Rising inflation has been the story of 2022, reaching roughly 8.5% in the latest report. To fight it, the Federal Reserve is raising interest rates and cutting back on the money supply – but that has an immediate effect of strengthening the dollar, which will negatively impact corporate earnings in the overseas markets.
Morgan Stanley chief U.S. equity strategist Mike Wilson sees the strong dollar as a headwind that can’t be dodged, at least not for long, and expects the stock market will continue to fizzle, especially when corporate earnings start getting revised downwards.
“Based on the extreme [dollar] rally so far this year, the U.S. dollar is now up 16% year over year. This is about as extreme as it gets historically speaking and unfortunately it typically coincides with financial stress on markets, a recession or both,” Wilson noted.
That’s not to say there aren’t any compelling plays out there. Against this backdrop, the stock analysts from Morgan Stanley argue that a select few actually stand to gain, pointing to two stocks in particular that represent exciting opportunities.
While the firm’s analysts believe both are poised to surge at least 90% in the year ahead, we wanted to get the rest of the Street’s opinion. After using TipRanks’ database, we learned that each ticker boasts a “Strong Buy” consensus rating from the analyst community and triple-digit upside potential.
Iveric Bio (ISEE)
We’ll start in the healthcare sector. Iveric Bio is a biopharmaceutical company focused on the development of innovative new medication to treat retinal diseases with high unmet medical needs. Narrowing down that focus, we find that Iveric has one main drug candidate in its clinical trial program, Zimura. It is currently undergoing late-stage trials in the treatment of Stargardt disease, or age-related macular degeneration (AMD).
This is a serious eye condition, an autosomal recessive disorder that causes progressive loss of photoreceptor cells in the retina and consequent reductions in visual acuity and color vision. Zimura is under investigation as a treatment for AMD, and for geographic atrophy secondary to AMD.
The company recently released post-hoc data analysis from the phase 3 GATHER1 study, which showed a 22% reduction in progressive damage at 18 months after treatment with Zimura. The GATHER1 study’s original analysis was used to justify the currently underway GATHER2 trial, a Phase 3 study of 400 patients with top line data expected to be released during 3Q22.
Additional clinical trials of Zimura are on the planning boards, including a new trial of the drug in the treatment of intermediate AMD set to start in Q4 after planned interactions with the FDA. The STAR trial, a Phase 2b study in the treatment of autosomal recessive Stargardt disease is already begun, with patient enrollment ongoing.
Morgan Stanley analyst Michael Ulz is upbeat about this biotech. After reviewing the company’s clinical trials, Ulz comes down squarely with the bulls: “We expect positive data from the Ph3 GATHER2 study in 3Q22 (likely September), supported by success of the first pivotal study (GATHER1) and additional de-risking factors that further increase our conviction…. We have increased our probability of success for Zimura to 75% from 65%...”
"Our scenario analysis indicates a favorable risk/reward with opportunity for meaningful upside on reductions in lesion growth of ≥20% (+75% to +125%, though we note our expectations could be conservative); while disappointing results would drive meaningful downside (-70% to cash ~$3/share)," Ulz added.
Based on all of the above factors, Ulz rates Iveric shares a Buy and sets a $30 price target, which implies a whooping 155% upside from current levels.
This is far from the only bullish view on Iveric; ISEE stock has picked up no fewer than 8 recent analyst reviews, which break down 7 to 1 in favor of Buys over Holds, for a Strong Buy consensus view. The shares are priced at $11.75 and their $24.13 average target suggests gains of 105% in the next 12 months.
Xponential Fitness (XPOF)
Now we’ll make a sharp change in direction, and look at Xponential Fitness. This is a curation and franchise company, in the personal fitness sector. The company owns a portfolio of brands, offering a wide range of fitness activities across multiple categories, including yoga and dance, Pilates, cycling and rowing, running, and boxing and fighting sports. Xponential aims to make boutique fitness available to a larger audience, and operates, through its master franchise agreements and franchisees, in 48 US states, Canada, and another dozen countries.
In May of this year, Xponential announced a master franchise agreement in Mexico that will take three of its brands ‘south of the border.’ The included brands are StretchLab, Rumble and AKT. The agreement gives the new Master Franchisor rights to license up to 60 new studios across Mexico over the next 10 years.
This is just the latest in Xponential’s expansionary moves. The company sold a total of 260 new franchise licenses during 1Q22, and opened 99 new studios. Overall, Xponential’s count includes a total of 4684 franchise licenses sold and 2,229 studios in operation as of the end of the first quarter.
Xponential Fitness went public just one year ago, in July of last year, and has registered sound top-line growth since then. The last three quarters have shown consecutive revenue gains in each quarter, driven by steady growth in the network of franchisees and studios.
In 1Q22, the company had a top line of $50.4 million, up a robust 73% from the year-ago quarter. This was driven by a 70% growth in North American system-wide sales, and same-store sales in North America (the company’s largest market) grew 47% in Q1 – compared to a 24% decline in the year-ago quarter.
This is the background against which Morgan Stanley’s Brian Harbour looks at the stock. The analyst rates XPOF an Overweight (i.e. Buy) and his $25 price target indicates potential for 92% share appreciation in the 12 months ahead.
Backing his bullish stance, Harbour writes: “If the recession bear case is in store, we don’t expect fitness stocks to be defensive per se. But fundamentals aren’t likely to fare badly, in our view, and we still view XPOF as an interesting growth story that can be a relative winner in boutique fitness and stand among quality franchisors in the public markets, with an early track record of meeting or beating IPO-era targets.”
Once again, we’re looking at a stock with a Strong Buy analyst consensus rating. The stock has an average price target of $27.33, which implies a 110% gain from the current share price of $13.02.