It’s hard to tell where the markets are headed right now. Are we on the road to recovery or is there more head pain? Is the recession just around the corner or can it be prevented?
By one measure, a recession is indeed in the cards, according to JP Morgan’s head of global equity strategy Mislav Matejka.
Whenever jobless claims exceed their current three-month average by 10% or more, a recession materializes. 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 the stock. Whenever it has flashed, the other consequence is an average 11% gain 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 may take a much more balanced policy stance after September,” Matejka explained, “as some of the inflationary pressures continue to ease.”
Against this backdrop, Matejka’s fellow analysts at the banking giant have snapped up two lesser-known stocks that they believe are poised to appreciate. Are they the only ones who believe this or do they have the support of other experts in the analyst community? With the help of TipRanks databasewe can certainly understand.
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 United States, 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 bowling centers in the US have an average of 21 lanes, Bowlero’s has an average of 40. The family of brands includes Bowlero, Bowlmor Lanes and AMF, with their combined lanes serving over 26 million guests 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 of millions.
The company has yet to announce its fiscal fourth quarter (June quarter) results, but we can get an idea of how the business is performing by looking at the March quarter report.
Revenue reached $258 million, representing a 129.8% year-over-year increase 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 was $41 million (60.9%) above the pre-pandemic display.
Investors have apparently been happy with the company since it went public late last year through a SPAC merger. Even in a very difficult environment in 2022, the stock is up 31% year-to-date.
JP Morgan analyst Kevin Heenan believes there is more to come and highlights the company’s distinctive qualities.
“Bowlero is unique, with unmatched scale, delivering material earnings and profits related to two key economic features of the industry: (i) ~2/3 of revenue comes from essentially no variable costs (bowling and entertainment), driving material operating leverage on step-by-step visits/games; and (ii) ~90% market share is captured by domestic independents, of which ~1,500 (or >40%) represent ‘high quality acquisition’ targets for Bowlero to apply its proven operating model to,” Heenan explained.
“Looking forward, our work points to stable/improving margins at 10% modeled top-line growth with tailwinds in the bowling industry coming out of the pandemic (versus outdoor-based peers),” the analyst added.
To that end, Heenan initiated coverage on Bowlero shares with Overweight (i.e., Buy) and a $17 price target, which suggests the stock will rise 44% over the next year. (To watch Heenan’s record, Press here)
Bowlero has slipped under the radar a bit and only has 2 recent analyst reviews. However, both agree that it’s a buy stock, making the analyst consensus unanimous at Moderate Buy. With shares trading at $11.82, the average target price of $15.50 suggests ~31% upside potential. (Check out the Bowlero stock forecast at TipRanks)
Arco platform (ARCE)
Next is the Brazilian technology company Arco Platform, which works in the field of education. 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 available in print and digital form through a dedicated site. Publishing, editing, promoting and advertising educational materials for private schools are business activities and services are directed to parents, teachers, administrators and children.
Arco reported 2Q22 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), representing growth of 53% year-on-year, as the company’s efficiency initiatives appear to be taking shape and helping to offset rising operating costs, mainly in of higher printing and shipping costs.
The focus on efficiency is one reason JP Morgan’s Marcelo Santos change your ringtone to Arco. The alluring share price (down 35% year-to-date) is another, and they’re not the only ones.
“With the exception of the pandemic years 2020 and 2021, private K12 schools have been able to increase tuition 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 push higher prices,” Santos wrote. “We see (1) the company as well-positioned to weather the uncertain macroeconomic scenario given strong inflation pass-through opportunities in K12’s private market; and (2) the stock’s weakness is an attractive entry point given significant underperformance relative to the broader education sector.”
Based on the above, Santos recently upgraded Arco from Neutral to Overweight (i.e. Buy), while his $20 price target makes room for one-year gains of 48%. (To watch Santos’ record, Press here)
Small-cap foreign companies don’t always get much attention from analysts. Indeed, Arco has remained relatively under the radar, with the Moderate Buy consensus rating split at 1 Buy and 1 Hold. Arco shares are valued at $13.51, with an average price target of $19, indicating ~41% upside for the next 12 months. (Check out the ARCE stock forecast at TipRanks)
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Disclaimer: The opinions 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.