Six stock picks from Roth Capital for 2023

Investors looking for a few good names going into the new year will be pleased to know that Roth Capital Partners has them covered, offering up a list of its Top Ideas for 2023. Of the 25 companies profiled in the Tuesday report, Roth has singled out three stocks in Technology, two in Healthcare and one Cannabis name.

First up is analyst Darren Aftahi, who nominated e-commerce auto parts and accessories company CarParts.com (CarParts.com Stock Quote, Charts, News, Analysts, Financials NASDAQ:PRTS) as a top idea due to the company’s mix of prudent cost management and better operational optimization which has helped CarParts generate more sales of late from its existing distribution footprint.

Aftahi said sales have been growing by the double digits, while its inventory sits at about $155 million. The company should be starting to convert that to cash in 2023 as supply chain constraints have let up, thus erasing an overhang on the stock, according to Aftahi.

“We also believe in tougher economic times, PRTS could be seen as more of a ‘defensive play’ given its pricing, especially on private-label products is dramatically lower than branded product or what one would pay at a service shop,” Aftahi wrote.

Next is semiconductor company Semtech Corp (Semtech Stock Quote, Charts, News, Analysts, Financials NASDAQ:SMTC), which analyst Scott Searle likes as a contrarian pick, saying the stock dramatically underperformed in 2022. Searle said headwinds in the semi space along with investor concerns related to the pending acquisition of Sierra Wireless have contributed to SMTC’s 67 per cent drop in share price this year.

But Searle said the future is brighter for Semtech, arguing the following: that core trends in the semiconductors are stabilizing, that consumer integrated circuits have overcorrected, that the company has a strong core integrated circuit portfolio position and that adding Sierra will be highly accretive to the company’s business and value going forward.

“We believe that as the page turns into 2023 and SWIR acquisition closes, investors will take notice,” Searle wrote.

Digital marketing company Zeta Global (Zeta Global Stock Quote, Charts, News, Analysts, Financials NYSE:ZETA) has bounced around since its IPO last year, but Roth analyst Rich Baldry is bullish on the stock and has an explanation for why ZETA hasn’t performed as some might have wished up til now.

Baldry said Zeta received a “Neutral” rating from its lead IPO bank, with sub-IPO price targets, and the company has had to endure some short seller attacks which have gone unchallenged. What’s more, Baldry said the stock’s first rally was pretty much ended by a large pre-IPO investor selling four million shares. Add to that the broader tech sector retreat and you’ve got the stock where it’s at today.

But Baldry said Zeta’s fundamentals have been strong, with revenue growth climbing to 30 per cent over its most recent quarter compared to 20 per cent in 2020 and 25 per cent in 2021.

“Over the year ahead, we believe ZETA will continue to build on its strong growth track record, with good profitability in an important SaaS sector, drivers that should greatly improve its valuation,” Baldry wrote.

In Healthcare, Roth analyst Jonathan Aschoff likes US biopharm company Biofrontera (Biofrontera Stock Quote, Charts, News, Analysts, Financials NASDAQ:BFRI), which has fallen a long way since an early spike at the end of 2021. The company, which develops photodynamic therapy (PDT) along with topical antibiotics in the dermatology field, is currently commercializing a PDT treatment drug Ameluz and according to Aschoff is aggressively ramping US sales efforts for treatment of actinic keratosis (AK). Aschoff said the overwhelming majority of that market is still unconverted from competitor treatments, and Ameluz-PDT is now in several trials to expand in AK treatment as well as move into new indications.

“Our 12-month BFRI price target of $20 is based on a DCF analysis using a 15 per cent discount rate that is applied to all cash flows and the terminal value, which is based on a 5x multiple of our projected 2031 operating income of $174 million,” Aschoff wrote.

Ophthalmology-focused Iridex Corp (Iridex Stock Quote, Charts, News, Analysts, Financials NASDAQ:IRIX) is also a Top Pick, according to Roth analyst Scott Henry, who estimates IRIX to be currently trading below 0.5x EV/Revenue and in a sector that often trades closer to 2x.

“IRIX is a top idea given the combination of 1) consistent top-line growth, 2) a strong balance sheet absent material debt, 3) a path towards profitability, and 4) a heavily discounted valuation,” Henry said.

Finally, in cannabis, Roth analyst Scott Fortune has his eye on US multi-state operator Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A), with Fortune estimating the stock to be trading at 0.9x 2023 EV/Sales compared to an average of 2.8x among its peer group and trading at 3.8x EV/EBITDA compared to peers at 8.9x. Fortune said positive legislative momentum in the US will drive a potential re-rating of established operators in the space as investor access improves.

“AYR is a top idea due to reaching full production optimization and operational scale in its key markets with leading revenue and EBITDA growth in ’23, while the stock trades at the lowest multiple/valuation in the MSO group,” Fortune wrote.

Stock: CarParts.com

Roth Capital rating: Buy

Target price: $7.50

Projected 12-month return: 26 per cent

Stock: Semtech Corp

Roth Capital rating: Buy

Target price: $63.00

Projected 12-month return: 113 per cent

Stock: Zeta Global

Roth Capital rating: Buy

Target price: $21.00

Projected 12-month return: 153 per cent