The start of a new year is always a convenient time to evaluate, or reevaluate, the stock portfolios. With a year’s worth of data behind us, and fresh forecasts ahead, investors can use the fresh start on the calendar to figure out if they need a rethink on their investment strategy.
In a note from Morgan Stanley, chief investment officer Mike Wilson defines the key question for investors now as a simple binary decision, between staying with relative winners or going ‘bottom fishing.’ Each has its supporters, but Wilson notes that, with no need to keep up with the market indexes, bottom fishing has an edge in January.
Wilson suggests that investors follow dual strategy, keeping their hands in large cap defensive stocks, but also “creating a barbell with stocks that have already corrected but still offer good prospects at a reasonable valuation.”
Sounds like good advice, and Wilson’s colleagues among the Morgan Stanley stock analysts have picked out two stocks whose price has fallen low – but in these cases, the analysts see the low price as a gateway. We ran both names through TipRanks’ database to see what other Wall Street’s analysts have to say about them.
Hippo Holdings (HIPO)
Let’s start in the insurance industry, a sector that tends to perform well as its core product – financial protection – is always in demand. Hippo, based in Palo Alto, brings AI and data tech to bear on the homeowner’s insurance segment. The company boasts that its tech systems allow fine-tuning of the insurance policies, taking into account the contents of the home, up-to-date neighborhood statistics, and can even offer complimentary smart home devices. Hippo currently operates in 36 of the lower 48 states.
Hippo’s main point of differentiation from competitors, and its attraction for investors, is its dual income stream. The company underwrites insurance, of course, but it also collects commissions on sales agency business. Most insurance companies sell through licensed agents, but Hippo uses a direct-to-consumer model in addition to that, and so brings in commissions of its own.
Like many tech-oriented companies, Hippo went public last summer through a SPAC transaction. The business merger, with Reinvent Technology Partners Z, was completed in August and the stock started trading on August 3 at $9.91. It has since fallen sharply, losing 76% of its share value.
Hippo was hit by several negative factors – a general pullback from insurance-tech companies, a heavy winter storm that increased claims, and a quirk in the SPAC structure that allowed early investors to cash out before the merger.
So that’s what has pushed the stock down. But what about the flip side? Hippo’s most recent quarterly report, for 3Q21 and its second as a public company, showed big gains on several vital metric. Homeowner’s retention grew 89% year-over-year, leading to total generated premiums reaching $162 million. But more importantly, the company raised its full-year outlook, bumping it up 6.6% at the midpoint, to the range of $600 million to $605 million.
According to Morgan Stanley analyst Michael Phillips, Hippo has a strong chance of meeting that guidance. He writes, “The fragmented [homeowner’s insurance] market (the top player is the only one with market share above 10%, and no one outside the top 14 has market share greater than 1%) and Hippo’s hybrid distribution model should allow for strong growth over the near term. But expected growth is not a new story for ‘InsurTechs,’ and quite a few in the class have disappointed recently. Those have been companies mainly focused on a single product and/or channel. We expect Hippo’s multi-channel approach to protect it from challenges that may arise in any one channel.”
To this end, Phillips rates HIPO shares an Overweight, and his $4.6 price target implies room for ~92% upside potential in the next 12 months. (To watch Phillips’ track record, click here)
This stock, a relatively new one in the pubic markets, has picked up 3 recent analyst reviews, including 2 to Buy and 1 to Hold, for a Moderate Buy consensus view. The shares are selling for $2.40 each, but their average price target of $6 is quite bullish and suggests a one-year upside potential of 150%. (See HIPO stock analysis on TipRanks)
Sight Sciences (SGHT)
Next on JPMorgan’s radar is Sight Sciences. As its name implies, Sight Sciences works in the ophthalmology and optometry field, creating surgical devices for the correction of eye problems. The company has two products on the market: the OMNI surgical system for the treatment of cataracts and glaucoma without implants, and the TearCare system for the treatment of dry eye disease. These two conditions represent a substantial global patient base, as they are the most common treatable eye conditions.
The company went public through an IPO last summer, when the stock began trading on the NASDAQ on July 15. The company put 11.5 million shares on the market, and the initial price of $24 was above the expected range of $20 to $23. Overall, the company brought in net proceeds of $252.2 million. Since then, however, the stock has fallen by 52%.
The company has had some good news to report, however. In December, its TearCare system received approval from the FDA for a label expansion, allowing it to be used for the treatment of Meibomian Gland Dysfunction, a leading cause of dry eye. The approval will expand the potential patient base for the system.
A month before that, Sight Science reported its 3Q21 results (the most recent quarterly results reported). The company showed a modest 4% sequential revenue gain, to $13.1 million, which translated to a higher 51% year-over-year gain. Several other metrics also showed gains. Gross margins expanded from 70% to 84%, and gross profit rose yoy from $6 million to $11 million.
Among the bulls is Cecilia Furlong, one of Morgan Stanley’s 5-star analysts, who takes a bullish stance on SGHT shares.
“On a fundamental basis, we see OMNI traction and momentum building in 2022. Targeted sales team expansion in ’22 with a focus on office-based education can further leverage OMNI’s label to drive referral channel buildout… Reimbursement improves over ’21 on a relative basis vs. competitive stent procedures and provides an added tailwind in ’22. Overall, we model total 2022revenue of $76.2mn, reflecting 59% y/y growth. OMNI remains the primary near-term contributor to total revenue, with our 2022 outlook incorporating $4.4mn in TearCare contributions prior to a broader commercialization push in the 2024+ timeframe,” Furlong opined.
In line with her bullish stance, Furlong rates SGHT an Overweight (i.e. Buy), and her $27 price target implies room for ~69% upside potential in the next 12 months. (To watch Furlong’s track record, click here)
Judging by the consensus breakdown, opinions are anything but mixed. With 3 Buys and no Holds or Sells assigned in the last three months, the word on the Street is that SGHT is a Strong Buy. At $36.33, the average price target implies ~127% upside potential from current levels. (See SGHT stock analysis 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.
