Those hoping for the fourth quarter to herald a stock market comeback have been disappointed so far. A late-year rally has yet to properly materialize with the market still factoring further turmoil as the fight against inflation continues and the specter of a recession remains.
However, while the prospect of a recession looms, Morgan Stanley’s Investment Management Managing Director Andrew Slimmon points out that many stocks already appear to be taking for granted the likelihood of a recession.
“I can't imagine that the tightening that the Fed's done and will continue to do will not affect the stock market at some point... But the key point, and maybe this is where stock picking can add a lot of alpha, is there are so many stocks down 40%, 50%, 60% that they're already reflecting a recession,” Slimmon said.
Slimmon does not see “tremendous downside” for most stocks from here, so maybe it’s time to look at some of these downtrodden names.
Morgan Stanley analysts have homed in on two such stocks which are down at least 40% this year, but which they believe are primed for a turnaround. We’ve used the TipRanks database to get a feel for the rest of the Street’s take on these names. Let's take a closer look.
Smartsheet Inc. (SMAR)
Online workplace collaboration is big business these days with many companies offering software services to bring about a more convenient working environment. One such name catering to these needs is Smartsheet. The company is a leader in the competitive Project Portfolio Management (PPM) software segment. The company offers a platform which is used for assigning tasks, following a project’s progress, managing calendars and the sharing of documents with the product’s ease of use making for more effective workflow management.
A glance at the growing revenue haul indicates that companies using the service agree; sales have been steadily increasing over the past couple of years, a trend which continued in the financial results for the second fiscal quarter (July quarter). Revenue increased by 41.7% year-over-year to $186.7 million, beating the consensus estimate by $6.14 million. The company posted a beat on the bottom-line too, with adj. EPS of -$0.10 faring much better than the -$0.20 anticipated by the analysts.
Even so, the company’s stock price has fallen dramatically, by 56% year-to-date. For Morgan Stanley’s Josh Baer, however, investors should take note of this stock’s “underpriced secular growth.”
“Smartsheet is a high quality asset in the collaboration software space, with the most robust Enterprise features and the broadest product portfolio equipped to handle the widest array of use cases compared to workplace collaboration peers,” Baer said. “We see Smartsheet going after a large $21B total addressable market as its platform addresses a growing number of use cases. With >100K customers of all sizes, Smartsheet has seen viral adoption within its customer base, as highlighted by a best-in-class 120%+ net retention rate. Given the company's low market penetration and a strong competitive moat, we see sustainable >20% rev CAGR over the next 10 years.”
Accordingly, Baer rates SMAR shares an Overweight (i.e., Buy) while his $54 price target suggests the shares are undervalued to the tune of 70%. (To watch Baer’s track record, click here)
Most agree with Baer’s thesis; SMAR’s Strong Buy consensus rating is based on 15 Buys vs. 3 Holds. At $45.24, the average target implies one-year share appreciation of 42%. (See SMAR stock forecast on TipRanks)
Ford (F)
The next beaten-down name we’ll look at needs no introduction, but let’s do it anyway. Auto giant Ford is a household name and one of the world’s most recognizable brands. Millions have ownership of a Ford, be it a truck, car, SUV and more recently EVs (electric vehicles).
Indeed, it’s all been change in the auto industry with the rise of the electric vehicle and Ford is wary of being left behind. The company is increasingly leaning into the EV opportunity and currently offers the Ford F-150 Lightning pickup, the Mustang Mach-E crossover and the e-Transit van. More EVs are anticipated to be added in the years ahead with the company pledging to invest up to $50 billion by 2026 on its electrification endeavors.
As part of its reorganization plan, Ford is also splitting the business into three segments of commercial, electric, and internal-combustion offerings.
However, these plans cannot paper over the problems currently faced by an industry rocked by supply chain woes, a shortage of parts and higher inflation-related supplier costs.
While Ford delivered beats on both the top-and bottom-line when it reported Q2 earnings in July, in a recent update the company said Q3 EBIT will come in the $1.4 billion to $1.7 billion range, far below consensus at $3 billion.
As Morgan Stanley’s Adam Jonas notes, “3Q profits warning coupled with macro concerns have resulted in a decline in buy-side expectations and sharp pull-back in shares.” On a year-to-date basis, the stock is down 43%.
However, Jonas believes current share price makes Ford attractive on valuation basis, and lays out why: “We estimate Ford cash flows through FY30 may far exceed 100% of the company's current enterprise value. Our preference for Ford is very much tied to our confidence in management's strategy to re-architect the business portfolio following its sweeping re-organization.”
To this end, Jonas rates Ford shares an Overweight (i.e. Buy) backed by a $14 price target, signifying potential for 12-month returns of 21%. (To watch Jonas’s track record, click here)
What does the rest of the Street think? Looking at the consensus breakdown, opinions from other analysts are more spread out. 7 Buys and Holds, each, and 2 Sells add up to a Moderate Buy consensus rating. The average target is an upbeat one; at $16.53, the figure suggests shares will climb 43% over the coming months. (See Ford stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
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.
The week didn't kick off well for Ford (NYSE:F) at all. The automotive giant slid over 6% in pre-market trading on Monday, and it also kept those losses going into the day's trading session. What took the wind out of Ford's sails was a downgrade from Goldman Sachs (NYSE:GS). Analyst Patrick Hummel lowered Ford from Neutral down to Sell. Hummel also cut the company's price target from $13 per share to $10 per share. Hummel noted that a recession in the U.S. and troubles in Europe are likely to add up to a disaster for the company.
The news wasn't good for Ford and worse for Ford investors. Two months ago, I was neutral on Ford, thanks to a worsening economic climate and a rising price structure. I'm staying neutral, mainly because the picture hasn't changed enough from last August to really justify any move in assessment.
The last 12 months for Ford shares started off well but couldn't hold on to the gains realized. Last October, the company began an upward trek that saw shares briefly break the $25 level. After January's midpoint passed, though, the company began a long trip down that finally saw a bottom in July. Now, shares are trading at around $11.
Investor Sentiment is All in or Nothing at AllThe state of investor sentiment at Ford is at least a little strange right now. Some metrics have been mostly quiet for months. Others are screaming. Currently, Ford has a 'Perfect 10' Smart Score on Tipranks. That's the highest level possible, meaning that it's almost certain that Ford will ultimately do better than the broader market, according to this metric.
However, despite this, Ford insiders seem in no rush to buy the stock. In fact, insider trading at Ford has been relatively quiet since last April. There hasn't been an informative transaction made in the last three months. The last one was an Informative Sell from Ford Blue President Galhotra Ashwani Kumar, who sold $321,320 worth of shares.
The aggregate, however, tells a different story. In the last three months, insiders have purchased Ford stock twice and sold it once. However, in the last 12 months, the story has been much different.
First, there were no transactions for May or June 2022. Second, the aggregate shows a clear rush for the exits. Insiders sold Ford stock on 34 occasions. Meanwhile, they bought stock on 20 occasions.
A Long Slog Ahead for FordThere are two words that describe what Ford is likely to run into right now: bullwhip effect.
For those unfamiliar with the term, the “bullwhip effect” is a term that describes how issues in a supply chain can amplify the farther from the supplier one considers. Normally, a bullwhip effect starts at the retail level, as retailers modify their orders to wholesalers, and wholesalers, in turn, modify their orders to the manufacturer.
Here, however, wholesalers tend to increase their demand for manufacturers, as they have less information to work with. Thus, the wholesalers extrapolate future demand trends based on the increased orders they get from retailers.
They, in turn, increase their orders to the manufacturer significantly, anticipating that more retailers will behave like the ones who placed the larger orders.
It's a bit different this time around, though; retailer demand is explosive because they've been getting half-orders and quarter-orders and “sorry, sold out” for months now, thanks to issues in the supply chain.
Manufacturers have been frantically trying to fill demand holes for months now, but they're doing so right at a time when demand for everything is about to plunge: a recession.
Thus, it's a safe bet that soon, Ford will have a lot of cars on its hands that it can't sell. That's mainly because the demand that prompted the increased production has suddenly vanished.
The vagaries of supply and demand aren't the only problem ahead for Ford, though. Ford is also facing issues with its electric vehicles. Certainly, they're in demand, and in a big way. It's now impossible to order an entry-level Ford Mustang Mach-E, reports note, as demand is outstripping supply.
Yet, there are clear signs the market isn't happy with Ford's electric trucks. One significant disaster for Ford emerged when Tyler Hoover—operator of the Hoovie's Garage YouTube channel, which boasts a subscriber base of 1.4 million—revealed that the Ford Lightning EV “can't do normal truck things.”
This is the last thing any marketing department wants to hear from a YouTube influencer with 1.4 million subscribers. Hoover detailed how towing with the Ford Lightning was a “total disaster.” The truck was unable to tow a 3,500-pound 1930s Ford pickup for more than 100 miles without running out of charge.
That's not the only problem, either; James Klafehn, another YouTube personality with a substantial subscriber base, detailed issues of getting the trunk to close properly.
Klafehn also noted troubles with the optional massaging seats, which haven't worked since the truck was delivered. Worse, reports note that some messaging forums report similar issues with the trunk.
Recent reports also suggest that owning a Ford Escape could result in outsized repair costs. That's bad news considering that General Motors (NYSE:GM) offers a very similar model, the Chevrolet Equinox.
Is Ford a Good Stock to Buy?Turning to Wall Street, Ford has a Hold consensus rating. That's based on five Buys, seven Holds, and two Sells assigned in the past three months. The average Ford price target of $15.96 implies 41.1% upside potential.
Analyst price targets range from a low of $10 per share to a high of $28 per share.
Conclusion: Hold on to Ford, and Hold on TightFord is facing a lot of bad news right now. There are competitors on all sides and some significant issues with its product line that could readily be used against it by astute marketing departments. Also, the macroeconomic environment definitely doesn't support high demand for anything beyond the most basic of food and shelter needs.
Yet, we must consider the whole picture. Ford is trading only slightly above its lowest price targets, making for a worthwhile entry point. There is substantial upside potential to investing in Ford as well. The problem is that the upside isn't likely achievable under current conditions.
That isn't to say that that upside won't occur later on. Looking for big gains at Ford in the near term is probably a forlorn hope. However, looking for Ford to perform after the supply-chain issues are finally worked out and demand comes back? That's entirely possible.
There's a path to victory for Ford, but it depends on a lot going right, including quite a few things that are out of Ford's control. Thus, I'm neutral on Ford; getting in now may be a good idea for the long term, but that may be too far off for many investors.