of metastatic pancreatic cancer, after previously beating cancer four times. Ginsburg was appointed to the Supreme Court in 1993, the second-ever female justice, and was well known for championing gender equality, abortion rights, affirmative action, and other progressive causes. She was a part of the liberal wing of the Supreme Court; with her seat vacant, President Trump will have the opportunity to further solidify the court’s conservative majority. Days before Ginsburg’s death, she said “My most fervent wish is that I will not be replaced until a new president is installed.” Senate Majority Leader Mitch McConnell (R-Ky.) said “Trump’s nominee will receive a vote” on the Senate floor. [CNN, NPR]
President Trump and his Democratic challenger, former Vice President Joe Biden were among the many current and former U.S. politicians on both sides of the aisle to pay tribute to the late Supreme Court Justice Ruth Bader Ginsburg, who died Friday night at 87. Trump didn’t find out about Ginsburg’s passing until after he finished giving a rally speech in Minnesota on Friday night. Upon hearing the news, he called her an “amazing woman who led an amazing life.” He later released a formal statement, describing Ginsburg as a “titan of the law” who was “renowned for her brilliant mind and her powerful dissents at the Supreme Court.” Biden, who voted to confirm Ginsburg’s nomination in 1993 when he was still a senator, called her “a relentless voice in the pursuit of that highest American ideal: Equal Justice Under Law.” [Joe Biden, Donald Trump]
The Centers for Disease Control and Prevention on Friday walked back its controversial COVID-19 testing guidance change, which was reportedly not written by the agency’s scientists and was published against their objections. The CDC website now recommends testing “all close contacts” of anyone infected with COVID-19. In August, the CDC’s recommendation was controversially tweaked to say not everyone exposed to the coronavirus “necessarily” needs to be tested if they don’t have symptoms. The guidance change last month was reportedly published despite serious objections from CDC scientists, since experts have emphasized the importance of testing anyone exposed to COVID-19 given the number of asymptomatic carriers. The agency now says “due to the significance of asymptomatic and pre-symptomatic transmission, this guidance further reinforces the need to test asymptomatic persons.” [CNN, The New York Times]
President Trump on Friday claimed there will be 100 million doses of a COVID-19 vaccine ready before the end of the year, and “we expect to have enough vaccines for every American by April,” breaking with what experts and vaccine officials have said. No vaccine has been proven safe and effective for humans yet, making specific timelines impossible. Moderna, a company developing a vaccine in the U.S., has found it hard to prove the vaccine candidate’s effectiveness as COVID-19 cases decline, but suggested vaccines could be widely available early next year. “How is it that you don’t trust your own experts? Do you think you know better than they do?” Trump was asked at the Friday conference. “Yeah, in many cases I do,” Trump claimed without evidence or explanation. [ABC News]
The Trump administration will ban downloads of TikTok and WeChat in the United States beginning on Sunday. President Trump last month ordered ByteDance, the Chinese owner of TikTok, to sell the app’s U.S. operations or face a ban due to national security concerns, and the Commerce Department on Friday said it’s issuing an order that will ban TikTok from U.S. app stores beginning on Sept. 20. Those users who have TikTok downloaded will reportedly still be able to use it. U.S. downloads of the Chinese-owned WeChat will also be banned. ByteDance has reportedly reached a deal for Oracle to take over TikTok’s U.S. operations, but the president and officials in China still need to approve. [The Financial Times, Reuters]
President Trump will reportedly approve an $11.6 billion package to aid Puerto Rico’s recovery from Hurricane Maria, which devastated the island three years ago. It will go toward rebuilding Puerto Rico’s power grid that was largely destroyed during the hurricane, leaving some people without power for nearly a year, as well as to the island’s education systems. In a Thursday statement, Rep. Nydia Velasquez (D-N.Y.), who is from Puerto Rico and championed the relief measure after Hurricane Maria, suggested Trump’s motivations were largely political. Trump “dragged his feet and resisted allocating these badly needed funds” for the past three years, but “47 days before the election,” seemed to have a change of heart, Velasquez said. Asked about the timing, Trump claimed the package took a long time to put together. [CBS News]
Russian opposition leader Alexei Navalny on Saturday posted a photo to his Instagram account in which he is walking down a flight of stairs as part of his recovery after he was poisoned last month. In the photo’s caption, Navalny, one of Russia’s most prominent Kremlin critics, said he has a “clear path” to recovery, but suggested it will be a long one. He was removed from a ventilator five days ago and said he is still having trouble climbing stairs, pouring water, and using his phone. He fell ill in August while in Siberia and was airlifted to a hospital in Berlin while in a coma. Multiple labs in Europe have confirmed he was poisoned by a Soviet-era nerve agent called Novichok. His supporters suspect Russian President Vladimir Putin was behind the assassination attempt, but Moscow has denied any involvement. [Deutsche Welle, The Guardian]
Tropical Storm Beta formed in the Gulf of Mexico on Friday night right after Tropical Storm Wilfred and Subtropical Storm Alpha in the Atlantic, marking the first time since certainly 1953 — when storms were first named — and possibly 1893 that three new storms were named in one day. There have been 23 named storms during the 2020 hurricane season. Because the World Meteorological Organization skips the letters Q, U, X, Y, and Z, forecasters officially ran out of planned names for the season with Winifred, forcing them to turn to the Greek alphabet. It’s only the second time that the Atlantic hurricane season has made it through the alphabet and the earliest that has happened as well, underscoring this year’s hyperactivity. Winifred is expected to fizzle out before hitting land, Alpha is headed toward Europe, and Beta could become a Hurricane that poses a serious threat to the Texas coast. [The Week, The Sun Sentinel]
A magnitude 4.5 earthquake rattled much of Southern California on Friday night. It was felt across the Los Angeles area and reached as far as San Diego, The Los Angeles Times reports. So far, despite shaking buildings, there have been no reports of serious damage or injuries. Lucy Jones, a seismologist at the California Institute of Technology, said the temblor produced “a pretty good jolt” near the epicenter, about 10 miles from South Pasadena. That location is very close to the epicenter of a 1987 magnitude 5.9 earthquake that caused multiple deaths and more than $200 million in damage. The Greater Los Angeles area averages five earthquakes with magnitudes between 4.0 and 5.0 per year. [The Los Angeles Times, CNN]
A firefighter in California died while working to extinguish a blaze that was set off by a gender reveal party, officials said Friday. The El Dorado fire, which broke out in Southern California on Sept. 5, has been blamed on a gender reveal celebration that went awry when a smoke-generating device meant to signal a baby’s sex instead caught some nearby grass on fire, which quickly spread. Officials had previously suggested the family may be responsible for the costs of fighting the fire, and criminal charges were already being considered even before the firefighter’s death. The El Dorado fire is one of several across the state; this summer’s fires have burned through a record-breaking 3.4 million acres. [The New York Times]
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Roku and NBCUniversal Reach Deal for Peacock, Renew Agreement for NBC TV Apps
Peacock will finally be taking flight on Roku devices, after months of wrangling — and NBCUniversal’s TV apps will not be going dark on Roku after all.
Roku and NBCU reached a deal Friday afternoon that will provide access to the Peacock app on the streaming platform’s players and Roku-enabled TVs. In addition, the companies renewed their agreement to keep 46 NBCU broadcast and cable apps on Roku, after the media company had threatened to pull them this weekend over the dispute over Peacock.
Under the companies’ expanded pact, NBC content will be added to the free, ad-supported Roku Channel. Financial terms of the deal weren’t disclosed. But there is money changing hands, in the form of NBCU providing some kind of value to Roku: The platform company said it has a deal for “a meaningful partnership around advertising.”
Peacock will be coming to the Roku Channel Store within a few weeks, pending technical integration work between the two companies.
Roku said in a statement, “We are pleased to have reached an agreement with Comcast that will bring Peacock to Roku customers and maintains access to NBCU’s TV Everywhere apps. We look forward to offering these new options to consumers under an expanded, mutually beneficial relationship between our companies that includes adding NBC content to the Roku Channel and a meaningful partnership around advertising.”
NBCU praised Roku’s “incredible reach” in announcing the deal. “We are pleased Roku recognizes the value in making NBCUniversal’s incredible family of apps and programming, including Peacock, available to all of their users across the country,” an NBCU rep said in an emailed statement. “More than 15 million people signed up for Peacock since its national launch in July and we are thrilled millions more will now be able to access and enjoy Peacock along with other NBCUniversal apps on their favorite Roku devices.”
Each side had accused the other of making unreasonable demands: NBCU wanted Peacock to be distributed on Roku without giving up a share of the advertising inventory on the service. Roku was insisting on getting some kind of compensation.
Peacock launched nationwide July 15, but until now it has been unavailable on Roku as well as Amazon Fire TV. WarnerMedia’s HBO Max remains unavailable on Roku and Fire TV over deal disagreements.
Such distribution standoffs are likely to become more common as Roku and Amazon flex their big installed bases. Roku reported 43 million streaming accounts as of the end of June; Amazon says Fire TV has more than 40 million customers. Prior to Roku’s standoffs over Peacock and WarmerMedia’s HBO Max, the highest-profile case of a similar dispute was when Fox’s TV app was pulled from the platform in January 2020 — before they made peace and the app returned at the 11th hour, one day before the Super Bowl.
Peacock is available in three tiers: Premium Free (with ads) and Peacock Premium, which includes a bigger content selection, available with ads ($4.99/month) and no ads ($9.99/month). In addition, Comcast Xfinity X1 and Flex customers and Cox Contour subscribers have access to Peacock Premium with ads for no extra charge (or the ad-free tier for $5/month).
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