We have yet to find out what is in store for the stock market in 2023. However, we do know that the previous year was one of the worst on record: the index S&P 500 became the seventh worst annual indicator since 1929.
Whichever way you look at it, most investors have not enjoyed the market action over the past 12 months. One positive takeaway, however, is that the overall bearish trend has sent share prices down across the board, leaving some stocks at levels that are now too cheap to ignore.
This, of course, is the opinion of analysts. Analysts have identified an opportunity in two companies whose valuations have recently fallen significantly – in their opinion, undeservedly. Does the rest of the Street agree that they are going cheap? Let’s take a closer look.
Palomar Holdings ( PLMR )
We’ll start with Palomar Holdings, a unique insurance company. Instead of focusing on traditional insurance coverage, Palomar is targeting what it calls “underserved” markets, such as earthquake, flood and hurricane insurance. The company offers its customers a range of diverse products and customized pricing plans using its data analytics and advanced technology platform.
2022 has been a pretty good year for the specialty insurer’s stock, but then Palomar released its Q3 earnings report, and it wasn’t what investors wanted to see.
While revenue was up 17.2% year-over-year to $79.3 million, the figure was $14.18 million above the consensus estimate. Similarly, analysts expected a correction. Earnings per share were $0.52, but that figure was $0.23. The consequence of these soft indicators was a downward spiral for stocks; the stock is now down 47% from last October’s highs.
Aware of the weak quarterly performance and mindful of the “meeting likely to weigh on PLMR’s results through 2023,” JPM’s Jimmy Bhullar thinks the stock selloff “seems too sharp.”
“We believe the current share price ignores near-term business trend improvements that are already materializing (PLMR signaled a resumption of premium growth in binary lines after a softer 3Q22) as well as the various steps PLMR is taking to offset the impact of the higher rate reinsurance pricing (albeit with a delayed impact),” the analyst said. “Furthermore, we believe that PLMR’s above-average growth profile remains intact given the opportunities in its core earthquake market and in new lines. At the current share price, PLMR is trading in line with its large commercial peers, with 2024 earnings already diluted due to the above factors, without benefiting from its higher margin valuation or growth profile in the years ahead.”
Accordingly, Bhullar believes PLMR is overweight (i.e. a buy), while its $75 price target leaves room for a 12-month upside of ~56%.
The average Street target is pretty much the same; at $75.40 US, the stock is expected to return 57% over the next year. Overall, based on 3 buys and holds, each stock qualifies for a Moderate Buy consensus rating. (See PLMR stock forecast on TipRanks)
TransUnion (TRU)
Next on our list of cheap stocks is TransUnion, a US credit reporting agency. Along with Experian and Equifax, the company is among the top three credit agencies. Serving more than 65,000 customers in more than 30 countries, TransUnion collects and aggregates data on more than one billion individual consumers, 200 million of which reside in U.S. consumer credit reports, risk ratings, risk mitigation analytics and decision-making capabilities for provision of information during the life cycle of consumer credit is among the goods and services offered by the company.
In its latest quarterly report for 3Q12, revenue rose 26.2% year-over-year to $938 million, but that number fell $7.58 million short of analysts’ estimates. However, delivering the adv. Earnings per share amounted to $0.93, the company managed to exceed the consensus forecast of $0.91. For the fourth quarter, the company expects revenue in the range of $896 million to $916 million, compared to the Street’s expectation of $940.71 million. adj. EPS is expected to be in the range of $0.80-$0.86. The consensus was $0.91.
However, this was not the reason for the stock’s weak performance in 2022, during which the stock lost 52% of its value. Overall, a softening consumer environment amid rising interest rates is not great news for credit reporting agencies. But JPMorgan’s Andrew Steinerman believes investor skepticism about the acquisition of identity company Neustar (closed in December 2021) is the main factor behind the stock’s decline.
Calling TRU his “favorite information services idea for 2023,” the analyst lays out a bullish case for the company’s expansion.
“We believe TRU stock is too cheap to ignore, and that Neustar’s acquisition will improve the company’s anti-fraud and digital marketing capabilities for years to come,” Steinerman said. “We view Neustar as an addition to TRU’s data analytics portfolio and believe Neustar enhances TRU’s anti-fraud and digital marketing capabilities. In 2022, TRU integrated its data into the Neustar OneID platform, and in 2023, TRU plans to integrate OneID into the company’s solutions to develop new joint products. We recognize that the first year of integration has encountered some bumps along the way, but we believe TRU will achieve its goals for Neustar to drive organic growth in TransUnion’s revenue and margins.”
Overall, Steinerman rates TRU as “Overweight” (i.e., “Buy”), supported by a $76 price target. Implications for investors? Potential upside of ~19% from current levels.
Looking at the consensus breakdown based on 8 buys versus 7 holds, analysts believe the stock is a moderate buy. With an average price target of $72.89, the stock is on track to gain ~14% over the next year. (Check out the TransUnion stock forecast at TipRanks)
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