The conditions are ripe for an end of year rally in the markets, says analyst Stephen Harris of GMP Securities, which on Monday released its list of Best Ideas, including a number of tech and healthcare names.
So far, the market looks to be experiencing a textbook correction, says Harris, who points out that of the 23 market declines over the past 31 years, 20 have been between five and 20 per cent and lasted an average of 66.9 days, with only three that have become full-blown bear markets, lasting on average 515.7 days and typically associated with a US economic recession.
“Statistically, it is much more likely (87 per cent versus 13 per cent) that this is just a correction, especially if you believe, as we do, that a US recession is not at hand,” Harris says. “The S&P 500 has declined by 10.2 per cent thus far and has lasted 63 days. If it ended today it would be, in statistical terms, a textbook average correction.”
To that end, GMP is recommending a number of stocks possessing the following qualities: (1) more than or equal to 30 per cent below their 52-week highs; (2) more than or equal to 15 per cent growth in the relevant metric for 2019 (EPS/EBITDA/CRFS): (3) valuation at the low end of historical ranges on 2019 forecasts; and (4) high conviction from GMP analysts.
Altus Group (Altus Group Stock Quote, Chart: TSX:AIF) makes the list on growth in its software and analytics segments, with the company expecting mid-teens to low-20 per cent growth in analytics over Q4/2018 and Q1/2019. Analyst Deepak Kaushal says AIF is currently trading at 11.2x his 2019 EV/EBITDA estimate, which is below its peer group at 13.2x. Kaushal expects consolidated EBITDA of $97 million in 2019, a 20 per cent year-over-year increase, and has a “Buy” rating with a 12-month target price of $35.00, representing a 43 per cent return. (All return percentages are as of publication date.)
“Altus has made strong progress with its software strategy and we believe it is well down the path in becoming the leading technology provider to the global commercial real estate industry. We see software as the key value driver over time and we believe patient investors will be rewarded,” says Kaushal.
After a doubling in share price over the past 14 months ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart TSX:ATA) has witnessed a sharp correction starting in early October. But the company’s organic fundamentals remain very strong, says analyst Justin Keywood, driven by its healthcare and EV segments, while the recent pullback in response to a Q2 sales miss Keywood attributes to temporary glitches on revenue recognition for large projects.
“We do not consider this a break in what has been a very successful thesis of ATS capitalizing on a booming automation industry with a strong new CEO in place,” says the analyst. “Record bookings, up 36 per cent YTD point to better results in the back half of the year and positive scuttlebutt gives us confidence of high organic growth going into next year.”
ATA is a top pick for GMP with a “Buy” rating and target price of $29.00, representing a projected return of 70 per cent.
Supply chain SaaS company Kinaxis (Kinaxis Stock Quote, Chart TSX:KXS) reported a drop in revenue growth and adjusted operating earnings in its third quarter report and trimmed its guidance, both due to unexpected delays in new contract signings, but revenue and adjusted EBITDA margin growth remain strong at 19 per cent year-over-year and 31 per cent, respectively, says Kaushal.
“Despite the negative surprise, our confidence in Kinaxis’ strength and growth momentum has increased over the past year and we believe a pullback in the stock offers a good opportunity for investors. Through various customer events, we have observed improved penetration of new vertical markets, gained greater comfort vs competitive risks, and detect enough evidence of new customer wins to sustain 20 per cent-plus annual growth for several years,” says Kaushal.
The stock currently trades at 35x trailing EBITDA, says the analyst, which is below its average of 51x over the past three years, while on a forward basis, KXS trades at 22x NTM EV/EBITDA versus an average of 29x and a low of 16x over the past three years. Kaushal recommends a “Buy” for Kinaxis with a price target of $98.00, representing a projected return of 46 per cent.
In healthcare, GMP points to a couple of cannabis plays, starting with Curaleaf Holdings (Curaleaf Holdings Stock Quote, Chart CSE:CURA), which is GMP’s top pick going into the holiday season. Analyst Robert Fagan says that the company is experiencing the fastest expansion among its peers in the state of Florida, suggesting that CURA has gained share over the second half of 2018 and thus that the company should produce strong top line results in Q3 and Q4 of this year.
Fagan says that Curaleaf has the best exposure among its peers to market conversions from medical to recreational in the states of Massachusetts, New York and New Jersey.
“CURA has emerged as the industry leader amongst public US cannabis operators, with a multi-state retail footprint/production base which is ~2x the size of its peer group average,” says Fagan. “We view CURA’s industry leading platform as arguing for the highest valuation metrics in the sector.”