Less than two weeks into the new year, the key question is coming clear: should we buy the dip? The markets are swooning a bit, so far in January. Both the S&P 500 and the NASDAQ are registering losses in 2022’s cumulative trading sessions – 2% on the S&P, and 4.5% on the NASDAQ.
A combination of headwinds and tailwinds are pushing on equities. The former include the Omicron wave of COVID-19, as well as ongoing disruptions in the supply chains and labor markets. On the positive side, Omicron is looking both less dangerous and more contagious, leading to the possibility of mass natural immunity with less death, and marking an end in sight for the pandemic. And, the Federal Reserve is signaling that it will begin raising interest rates later this year. That move promises to put damper on rising inflation rates, with long-term benefits.
Overall, there is room for optimism, as pointed out by JPMorgan’s global markets strategist Marko Kolanovic: “We believe there is further upside for stocks and the dip driven by the Omicron scare should be bought into. The new variant is proving to be milder, and the adverse impact on mobility much more manageable.”
Turning to the general economic situation, Kolanovic adds, “Inventories are very low and the labor market is staying strong. We continue to see gains for earnings, and believe that consensus projections for 2022 will again prove too low.”
With this in mind, we wanted to take a closer look at two stocks that received JPMorgan’s stamp of approval, with the firm projecting upside potential of more than 80% for each. Using TipRanks’ database, we found out that the rest of the Street is also on board as both have earned a “Strong Buy” consensus rating.
Driven Brands Holdings (DRVN)
We’ll start with Driven Brands, North America’s largest automotive services company. Driven Brands is a holding company, operating a wide range of auto service locations through its subsidiaries. The services are offered in four divisions, including Maintenance; Paint, Collision, & Glass; Platform Services; and Carwash. Brands include well-known names such as Meineke, Take 5 Oil Change, Maaco, and Automotive Training Institute. There are over 4,200 brand locations, most owned and operated on a franchise basis.
Driven held its IPO in January of last year, and raised over $650 million in net proceeds from the offering. The company’s stock has been volatile over the past year, but remains well above the initial pricing of $22.
Since the IPO, Driven has released four quarterly financial reports. Revenues rose through the summer; the Q3 result, of $371 million, was up 39% year-over-year, and same-store sales rose 12.8%. Adjusted earnings came in positive, at 26 cents per share, up by 30% yoy. The company added 53 stores during the third quarter.
This growth comes hand-in-hand with the economic reopening. As people get out and move around, they drive – and that means their cars will need maintenance and accessories. The company’s growth continued after Q3; since that quarterly release, the company has announced expansions in its carwash and auto glass segments. The company in November acquired its 100th car wash since August 2020, and now boasts over 300 car wash locations, while earlier this month Driven announced its acquisition of Auto Glass Now, with 75 locations in the auto glass repair segment.
JPMorgan’s 5-star analyst Christopher Horvers is bullish on DRVN for this year, writing of the stock: “We continue to see DRVN as one of the most differentiated stories in our coverage… DRVN checks many boxes in 2022 given: (1) supportive recovery dynamics (i.e., miles driven still below 2019 with congestion miles lagging), (2) pricing power largely offsetting cost inflation (labor and goods), (3) fewer competitors post-COVID, (4) material upside bias to estimates, (5) potential for structural valuation re-rating, and (6) a general defensive bias emphasizing perceived asset quality.”
In line with his optimistic approach, Horvers gives DRVN shares an Overweight (i.e. Buy) rating and his $15 price target suggests an impressive ~83% potential upside for the coming year. (To watch Horvers’ track record, click here)
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