J.P. Morgan: These 3 Stocks Are Poised to Surge by at Least 40%

For investors remaining sidelined after the market’s impressive bounce back, the opportunity may now be too enticing to ignore. According to J.P. Morgan strategist Nikolaos Panigirtzoglou, COVID-19 will drive equity supply growth as companies pivot away from buybacks in an effort to raise capital, with 2019 marking the first time since 2015 that the net supply of shares, or the share issuance adjusted for de-listings and buybacks, increased materially.

Alarming for investors, the previous decade-long trend of declining equity supply in part fueled the market’s bull run as buybacks pushed earnings higher. Some analysts also point out that a larger equity supply could weigh on stocks and cause volatility if companies don’t purchase shares when their stocks fall.

Panigirtzoglou, however, takes a different stance. He notes that the drop in buybacks hasn’t negatively impacted the market yet. In fact, he argues the low returns for both bonds and cash will ultimately create an environment that makes equities attractive.

“Our most holistic of our equity position metrics, which compares the size of the equity universe to the size of the bond and cash universe, implies 47% upside for equities from here assuming the implied equity allocation of non-bank investors globally rises from 40% currently to the post Lehman period high of 49%,” Panigirtzoglou commented.

Taylor Morrison (TMHC)

Taking its place as one of the largest home building companies in the U.S., Taylor Morrison uses its resources, support and industry experience to make the development process easier for its clients. While shares took a nasty tumble earlier this year, J.P. Morgan believes that any weakness presents a buying opportunity.

Representing the firm, analyst Michael Rehaut is now taking a more bullish approach when it comes to this name. Pointing to its valuation, he sees the “highly discounted valuation relative to its peers as attractive against our fundamental outlook for the company.”

Expounding on this, Rehaut stated, “Specifically, TMHC trades at 8.2x and 6.4x our 2020E and 2021E EPS, respectively, significantly below its smaller-cap peers’ averages of 10.0x and 9.5x, while additionally, we point to the stock’s P/B of 0.9x, well below its peers’ 1.3x average. We view this relative valuation as not properly reflecting our fundamental outlook for the company, which features 2021E operating margins of 8.1%, roughly in-line with its smaller cap peers’ average, as well as our 2021E ROE of 11.6%, which we note is only modestly below its peers’ 12.2% average.”

To support his optimistic stance, Rehaut cites the demand improvement over the last two months, “which has resulted in a likewise improvement in earnings visibility.” He added, “We believe, on average, current P/E multiples are appropriate relative to the current backdrop, as we note that these levels are close to the group’s longer-term mid-cycle average valuation, which we view as reasonable given that housing starts were approaching their long-term averages prior to the current COVID-19 pandemic, towards which we believe demand is currently reverting.”

To this end, Rehaut rates TMHC an Overweight (i.e. Buy) along with a $27 price target. This new target puts the upside potential at 42%.

Judging by the consensus breakdown, 4 Buys and 2 Holds received in the last three months merge to a Moderate Buy rating from the analyst consensus. Given the $20.67 average price target, the upside potential lands at 9%. 

Reprinted from Yahoo Finance. All copyrights are reserved by the original author.