Wow, it’s been a week in the stock market, hasn’t it? Thursday marked the fourth consecutive session of daily losses, with this particular blow coming after the Fed introduced its fourth straight 75 basis point rate hike. However, this increase was expected; what really rattled the markets were Fed Chairman Powell’s indications that the central bank would not reduce or even slow the pace of interest rate hikes any time soon. Inflation is currently 8.2% y/y and core CPI is up 6.6% y/y.
Those numbers are bad enough, but today’s unemployment numbers show that the Federal Reserve still has a long way to go to reduce inflation. The October jobs report showed strong hiring, leading to 261,000 new jobs in the month, beating expectations and throwing a wrench into efforts to fight inflation – which will require higher unemployment. The Fed raises interest rates to discourage spending that fuels inflation; a higher unemployment rate will help this by reducing consumer spending. Clearly, we are not there yet.
However, the jobs report showed the economy is still growing and a four-day losing streak could be reversed for now.
Between these conflicting currents, finding the right stocks will be difficult. A good strategy for the retail investor may be to follow a large investment bank and pick up the stocks selected by the bank’s professional analysts.
Goldman-Sachs is a staple of the Street, and its analysts have been busy scouring the trading markets for stocks poised to weather the current uncertainties. We downloaded details of three of Goldman’s picks using TipRanks platform; for two of those stocks, Goldman analysts see more than 60% upside potential. Let’s take a closer look.
Remitly Global (AVAILABLE)
We’ll start with Remitly, a financial services company operating in the international transfer payment niche. The company offers customers a secure platform to send and receive money transfers across international borders. Users can access the service through a mobile app and benefit from lower fees than those offered by banks. Remitly’s niche is popular among immigrant communities around the world and the company operates in 170 countries.
This company has been on the public markets for just over a year – it held its IPO last September. After the IPO, Remitly saw its share price drop by 79%; in 2022 alone, shares are down 51%.
The losses in Remitly’s stock come even as the firm manages to expand its business and increase revenue. Remitly posted a top line of $169.3 million in the recently reported 3Q22, for a year-over-year increase of 40%. The revenue increase was supported by a 49% year-over-year increase in active customers, from 2.6 million to 3.8 million, and a 44% year-over-year jump in shipment volume to total $7.5 billion for the quarter. Remitly is targeting 38% to 40% revenue growth in 2022 and is on track to achieve that.
At the same time, however, the company’s quarterly net loss remains high. The loss for the third quarter was reported as $33.1 million, compared to $12.9 million in the prior quarter.
Money Cover for Goldman Sachs, Analyst Will Nance notes the risks – and explains why this company is likely to beat them.
“Taking a step back, the bearish thesis on RELY since they went public has been a generalized remittance bearishness on competition, price compression and poor unit economics; against this backdrop, RELY is sustaining 50% customer growth, expanding transaction margins and reducing CAC by 20%,” explained Nance.
“While the market has been reluctant to reward RELY’s outperformance on these common concerns in recent quarters, we believe the market should start rewarding the company for their solid execution and the secular cash-to-digital tailwinds behind their business, as the company sustains robust growth rates and scale in profitability over the coming quarters,” the Goldman analyst added.
Quantifying his forecast, Nance gives RELY stock a Buy rating with a $16 price target to suggest ~65% upside over the next year. (To watch Nance’s record, Press here)
In total, there are 4 recent analyst reviews recorded for Remitly and all of them are positive – giving the stock a consensus analyst rating of Strong Buy. Shares are trading at $9.71, and the average price target of $14 suggests a 12-month gain of 44%. (See RELY stock analysis at TipRanks)
TE Connectivity, Ltd. (TEL)
We will now move from financial services to technology, where TE Connectivity works on the hardware side. The company designs and manufactures sensors and connectors for various industries, including data communications, 5G networks, aerospace defense, automotive, industrial equipment and instruments, consumer electronics and smart homes. TE boasts a significant footprint in the technology world, with $675 million cumulatively invested in research and development, more than 247 billion individual products manufactured annually, and more than $16.3 billion in total sales for fiscal year 2022. This is a company that has clearly found profit in the digital world.
Earlier this month, TE announced its financial results for the fourth quarter of its fiscal year 2022, which ended on September 30. The company reported a 14% year-over-year increase in quarterly revenue to $4.4 billion and an 11% increase in GAAP diluted EPS to $2.21 per share. In addition, TE posted company-record cash flows, with $944 million in cash from operating activities and $745 million in free cash flow.
Looking at the full fiscal 2022, total sales revenue of $16.3 billion was up 9% year-over-year, and adjusted EPS for the fiscal year of $7.33 was up 13%. Cash from operations on a year-over-year basis was $2.5 billion, with $1.8 billion in free cash flow. TE returned $2.1 billion to shareholders during the fiscal year.
The return on capital was achieved through a combination of share buybacks and a modest dividend. In June of this year, the company’s board approved a $1.5 billion increase in buyback authorization, and a fiscal first-quarter dividend was announced at 56 cents per common share, payable in March next year. The declared payment increases the dividend on an annualized basis to $2.24 per common share and yields 2%, in line with the average yield found among S&P listed companies.
This technology company has attracted the attention of Goldman Sachs 5-star analyst Mark Delaney, which lays out exactly why he thinks TE will do well going forward: “We continue to see TE in a good position for long-term growth, given both its exposure to key global growth markets (including EVs and charging/renewables), as well as increasing device content (including about 2x the EV content of an ICE vehicle) and its exposure to markets that are either relatively stable and/or cyclically below normal levels (e.g. automotive, A&D and medical, which are collectively about half of its total revenue). Finally, TE’s FCF generation remains strong, allowing the company to return cash and increase growth through embedded M&A.”
To that end, Delaney rates TEL stock a Buy and sets a price target of $160 to indicate confidence in 38% growth over the next year. (To watch Delaney’s record, Press here)
Wall Street analysts like to follow technology firms, and TE has 10 recent reviews. These include 6 Buy ratings and 4 Holds (ie neutral), for a consensus moderate Buy rating. The stock is priced at $115.46 and the average price target of $134.50 suggests ~16% upside potential for one year. (See TA stock analysis at TipRanks)
Dynatrace, Inc. (DT)
The last “Goldman pick” we’ll look at is another technology firm. Dyantrace offers a cloud-based platform powered by AI, providing customers with an intelligent automation system for network management and cloud monitoring. Dynatrace’s platform is billed as “cloud done right,” and customers can use it for a wide range of applications, including business analytics, digital security, application automation, microservices, and infrastructure monitoring. It’s big business, as evidenced by some key numbers: Dynatrace has over 3,300 enterprise customers and sees a total addressable market of over $50 billion.
Dynatrace is well into its 2023 fiscal year and reported second-quarter results for the quarter ended Sept. 30 last Nov. 2. The company’s financial results beat estimates on both the top and bottom lines, with total revenue growing 30% year-over-year to $279 million and non-GAAP earnings per share of 22 cents, up 22%. from the period a year ago. The company’s subscription revenue rose 29% year over year to $261 million, and annual recurring revenue, an indicator of future business, rose 33% to $1.065 billion. Dynatrace’s revenue has grown consistently over the past 8 quarters.
In a metric of particular interest, Dynatrace reported over $25 million in free cash flow for the fiscal second quarter. That’s nearly double the $13.63 million reported in fiscal 2Q12. The company is targeting $308 million to $321 million in free cash flow for the full fiscal year. Dynatrace reported that it had more than $563 million in total cash and liquid assets as of Sept. 30.
Kash Rangan, one of Goldman Sachs’ technical experts, covers Dynatrace and believes it is a good addition to a defensive portfolio.
“We believe Dynatrace remains attractive in light of the current macro backdrop. The recurring subscription revenue model coupled with a strong margin profile on both profitability and FCF makes for a defensive software company. A de-risked FY23 guidance and a realignment of expectations around their growth algorithm makes the stock well-positioned to ride out the current downturn,” Rangan said.
Following this, the analyst sets a Buy rating on DT stock, with a price target of $54, suggesting a solid upside of 68% over a one-year time horizon. (To watch Rangan’s record, Press here)
No less than 18 Wall Street analysts have sounded negative on Dynatrace, and their views stand at 14 buys and 4 holds, for a strong consensus buy rating. The stock is currently valued at $32.30, and the average price target of $44.31 suggests it has room for upside of 37% by the end of next year. (See DT stock analysis at TipRanks)
To find good stock trading ideas at attractive valuations, visit TipRanks’ The best stocks to buya recently launched tool that brings together all of TipRanks equity insights.
Rebuttal: 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.