Since the coronavirus outbreak began, the market’s pullback has been severe and the recent measures to help blunt the impact haven’t restored investors’ confidence. The S&P 500 tumbled 5.18% today and closed nearly 30% below its recent record peak.
However, the fact that the S&P 500 has fallen sharply in a matter of a couple of weeks is bound to get some analysts thinking that now might be a good time to start bottom-fishing for bargains in the stock market. Stocks whose valuations might not have been deemed attractive enough for Buy recommendations from the analyst fraternity before the crisis, now fit the bill.
In fact, amidst all the market turmoil, investment banker RBC Capital has thrown the hat in with recent upgrades.
We ran three stocks which recently gotten the thumbs-up from RBC through TipRanks’ database to see whether the Street agrees with this newly positive outlook. So which three stocks is RBC re-evaluating right now? Let’s take a closer look.
CrowdStrike Holdings Inc (CRWD)
Cyber security company Crowdstrike has only been on the market since June, when it began trading for $63.50 per share. The stock is currently selling for $39, a drop of nearly 40%. However, RBC's Matthew Hedberg believes “CrowdStrike is the type of disruptive growth asset with strong fundamentals to own.”
Putting his money where his mouth is, Hedberg boosted CRWD’s rating up from Perform to Outperform, along with a price target of $67. Should the figure be attained, gains of 76% will be heading investors’ way.
The company was formed in 2011 to address what it claimed legacy cyber security lacked: Iron safe protection for customers against modern cyber-attacks. To solve this problem the company’s unique approach involves providing customers with two main tools: Lightweight intelligent software (the agent) that runs efficiently in the background, alongside CrowdStrike’s Threat Graph database, located in the cloud, and which gathers data from the “agents” running across all operations using the software. This system provides extra protection, as with every new data point added, the network effect makes the Threat Graph grow stronger.
Hedberg is impressed with the platform, and noted, “We view CrowdStrike as a prime land-and-expand model benefiting from the SaaS delivery and ability to rapidly add more modules with no extra configuration or consulting needed. The long-term power of the install base of more than 5,500 customers should continue to lead to strong net expansion rates as the company cross-sells additional seats (endpoints) and modules… With shares of CRWD trading at ~8.9x EV/CY21E (a discount vs. hyper-growth SaaS peers at 12.4x), significant deceleration baked into sell-side estimates and shares -60% from its highs, we view valuation as compelling relative to growth.”
Looking at the consensus breakdown, 7 Buys and 2 Holds coalesce into a Strong Buy consensus rating. The average price target is $66.89, and could provide upside of 73%, should the target be reached over the coming months.
Masonite International (DOOR)
Let’s leave the CRWD behind and open the DOOR on Masonite. The Tampa, Florida, based company is a leading global manufacturer and merchandiser of commercial and residential doors. The company takes its name from its founder, engineer and inventor William H. Mason, who developed a better way to incorporate wood in building materials, the result of which was engineered wood named, you guessed it, Masonite.
Following a market beating performance in 2019, the stock has tumbled 44% this year. However, RBC’s Michael Dahl believes “the recent sell-off have created a better risk/ reward opportunity.”
Dahl commented, “We believe that DOOR's relatively low levels of leverage should help the stock in the current environment and allow the business to better weather a potential downturn in the US housing market, making it more favorably positioned to capitalize on the rebound., we expect that recent US price increases will largely hold, the company has relatively less European exposure than peers, doors are a smaller-ticket item, and we believe the 30% decline in the stock from peak accounts for near-term risk.”
As a result, Dahl upgraded his rating on DOOR from Perform to Outperform, yet on account of “coronovirus fears on the housing market,” reduces his price target from $85 to $75. Still, the potential upside is a strong 87%.
Does the Street want to walk through this DOOR? Apparently so. With 7 Buys and a single Hold, Masonite receives a Strong Buy consensus rating. The average price target of $94.88, presents investors with possible upside of a sky scraping 106%.
Mercer International (MERC)
Closing out list, we have Mercer International, a supplier of pulp known as NBSK (northern bleached softwood kraft). The small cap hasn’t provided investors with much to cheer about this year, shedding 38% along the way.
That said, RBC’s Paul Quinn believes Mercer’s “high quality assets” put the company in a favorable position. According to the 5-star analyst, Mercer’s NBSK mills are some of the highest quality in North America and Europe. Furthermore, the company’s old-world business is set to benefit from the availability of low-cost salvage wood which can provide Mercer with “material tailwinds."
The global pulp market is also set to benefit from economic activity ramping up again in China. The far east powerhouse is Mercer’s largest pulp market, and despite the significant downturn since the coronavirus outbreak, pulp prices have remained stable. “While we do not anticipate higher prices, we do not think prices could move much lower, especially as low as Mercer’s current valuation implies.” Quinn said.
It's not surprising, then, why Quinn upgraded Mercer from Perform to Outperform, while reiterating his $10 price target. The implication for investors? upside of 32%.
The analyst concluded, “Mercer’s share price has declined materially over the last year, driven by the historic decline in pulp prices. Under more normal conditions, we think that pulp prices would have room to fall as the economy slowed; however, we think most of the excess has already been squeezed out of the industry. Given capacity reductions and limited additions, we think that the future looks brighter for pulp… Mercer has significant leverage to higher NBSK prices and we believe the company is well positioned to serve China’s growing pulp needs in the medium to long term.”
In addition to Quinn’s Buy rating, 2 additional Holds add up to a Moderate Buy consensus rating for Mercer. Importantly, the average price is $11.33 and implies a possible addition of 49% over the next 12 months.