It’s Time to Let These 2 Stocks Out of the Penalty Box, Says J.P. Morgan

After heavy losses last week, the fifth week in a row that the markets fell and the longest such losing streak in a decade, investors may be forgiven for some hesitance when it comes to buying in. Year-to-date, the NASDAQ has fallen ~26%, the S&P 500 is down ~17%, and the Dow, which performed best among the major indexes, has shed 12%.

It’s a market environment that does not appear conducive to a bullish strategy – but JPMorgan strategist Marko Kolanovic has put together a set of reasons for buying into equities now.

“The past week’s sell-off appears overdone, and driven to a large extent by technical flows, fear, and poor market liquidity, rather than fundamental developments… We see supports for our pro-risk stance from COVID reopening, policy easing in China, strong labor markets, light positioning, distraught investor sentiment, and healthy consumer and corporate balance sheets. It also appears that we’ve reached peak hawkishness from central banks,” Kolanovic explained.

Following Kolanovic’s lead, JPMorgan’s stock analysts have picked two stocks for a turnaround. They’ve upgraded these stocks from Neutral to Buy, a solid sign that investors should take notice. After using TipRanks’ database, we learned that each ticker has scored Buy ratings from other members of the analyst community as well. Let’s take a closer look.

Valvoline, Inc. (VVV)

First up is Valvoline, a global leader in the production and distribution of automotive fuels and lubricating oils, along with other petroleum derivatives, and chemicals such as engine coolants. The company has a major footprint in the quick-service oil change niche, operating the second-largest such chain in the US with over 1,500 owned and franchised locations.

Last year, Valvoline began the process of splitting its Global Products and Retail Sales into separate subsidiary companies. In an announcement coincident with the last quarterly report, management reiterated that the split is proceeding, and is expected to finish before the fiscal year ends in September.

Valvoline has seen a double benefit from the reopening of the economy and the people’s return to work. Being able to restart brick and mortar locations was a boon, but more importantly, as people got out and into leisure activities, demand for Valvoline’s products grew. The company’s top line bottomed out in the June quarter of 2020, and has seen consistent gains since then.

In the most recently quarterly results, for fiscal 2Q22, Valvoline reported $886 million in total sales, up by 26% year-over-year. In other key metrics, net income increased 19% from fiscal 2Q21, to reach $81 million, and diluted EPS hit 45 cents, for a 22% year-over-year gain. This strong growth included sales gains in the retail services section of 23% y/y.

Of importance to investors, especially in a difficult market environment, Valvoline has a long-standing commitment to return profits and cash to shareholders. In the fiscal second quarter, the company returned $57 million in cash to shareholders, through both the stock repurchase program and the regular dividend payments. The most recent dividend declaration, for 12.5 cents per share, is payable in June. At the current level, the dividend annualizes to 50 cents and yields 1.7%. The salient factor in the dividend is not the yield, but the reliability; Valvoline has a 5-year history of keeping up the payments, and has raised them twice in the past two years.

Explaining his upgrade of Valvoline shares from Neutral to Overweight (i.e. Buy) with a price target of $36, JPMorgan’s Jeffrey Zekauskas writes: “We had lowered our rating on Valvoline to Neutral in early March. We thought that Valvoline had good intrinsic investment characteristics, but we also believed that its operations would be pressured by rising raw material prices and slowing demand growth as oil and gasoline prices moved up. Valvoline reported lower than expected EBITDA in 2Q:F22 of $158m versus our expectation of $167m and the Street Consensus of $163m. We had downgraded the shares because we thought that we might find a more attractive entry point. The price is now lower than our $29.52 downgrade, and we would add to positions.” (To watch Zekauskas’ track record, click here)

Overall, there are 4 analyst recent reviews on record for this mid-cap conglomerate, and they break down 3 to 1 in favor of Buys over Holds – for a Strong Buy consensus rating. The shares are priced at $28.25 and their $38 average target implies an upside of ~35% over the next 12 months. (See Valvoline stock forecast on TipRanks)

Planet Fitness (PLNT)

Next up is Planet Fitness, a major chain of gyms and workout centers with its headquarters in New Hampshire. The chain has over 2,200 locations in the US, Canada, Mexico, Panama, and Australia, and boasts over 16.2 million paying members. More than 90% of the company’s locations are owned by independent franchisees; the remainder are company owned and operated.

For the first quarter of 2022, Planet Fitness showed a 15.9% increase in same-store sales system-wide. This powered a $196 million increase in total system-wide sales, which reached $961 million for the quarter. The company’s net income nearly tripled from $6.2 million in the year-ago quarter to $18.4 million in the current report. Diluted EPS also saw heavy year-over-year growth, from 7 cents in 1Q21 to 19 cents in 1Q22. Planet Fitness opened 37 new locations during the quarter.

Over the past several months, Planet Fitness has been making moves toward expansion. In February, the company acquired Sunshine Fitness, a gym chain in the Southeast with 114 locations. The move was funded, in part, by a debt refinancing move totaling $900 million. The company has also entered an Area Development Agreement with New Zealand’s Castle Point Fitness, to expand the Planet Fitness brand into that country.

Looking ahead, Planet Fitness expects to see 2022 show a year-over-year revenue increase in the mid-50%s range, with adjusted net income to grow by 90% or more.

Acknowledging the company’s potential growth, JPMorgan’s 5-star analyst John Ivankoe upgraded PLNT shares to Overweight (i.e. Buy), and his $90 price target suggests an upside of 28% for the year ahead. (To watch Ivankoe’s track record, click here)

Backing his stance, Ivankoe writes, “PLNT growth algorithm intact, supported by improving usage trends, solid franchisee economics, and unit white space as the ~2,230+ unit US chain (and ~2,320 global) approaches its 4,000+ US target. We expect 185 openings in F22, as the brand’s development is “pretty close” to a 200-unit annual run rate.”

“The terminal value of PLNT assumes 4,200 North American stores (360 company + 3,840 franchised) at an average members/gym of 7,000, or ~10% of 18-75 aged US population, inclusive of 20% of the US population that already have a gym membership and ~16% ‘underbanked’ households (per the Federal Reserve),” Ivankoe added.

All in all, there are 12 recent analyst ratings on this fitness franchisor, with 10 Buys overwhelming 2 Holds for a Strong Buy consensus view. The stock is trading for $70.50 and has an average price target of $93.08, indicating a one-year upside potential of 32%. (See PLNT stock forecast on TipRanks)

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Disclaimer: 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.