It’s hard to tell where the markets are headed right now. Are we on the road to recovery or is there more headache? Is the recession just around the corner or can it be avoided?
By one index, a recession is indeed on the cards, according to JP Morgan’s head of global equity strategy, Mislav Matejka.
Any time jobless claims have exceeded their current quarterly average by 10% or more, a recession is occurring. And that just happened.
But that doesn’t necessarily mean it’s time to pack up the portfolio. In fact, the indicator is actually a bullish signal for stocks. Whenever it blinked, the other consequence was an 11% gain, on average, for the S&P 500 over the next year.
Further boosting confidence, Matejka believes the central bank will soon ease its monetary policy. “The Fed could take a much more balanced view of policy after September,” Matejka explained, “as some of the inflationary pressures continue to recede.”
Against this backdrop, Matejka’s fellow analysts at the banking giant have settled on two lesser-known stocks that they believe are poised to charge ahead. Is it just them who believe this or do they have the support of other experts in the analyst community? With the help of the TipRanks database, we can definitely find out.
The first JP Morgan pick we’ll look at is US bowling center operator Bowlero. With approximately 300 centers, most of which are based in the US, the company is the largest operator of ten-pin bowling centers in the world. That’s not the only big thing about the company. while most US bowling centers average 21 lanes, Bowlero’s averages 40. Its family of brands includes Bowlero, Bowlmor Lanes and AMF, and combined their lanes serve over 26 million visitors each year. Not to mention, in 2019, the company acquired the Professional Bowlers Association, which came with thousands of members and a global fan base in the millions.
The company is yet to announce its fourth quarter (June quarter) financial results, but we can get a feel for how the business is performing by looking at its March quarter report.
Revenue reached $258 million, up 129.8% year-over-year and a 25.8% improvement over pre-pandemic levels. Adjusted EBITDA of $108.4 million increased by $81 million (295.7%) compared to the same period last year and reached $41 million (60.9%) above the pre-pandemic performance.
Investors have apparently been happy with the company since it went public late last year through a SPAC merger. Even in the very difficult environment of 2022, shares are up 31% year-to-date.
JP Morgan analyst Kevin Heenan believes there is more to come and highlights the company’s special features.
“Bowlero is unique, with unmatched scale performance P/L advantages tied to two key industry economic characteristics: (i) ~2/3 of revenue comes essentially without variable costs (bowling and entertainment), driving operating materials to incremental visits /games and (ii) ~90% market share is captured by local independents, of which ~1,500 (or >40%) represent ‘high-quality acquisition’ targets for Bowlero to implement its proven operating model,” explained Heenan . .
“Looking ahead – our work shows stable/improving margins at 10% modeled top-line growth with bowling industry wind turbines coming out of the pandemic (vs. outdoor-based leisure peers),” the analyst added.
To that end, Heenan initiated coverage on Bowlero shares with an Overweight (i.e., Buy) rating and a $17 price target, suggesting the stock will climb 44% higher in the next year. (To watch Heenan’s record, Click here)
Bowlero has been a bit off the radar and only has 2 recent analyst reviews. Both agree, however, that it is a buy stock, making it a unanimous Moderate Buy analyst consensus. With shares trading at $11.82, the average price target of $15.50 suggests room for ~31% upside. (See Bowlero Stock Prediction on TipRanks)
Arco Platform (ARCE)
Next is the Brazilian technology company Arco Platform, which is active in the education sector. The Sao Paulo, Brazil-based company provides educational systems with technologically advanced features designed to deliver educational content primarily to private schools across the country.
The curriculum is designed for grades K–12 and is accessible in print and digital form through a dedicated site. Publishing, editing, promoting and advertising educational materials for private schools are all business activities and services are directed to parents, teachers, administrators and children.
Arco reported 2Q12 earnings earlier this month, with revenue up 60.8% year-on-year to R$412.1 million ($80.43 million). Adjusted EBITDA reached R$110.7 million ($21.61 million), up 53% year-on-year, as the company’s efficiency initiatives appear to be taking shape and help offset rising operating costs , mainly in terms of higher printing and transport costs.
A focus on efficiency is one of the reasons JP Morgan’s Marcelo Santos changed his tune to Arco. The enticing share price (down 35% year-to-date) is another, and they’re not alone.
“With the exception of the pandemic years of 2020 and 2021, private K12 schools have been successful in increasing enrollment above inflation since at least 2006, and we expect this positive behavior to continue in the coming years. Content providers like Arco should benefit, also being able to raise prices,” Santos wrote. “We see (1) the company as well-positioned to ride out the uncertain macroeconomic scenario, given the strong pass-through potential of K12 private market inflation; and (2) weakness in stocks is an attractive entry point given the significant underperformance against the broader education sector.”
Based on the above, Santos recently upgraded Arco from Neutral to Overweight (i.e. Buy) while the $20 price target leaves room for one-year gains of 48%. (To watch Santos’ record, Click here)
Foreign small-cap companies do not always attract the attention of analysts. Indeed, Arco has remained relatively under the radar, with the moderate buy consensus split at 1 Buy and 1 Hold. Arco shares are priced at $13.51, with an average price target of $19 suggesting an upside of ~41% over the next 12 months. (See ARCE stock forecast on TipRanks)
To find good ideas for trading stocks at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all of TipRanks’ stock information.
Disclaimer: The views expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.