The US economy has been grappling with inflationary pressures over the past year, causing concern among policymakers and investors alike. However, the latest Consumer Price Index (CPI) report has shown a glimmer of hope, indicating that headline inflation eased from 6% in February to 5% in March.
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According to Hugh Gimber, global market strategist at JPMorgan Asset Management, this is a promising sign that the Federal Reserve’s aggressive efforts to raise interest rates are bearing fruit.
“The message is that the Fed is winning its fight against inflation,” Gibber said. “The case for (policymakers) to pause is strengthening, though I still think they may be tempted by one more hike.”
Whether that hike comes or not, in the meantime, J.P. Morgan analysts are pointing investors toward the equities that they believe deserve some credit for their durability. Whatever the macro outlook, they expect a pair of stocks to post gains of at least 50% over the coming months. We ran these tickers through TipRanks, the world’s biggest database of analysts and research, to get a feel for general Street sentiment toward these names. Here are the details.
LendingClub Corporation (LC)
We’ll start with a company that says what it does on the tin. LendingClub is a digital marketplace bank focused on originating unsecured personal loans. In fact, with approximately an 8% share, it is the US’s 2nd largest personal loan originator. LendingClub started life on Facebook as a peer-to-peer lender and was one of its first apps, but its business model has been through a big transformation, one driven by the 2021 acquisition of a bank charter.
While the company has consistently beaten bottom-line expectations over the past couple of years, in recent times the stock has come under pressure from elsewhere. Although in the most recently reported quarter, 4Q22, the company outpaced Street forecasts on both the revenue and profitability profiles, investors were disappointed in the outlook for 1Q23. Specifically, given the negative effect of rising interest rates on marketplace demand, LendingClub anticipates loan originations in the quarter will come in between $1.9 billion and $2.2 billion, below consensus expectations of $2.57 billion.
And more recently, LC shares have been on the backfoot, driven by investor fears of more bank runs, given the multiple collapses seen across the banking industry. The result has been a stock that has shed 18% year-to-date.
However, with shares now trading at approximately 30% discount to tangible book, J.P. Morgan analyst Reginald Smith lays out the bull case.
“LendingClub’s digital marketplace-bank model provides unique financial benefits,” says Smith. These include, “(1) a more stable revenue stream, (2) relatively stable, low-cost funding, and (3) a more robust product offering: including lending, savings and banking products, which increases customer life-time value. Moreover, LendingClub is one of the few consumer-facing fintechs that are profitable on a GAAP basis, earning 1.7 times more revenue per employee and has one of the lowest operating expenses bases among other fintech peers.”
“We think LendingClub, which trades at a 30% discount to tangible book, is oversold (we estimate the market is pricing in a low-teens life time loss rate on LC’s HFI loan portfolio), and is a compelling way to express the view that the recession for which investors have been bracing for well over a year, will be milder than feared,” Smith summed up.
Considering the disconnect between the company’s share performance and its potential, Smith initiated coverage of LC shares with an Overweight (i.e., Buy) rating and a price target of $11. Possible gains of 52% could be heading investors’ way should the target be met over the next 12 months. (To watch Smith’s track record, click here)
Looking at the consensus breakdown, 5 Buys and 2 Holds have been published in the last three months. Therefore, LC gets a Moderate Buy consensus rating. Based on the $12.57 average price target, shares could rise 74% in the next year. (See LC stock forecast)
Afya Limited (AFYA)
For the next J.P. Morgan-backed stock, we’ll pivot to the healthcare education sector. Afya is a Brazilian company that offers educational products and services. These include medical schools, medical residency preparatory courses, and different educational programs. Additionally, the company provides digital health services. These offerings include a subscription-based mobile app and website portal that give health professionals and students the tools to help in making the right clinical decisions.
Afia has consistently demonstrated a positive trend of top-line growth since its IPO in 2019, which was once again evident in its most recent quarter – 4Q22. Adjusted net revenue surged by 17.8% year-over-year to reach R$595.1 million, while adjusted EBITDA exhibited a significant y/y increase of 24.1% to hit R$242.2 million. This resulted in an impressive adjusted EBITDA margin of 40.7%. In addition, adjusted net income grew by a 30.8% compared to the corresponding period last year, totaling R$128.8 million.
Last month, the Board of Directors made a significant announcement that is sure to interest investors. After successfully completing its third share repurchase program, the company has decided to initiate a new one. This new program involves the repurchase of up to 2 million shares, which corresponds to 5.8% of its free float.
J.P. Morgan analyst Marcelo Santos has chosen Afya as a top pick in the education sector due to the company’s strong FCF generation and the stability provided by its medical education business.
“Afya is the only higher education player under our coverage to have shown positive FCF generation after net interest payments, helped by lower leverage and good EBITDA conversion, while currently trading close to mass peers in terms of P/E’24E at 5.7x,” Santos went on to say. “We expect its results to be resilient against another uncertain year for higher education.”
These comments underpin Santos’s Overweight (i.e. Buy) rating while his $20 price target implies shares will appreciate by 51.5% over the coming months. (To watch Santos’s track record, click here)
Overall, the Street looks favorably upon this Brazilian medical education group’s prospects. The analyst consensus rates AFYA a Strong Buy, based on a total of 3 Buys against 1 Hold. The stock is selling for $13.12 and the average price target of $18.75 implies that there is room for 42% upside growth. (See Afya stock forecast)
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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.
