“The Fed Has Overreacted”: 10 Risky Stocks to Buy Today

Published on September 21, 2022 at 9:33 am by Aima Zaheer in Hedge Funds, News

In this article, we will be taking a look at the 10 risky stocks to buy today in line with the expectation of a soft landing. If you want to skip our discussion on the economic stance of JPMorgan’s strategists, you can go directly to 5 Risky Stocks to Buy Today.

Marko Kolanovic, a global markets strategist at JPMorgan, thinks that economic data and positioning of investors will aid stocks more as opposed to the hawkish stance adopted by the Federal Reserve. Mr. Kolanovic thinks that the economic data coming out reveals a higher probability of a soft landing as compared to the chances of a global recession, as inflation and wage growth are showing signs of moderation. Furthermore, there is a rebound in growth indicators and consumer confidence. In a note issued to investors on September 13, Mr. Kolanovic stated that the global economy is not likely to go through a recession as an increased fiscal stimulus by China to combat the economic slowdown, along with European support to combat the rising energy prices, will provide tailwinds to risky assets. Furthermore, investor positioning and sentiments also reflect a low likelihood of a recession.

“Inflation Will Resolve on Its Own”

Mr. Kolanovic shared the investment firm’s viewpoint by saying, “we maintain that inflation will resolve on its own as distortions fade and that the Fed has overreacted with 75bps hike.” Any increase or decrease in interest rate takes time to go through the system, and with only one month to go before the mid-term elections in the US, the strategist believes that taking a hawkish stance is an error in judgment by the Federal Reserve that could adversely impact the stability of the markets.

However, the Federal Reserve intends to further raise the benchmark interest rate by 0.75% at least when it convenes for its meeting on September 20 and 21. This expected development will take place after the Consumer Price Index (CPI) report for August 2022 revealed an increase in prices that were higher than the consensus forecast. The CPI increased by 8.3% YoY during August as opposed to the Street’s forecast of 8.1%. However, the CPI was 0.2% lower than July’s reading of 8.5%.

Signs of Resilience

Mr. Kolanovic believes that following the interest rate hike in September, the Federal Reserve will take a more balanced approach regarding interest rate hikes in the future as they could have very serious implications on the global economy. Furthermore, the ease in commodity prices recently points towards signs that inflation could decline in the future. He thinks that stocks offer significant upside as there are signs that global recession will be avoided, and, at present, investor sentiments are hovering at the lowest. According to Mr. Kolanovic, investment in equities remains in the tenth percentile for investment funds, and any change in sentiments would result in significant buying pressure for investment funds that have an underweight weightage on equities. Mr. Kolanovic also added that the latest earnings reported by companies reflected signs of resilience as opposed to the broader economic weakness.

Many analysts expected an earnings dip during Q2 2022, but this was not the case as companies reported higher earnings compared to the same period last year. Furthermore, the analysts are revising earnings estimates for the period ahead, and this reflects a divergence from the Purchasing Managers Index (PMI). The earnings downside is expected to be lower than what is anticipated during a recession. Mr. Kolanovic concluded that as long as the earnings of publicly listed companies remain resilient, the stock market will also perform well. Stocks such as Tesla, Inc. (NASDAQ:TSLA), The Walt Disney Company (NYSE:DIS), and the Alibaba Group Holding Limited (NYSE:BABA) have been attracting investor attention in the current economic circumstances.

Bullish Thesis

Presently, the S&P 500 Index is hovering below the 3,900 points level as the Federal Reserve is lined up to meet on September 20 and 21. Given all these developments, the analyst and his team have a bullish stance on the cyclical, small-cap, emerging market, and Chinese stocks. The analyst has recommended investors go long on the Energy sector following the recent dip. The diversified financial services firm is Overweight on commodities and assets that are sensitive to commodity prices based on its super-cycle thesis. Furthermore, Mr. Kolanovic believes this asset class also provides a hedge against inflation and global economic and geopolitical uncertainty.

Photo by Ruben Sukatendel on Unsplash

Our Methodology

JP Morgan believes we are not headed for a recession. If the firm’s analysis proves to be true, risky growth stocks that have taken a beating in 2022 could begin to rebound in the last quarter of 2022 or the first half of 2023. That means now is the right time to buy such stocks .We have shortlisted 10 risky and cyclical stocks that investors can buy based on the thesis provided by the JPMorgan global markets strategist and his team. We have dived down into the fundamentals of these companies and looked at the growth catalysts offered by these stocks.

“The Fed has Overreacted”: 10 Risky Stocks to Buy Today

10. PagerDuty, Inc. (NYSE:PD)

Number of Hedge Fund Holders: 22

PagerDuty, Inc. (NYSE:PD) is a San Francisco, California-based cloud computing company that specializes in providing software-as-a-service (SaaS) incident response platforms to IT departments.

In a research note issued to investors on September 2, Chad Bennett at Craig-Hallum assigned PagerDuty, Inc. (NYSE:PD) stock a Buy rating with a target price of $34. The target price reflects a potential upside of over 40% from the closing price as of September 20. The analyst gave the target price and rating after the company reported better-than-expected results for Q2 2022 and raised its guidance for the full year 2022. Mr. Bennett also added that the revenue for Q2 2022 was higher than the upper end of the guidance range and consensus forecast as well. Although PagerDuty, Inc. (NYSE:PD) reported a loss per share of $1.38 in the second quarter, analysts expect the company to increase its operational efficiency in the future and achieve profitability in the long run.

Overall, 22 funds held a stake in PagerDuty, Inc. (NYSE:PD) at the end of Q2 2022.

9. DraftKings Inc. (NASDAQ:DKNG)

Number of Hedge Fund Holders: 27

DraftKings Inc. (NASDAQ:DKNG) is a Boston, Massachusetts-based online sports betting platform that will surely benefit in case of a soft landing as the gradual ease in inflation would provide more disposable income for betting activities. The company is at the ninth position on our list of the 10 risky stocks to buy today.

DraftKings Inc. (NASDAQ:DKNG) has received favorable commentary from analysts following the start of Thursday Night Football (TNF). In a research note published on September 14, Curry Baker at Guggenheim increased the target price for DraftKings Inc. (NASDAQ:DKNG) from $31 to $34 and maintained a Buy rating on the stock. The analyst observed a higher number of downloads and better daily active user (DAU) performance during the first week of TNF. It should also be noted that Amazon.com, Inc. (NASDAQ:AMZN) has selected DraftKings Inc. (NASDAQ:DKNG) as the exclusive odds provider for TNF. In Q2 2022, DraftKings Inc. (NASDAQ:DKNG) posted an EPS of -$0.49, beating the analysts’ estimates by 19 cents.

8. Exact Sciences Corporation (NASDAQ:EXAS)

Number of Hedge Fund Holders: 28

Exact Sciences Corporation (NASDAQ:EXAS) is a Marlborough, Massachusetts-based molecular diagnostics company that is focused on detecting cancers at an early stage.

Exact Sciences Corporation (NASDAQ:EXAS) has lost over 55% of its value YTD as of September 20. On September 6, Cathie Wood’s Ark Investment Management bought nearly 188,000 shares of the company. Following this transaction, the hedge fund focused on disruptive innovation now holds over 15 million shares of Exact Sciences Corporation (NASDAQ:EXAS), which is equivalent to almost 8.5% of the total shares outstanding. Meanwhile, on August 24, Dan Leonard at Credit Suisse initiated coverage on Exact Sciences Corporation (NASDAQ:EXAS) stock with an Outperform rating and a target price of $55. The analyst believes that the leadership position held in the non-invasive screening of colorectal cancer through stool samples is durable.

Here’s what RiverPark Funds said about Exact Sciences Corporation (NASDAQ:EXAS) in its Q4 2021 investor letter:

“Exact Sciences: EXAS shares declined on a disappointing recovery in Cologuard screening due to COVID. Despite continued revenue growth from Precision Oncology and COVID testing, and Cologuard screening revenue growth of 30%, COVID restrictions limited access to physicians’ offices for the company’s and its Pfizer Joint Venture sales force as well as causing a severe drop off of in-person wellness visits.

In the last year, Exact has also pivoted the company significantly from its single cancer screening tests (Cologuard for colon cancer and Oncotype for breast cancer) to multi-cancer screening through its Thrive acquisition, and to minimal residual disease and recurrence monitoring through its Ashion and Tardis acquisitions. Through this pivot, Exact has tripled its market opportunity from $20 billion to $60 billion.”

Of the 895 hedge funds in Insider Monkey’s database, Exact Sciences Corporation (NASDAQ:EXAS) was held by 28 funds as of Q2 2022.

7. Coinbase Global, Inc. (NASDAQ:COIN)

Number of Hedge Fund Holders: 29

Coinbase Global, Inc. (NASDAQ:COIN) operates a cryptocurrency exchange platform. The cryptocurrency universe will receive a major push in case of a soft landing and gradual ease in inflation.

On September 14, Kenneth Worthington at JPMorgan increased the price target on Coinbase Global, Inc. (NASDAQ:COIN) by over 21% from $64 to $78 and maintained a Neutral rating on the stock. The target price reflects a potential upside of 11% from the closing price as of September 20. The analyst believes that Coinbase Global, Inc. (NASDAQ:COIN) has a significant opportunity to generate healthy revenue as the one-month Treasury yield is expected to creep towards the 3.75% level by the end of this year. Unlike conventional financial institutions, Coinbase Global, Inc. (NASDAQ:COIN) can keep all the interest income without disbursing it to shareholders in the form of dividends. The analyst anticipates the company to earn $1.2 billion in interest income in 2023. The company’s fundamentals merit its inclusion in our list of the 10 risky stocks to buy today.

Coinbase Global, Inc. (NASDAQ:COIN) was discussed in the Q2 2022 investor letter of Miller Value Partners. Here’s what the firm said:

“Coinbase Global Inc. Ordinary Shares (NASDAQ:COIN) fell during the quarter as the crypto markets continued to suffer. While the company reported disappointing results, it committed to capping EBITDA losses at $500M even in the event of “a prolonged market downturn”. COIN’s ample liquidity ($6b in cash on hand) should enable them to survive a prolonged “crypto winter” and invest to strengthen the business in the downturn. While the crypto market is early in its adoption, Coinbase is focused on building the platform for crypto not only supporting trading, and cold storage, but moving into NFTs, staking, and crypto derivatives. We see tremendous upside potential for COIN over the next decade if they are able to successfully execute on their platform strategy.”

6. Teladoc Health, Inc. (NYSE:TDOC)

Number of Hedge Fund Holders: 32

Teladoc Health, Inc. (NYSE:TDOC) is a New York-based telemedicine and virtual healthcare company through its licensable platform services.

Jessica Tassan at Piper Sandler maintained a price target of $40 on Teladoc Health, Inc. (NYSE:TDOC) with an Overweight rating following a key opinion leader (KOL) call with performance marketing expert Mark Spera on September 2. The analyst has better visibility on the outlook of Betterhelp but is not confident about the company’s ability to achieve 2022 guidance. Tassan believes the company’s 2022 EBITDA guidance depends upon flawless execution of Betterhelp, which is an unprecedented act. However, the analyst is certain about the long-term thesis of Teladoc Health, Inc. (NYSE:TDOC) stock that could be unlocked if the US economy achieves a soft landing and does not enter into a recession.

RiverPark Funds discussed its outlook on Teladoc Health, Inc. (NYSE:TDOC) in its Q1 2022 investor letter. Here’s what the firm said:

“Teladoc is the largest telehealth provider in the US and has recently begun to expand internationally. TDOC’s platform enables an ever-expanding list of patient-doctor interactions (including those for primary health care, mental health issues and chronic condition management) to transition from an on-site visit to one that can be done remotely with full video- based interaction. TDOC provides its platform of services on both a business-to-business and direct-to-consumer basis, through monthly subscription-based relationships. For its core business-to-business clients, the company contracts with a wide range of entities, including large scale employers (the company currently contracts with over 50% of the Fortune 500), health plans, health systems, and medical insurance companies, which currently cover more than 50 million members. For these customers, the company provides a win-win-win, as patients spend no time traveling and less time waiting, doctors are more efficient seeing more patients in less time, and payers (employers and plan sponsors) save money while being able to offer a highly popular additional benefit for their employees. This B to B market is projected to be a +$100 billion market opportunity and TDOC is the clear global market leader. For its direct-to- consumer clients, the company provides a growing suite of services for individuals to have affordable access to on-demand and scheduled medical services, for which their current insurance does not provide reimbursement (such as extended mental health counseling).

Although the company has been growing steadily for well over a decade, the business has transformed over the past few years as the COVID pandemic caused a significant increase in the demand for virtual healthcare. In addition, the company’s 2020 acquisitions of Livongo, the leader in virtual chronic condition management, and InTouch a competitive telehealth platform, materially broadened the company’s product offerings. At its recent analyst day, management guided to 25-30% top line growth for each of the next three years, exiting 2024 with more than $4 billion in annual revenue. The company also anticipates expanding margins by 100-150 basis points per year in each of the next three years, while still accelerating its investments in marketing and R&D. As with many of our recent purchases, we took advantage of the decline in the company’s shares (down a breathtaking 70% from its 2021 high of almost $300 per share) to establish a small position in Teladoc.”

In addition to Teladoc Health, Inc. (NYSE:TDOC), analysts have also shared their bullish outlook on stocks such as Tesla, Inc. (NASDAQ:TSLA), The Walt Disney Company (NYSE:DIS), and the Alibaba Group Holding Limited (NYSE:BABA) in case of a soft landing.

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