Citi Says Market Upside Is Limited Now, but These 2 Stocks Could Outperform

Given the current macroeconomic backdrop, the S&P 500 has little room for further gains. That is the opinion of the analysts at Citi, who in a recent note claimed the bellwether index is reaching a valuation level that will stunt further upside.

Going by present rates and various “macro inputs” like growth and inflation, the high end of Citi’s fair value framework suggests an S&P 500 price-to-earnings multiple of 18.5x. With the S&P 500’s trailing price-to-earnings ratio currently hovering near the 18.2x mark, the firm’s experts see little room for gains from here.

“For now,” the analysts wrote, “we suspect valuation could put a near-term cap on upside momentum. Based on our fair value framework, valuations much above current levels are unsustainable unless there is a significant change in the macro backdrop.”

This is not great news for investors hoping for a proper shift in sentiment. However, that doesn’t mean the upside for all stocks is capped. In fact, the stock experts at the banking giant have pinpointed an opportunity in two names they think could outperform in the current climate. Let’s take a closer look.

Mobileye Global Inc. (MBLY)

We’ll start with one of last year’s hottest IPOs. Mobileye is a leader in ADAS (advanced driver assistance systems) and was spun off from parent company Intel in October in an IPO that exceeded its targeted range; the shares made a big splash on the first day of trading, closing out the session up by 38% from its listing price.

Founded in 1999, the Israeli company’s driver-assistance tech has already been utilized in over 125 million vehicles. By 2030, the company expects 270 million more vehicles will be making use of its products. While Mobileye already claims a dominant position in ADAS, it has also set its sights on being the leader in the autonomous vehicle market of self-driving cars, although it could be a while until such offerings become widespread.

On the financial front, the company released its fiscal third quarter earnings in December (for the quarter ending October 1). Mobileye generated revenue of $450 million, amounting to a 38% year-over-year increase while delivering EPS of -$0.06. Both metrics beat Street expectations. Promisingly, for FQ4, the company is calling for revenue between $527 million to $545 million, exceeding the $483 million Wall Street predicted. For the full year, the company anticipates revenue north of $1.83 billion, above the $1.78 billion forecast, and operating income of at least $637 million.

For Citi analyst Itai Michaeli, the bull case for the ADAS leader is clear. “Mobileye is at the center of what we have long viewed as the most virtuous cycle of incremental content to ever occur in the industry,” the analyst said. “We believe the company’s competitive advantages have only grown in recent years, led by an innovation-data loop and a highly scalable ADAS-AV product suite. We see 2030E revenue of >$50bln (vs. ~$2bln now) and expect a domino effect of ADAS/AV adoption to create a catalyst-rich environment for the stock.”

Michaeli’s long term outlook is bright for MBLY stock, and he backs it with a Buy rating and a $77 price target that implies a one-year upside potential of ~123% for the stock. (To watch Michaeli’s track record, click here)

Michaeli is the Street’s most prominent MBLY bull, but plenty of others are backing his case. The stock claims a Strong Buy consensus rating, based on 14 Buys vs. 3 Teams. The average target stands at $43, implying the shares have room for 12-month growth of 25%. (See MBLY stock forecast)

Boston Scientific (BSX)

Next on our Citi-backed list is Boston Scientific, a global medical device company focused on developing, manufacturing and bringing to market products designed to improve patients’ health. The products run the gamut of indications, from cardiovascular to endoscopy, gynecology to neuro, urology and others. The result of its ongoing R&D research efforts is a wide portfolio of products which are sold to companies across the globe. This is a big operation with 40,000 employees and a market cap north of $65 billion.

In its latest quarterly report, for 3Q22, BSX reported revenue of $3.17 billion, for an 8.2% year-over-year gain, while beating the Street’s forecast by $30 million. The company just missed on the bottom line, delivering EPS of $0.43, below analyst expectations of $0.44.

The guidance was a bit of a letdown, too, with the company revising both top- and bottom-line forecasts downwards. Nevertheless, the stock still managed to significantly beat the market last year, delivering returns of 9% over the course of 2022.

The company has also been a serial acquirer and most recently announced it will buy MedTech company Apollo Endosurgery for close to $615 million – or $10 per share. The all-cash deal is anticipated to close in this year’s first half.

Along with exceeding targets over the past year, the potential for further acquisitions is one of the reasons Citi’s Joanna Wuensch thinks investors should take note.

The 5-star analyst writes, “Management’s strategy benefited BSX in 2022, delivering 9.2% organic revenue growth YTD and 11.5% in 3Q22, versus its 2022 guidance for 8-10% and its LRP of 6-8%. Some of this may simply be attributed to its end markets, which have largely recovered from the pandemic, or that ~70% of its products are sold in ASCs which have less staffing issues than hospitals, but it is also likely successful management execution.”

“Looking into 2023,” Wuensch further added, “the pipeline chart for BSX is among the most robust in our coverage and that is likely no coincidence. Thus, we anticipate that while we will be spending time thinking about the macro for BSX, we will also be thinking about the pipeline (still) particularly as it relates to Structural Heart, CRM, its next-generation Watchman, and the continuation of tuck -in acquisitions.”

To this end, Wuensch rates BSX shares a Buy while her $54 price target implies one-year share appreciation of 18%. (To watch Wuensch’s track record, click here)

Wuensch’s thesis gets almost full support on Wall Street; one skeptic aside, all 13 other recent reviews are positive, making the consensus view here a Strong Buy. Going by the $51 average target, the shares will generate returns of 11% over the coming year. (See BSX stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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