Tag: 3.2% year-over-year

Wall Street's D-Day on Sept. 13 Brings High Stakes – 5 Stocks to Consider in the Aftermath

Posted on by The INO.com Team

August’s Consumer Price Index (CPI) report, due to be released on September 13, 2023, holds immense significance as it will influence the Federal Reserve’s upcoming policy decision. The Fed’s decision on raising interest rates at the next FOMC meeting scheduled on September 19-20, 2023, could be a significant determinant of the market movement.

August’s CPI figures are important, especially after a surprising rise in prices in July, with the headline CPI rising 3.2% year-over-year, the first acceleration in more than twelve months. August’s inflation numbers would offer insight into whether inflation is easing and July’s rise in prices was a one-off.

The central bank had last raised rates by 25 basis points in late July, pushing the benchmark interest rate to the 5.25% - 5.50% range. The recent economic data has been mixed with the U.S. consumer spending in July rising the most in six months, and nonfarm payrolls increased by 187,000 in August.

However, the unemployment rate rose 3.8% in August, the highest since February 2022. Additionally, job openings edged down to 8.8 million, falling to their lowest level since March 2021. Towards the end of last month, Fed Chair Jerome Powell said that inflation is still too high and could require additional interest rate increases. However, he noted that policymakers would carefully proceed as they assess the incoming data.

A rise in energy prices is expected to have driven the increase in headline inflation last month. Economists forecast headline inflation to rise 3.6% year-over-year and 0.6% sequentially in August. Federal Reserve governor Christopher Waller said he currently sees nothing that would force the Fed to raise the short-term borrowing rates again.

In an interview with CNBC, he stated, “The biggest thing is just inflation. We got two good reports in a row.” The key now is to “see whether this low inflation is a trend or if it was just an outlier or a fluke.”

When asked if rate increases can stop, Waller said, “That depends on the data.” “We have to wait and see if this inflation trend is continuing. We’ve been burned twice before. In 2021, we saw it coming down, and then it shot up. The end of 2022, we saw it coming down, then it all got revised away.”

“So, I want to be very careful about saying we’ve kind of done the job on inflation until we see a couple of months continuing along this trajectory before I say we’re done doing anything,” he added.

The CME FedWatch Tool indicated a 93% probability of the Fed keeping interest rates unchanged in September, while there is just a 53.5% probability for another pause at the November meeting.

Usually, interest rates and the stock market have an inverse relationship. If the prices rise higher than expected in August, the Fed might be compelled to raise interest rates, which could hurt the performance of stocks. In this scenario, investors may consider investing in stocks that are less sensitive to inflation, such as Unilever PLC (UL), Dominion Energy, Inc. (D), and Thermo Fisher Scientific Inc. (TMO).

On the other hand, if inflation shows signs of easing in August, the Fed may keep the benchmark interest rate steady. This could help stock prices to rise. In this scenario, investors may consider investing in cyclical names like Microsoft Corporation (MSFT) and NIKE, Inc. (NKE). They are deemed cyclical due to their sensitivity to rising interest rates. Without rate increases, these stocks are likely to perform well.

Let’s discuss these stocks in detail.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

On April 17, 2023, MSFT and Epic announced the expansion of their strategic collaboration to develop and integrate generative AI into healthcare by combining the scale and power of Azure OpenAI Service with Epic’s electronic health record (EHR) software.

MSFT’s corporate vice president of AI platform, Eric Boyd, said, “Our expanded partnership builds on a long history of collaboration between Microsoft, Nuance, and Epic, including our work to help healthcare organizations migrate their Epic environments to Azure. Together, we can help providers deliver significant clinical and business outcomes leveraging the power of the Microsoft Cloud and Epic.”

MSFT’s revenue grew at a CAGR of 14% over the past three years. Its net income grew at a CAGR of 17.8% over the past three years. In addition, its EBIT grew at a CAGR of 18.7% in the same time frame.

In terms of trailing-12-month gross profit margin, MSFT’s 68.92% is 43% higher than the 48.20% industry average. Likewise, its 48.14% trailing-12-month EBITDA margin is 432.7% higher than the industry average of 9.04%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 13.26%, compared to the industry average of 2.42%.

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion for the fourth quarter ended June 30, 2023. Its net cash from operations increased 16.8% year-over-year to $28.77 billion. The company’s net income increased 20% year-over-year to $20.08 billion. Also, its EPS came in at $2.69, representing an increase of 20.6% year-over-year.

Analysts expect MSFT’s EPS and revenue for the quarter ending September 30, 2023, to increase 12.5% and 8.8% year-over-year to $2.64 and $54.51 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 39.4% year-to-date to close the last trading session at $334.27.

Thermo Fisher Scientific Inc. (TMO)

TMO provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products, and biopharma services.

On August 14, 2023, TMO announced the completion of the acquisition of CorEvitas, LLC, a provider of regulatory-grade, real-world evidence for approved medical treatments and therapies, from Audax Private Equity.

TMO’s Chairman, President, and CEO Marc N. Casper said, “CorEvitas expands our clinical research business with highly complementary real-world evidence solutions, which is an increasingly important area and will help to enhance decision-making as well as the time and cost of drug development.”

“We are excited by the opportunity to further accelerate innovation and advance productivity for our pharma and biotech customers in their new work to deliver new medicines and therapeutics to benefit patients,” he added.

TMO’s revenue grew at a CAGR of 18.4% over the past three years. Its net income grew at a CAGR of 15.6% over the past three years. In addition, its EBITDA grew at a CAGR of 15.5% in the same time frame.

In terms of trailing-12-month net income margin, TMO’s 13.14% compares to the negative 5.71% industry average. Likewise, its 24.43% trailing-12-month EBITDA margin is 373.9% higher than the industry average of 5.15%. Furthermore, the stock’s 10.09% trailing-12-month levered FCF margin is significantly higher than the industry average of 0.23%.

For the fiscal second quarter ended July 1, 2023, TMO’s revenues declined 2.6% year-over-year to $10.69 billion. Its adjusted operating income decreased 9% over the prior year quarter to $2.37 billion. The company’s adjusted net income declined 8% year-over-year to $2 billion.

Also, its adjusted EPS came in at $5.15, representing a decline of 6.5% year-over-year. On the other hand, its non-GAAP free cash flow rose 21.9% year-over-year to $1.26 billion.

Street expects its EPS and revenue for the quarter ending September 30, 2023, to increase 11.5% and 0.5% year-over-year to $5.66 and $10.73 billion, respectively. Over the past three months, the stock has gained 0.6% to close the last trading session at $518.27.

NIKE, Inc. (NKE)

NKE is engaged in the designing, marketing, and distributing athletic footwear, apparel, equipment, and accessories for sports and fitness activities. Its brand product offerings are in Running, Basketball, the Jordan brand, Football, Training, and Sportswear.

Over the last three years, NKE’s revenue grew at an 11.1% CAGR, while its EPS grew at a 26.4% CAGR during the same time frame. Its net income grew at a 25.9% CAGR over the past three years.

In terms of trailing-12-month gross profit margin, NKE’s 43.52% is 22.8% higher than the 35.45% industry average. Likewise, its 11.55% trailing-12-month EBIT margin is 58.7% higher than the industry average of 7.28%. Furthermore, the stock’s 7.56% trailing-12-month levered FCF margin is 49% higher than the industry average of 5.08%.

NKE’s revenues for the fourth quarter ended May 31, 2023, increased 4.8% year-over-year to $12.83 billion. Its gross profit increased 1.7% year-over-year to $5.60 billion. The company’s net income declined 28.4% year-over-year to $1.03 billion. In addition, its EPS came in at $0.66, representing a decline of 26.7% year-over-year.

Analysts expect NKE’s revenue for the quarter ended August 31, 2023, to increase 2.5% year-over-year to $13 billion. Its EPS for the same quarter is expected to decline 19.3% year-over-year to $0.75. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has declined 8% to close the last trading session at $97.67.

Unilever PLC (UL)

UL is based in London, the United Kingdom. It operates as a fast-moving consumer goods company. Its segments include Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

UL’s revenue grew at a CAGR of 5.7% over the past three years. Its net income grew at a CAGR of 12% over the past three years. In addition, its EPS grew at a CAGR of 13.2% in the same time frame.

In terms of the trailing-12-month EBIT margin, UL’s 16.32% is 106.7% higher than the 7.89% industry average. Likewise, its 18.29% trailing-12-month EBITDA margin is 60% higher than the industry average of 11.43%. Furthermore, the stock’s 42.06% trailing-12-month Return on Common Equity is 273% higher than the industry average of 11.28%.

UL’s turnover for the first half ended June 30, 2023, increased 2.7% year-over-year to €30.43 billion ($32.55 billion). Its operating profit rose 22.6% year-over-year to €5.52 billion ($5.90 billion). The company’s net profit increased 20.7% year-over-year to €3.88 billion ($4.15 billion). Also, its EPS came in at €1.40, representing an increase of 23.6% year-over-year.

In addition, its net cash flow from operating activities increased 10.4% over the prior-year period to €3.37 billion ($3.61 billion).

For the quarter ending September 30, 2023, UL’s revenue is expected to increase 4.7% year-over-year to $16.53 billion. Its EPS for fiscal 2023 is expected to increase 4.9% year-over-year to $2.89. Over the past year, the stock has gained 12.2% to close the last trading session at $50.45.

Dominion Energy, Inc. (D)

D produces and distributes energy in the United States. It operates through four segments: Dominion Energy Virginia, Gas Distribution, Dominion Energy South Carolina, and Contracted assets.

On September 5, 2023, D announced that it concluded a robust and competitive sale process and executed three separate definitive agreements to sell its three natural gas distribution companies to Enbridge (ENB). The three LDCs include The East Ohio Gas Company, Public Service Company of North Carolina, Incorporated, Questar Gas Company, and Wexpro Company.

D's Chair, President, and CEO, Robert M. Blue, said, “The transactions announcement also represents another significant step in our business review, which is focused on repositioning the company to create maximum long-term value for shareholders, employees, customers, and other stakeholders.”

D’s net income grew at a CAGR of 62.4% over the past three years. Its EBITDA grew at a CAGR of 3.5% over the past three years. In addition, its EPS grew at a CAGR of 69.4% in the same time frame.

In terms of the trailing-12-month gross profit margin, D’s 46.31% is 19.2% higher than the 38.86% industry average. Likewise, its 45.90% trailing-12-month EBITDA margin is 40.2% higher than the industry average of 32.74%. Furthermore, the stock’s 50.59% trailing-12-month Capex/Sales is 73.2% higher than the industry average of 29.20%.

For the fiscal second quarter ended June 30, 2023, D’s operating revenue increased 5.5% year-over-year to $3.79 billion. Its adjustments to reported loss came in at $131 million, compared to adjustments to reported earnings of $1.11 billion. Its reported income per common share came in at $0.69, compared to a reported loss per common share of $0.58 in the prior-year quarter.

Street expects D’s revenue for the quarter ending September 30, 2023, to increase 3.4% year-over-year to $4.53 billion. On the other hand, its EPS for the same quarter is expected to decline 32.6% year-over-year to $0.79. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 4.4% to close the last trading session at $47.12.

3 Stocks to Fall Into as 10-Year Treasury ‘Screams Buy’

Posted on by The INO.com Team

is prudent to explore why UnitedHealth Group Incorporated (UNH), Costco Wholesale Corporation (COST), and NextEra Energy, Inc. (NEE) could be wise portfolio additions now. Read on…

 

The 10-year Treasury yield surpassed 4.2%, and just a few weeks earlier, it hit its highest level since 2008, indicating investors are delaying their expectations regarding potential interest rate cuts by the Fed.

BMO Capital Markets head of U.S. rates strategy Ian Lyngen regards this uptick as a compelling opportunity for investors. In his view, the 10-year Treasury bond is a "screaming buy" for investors, owing to the Fed's successful endeavors in combating inflation.

Treasury yields and the stock market traditionally display an inverse relation. Still, defensive stocks, such as healthcare, utilities, and consumer staples, defined by their necessity, remain resilient. These sectors tend to preserve their revenue streams and overall stability, notwithstanding the volatility of the market conditions.

Before delving into the fundamentals of the stocks that could be solid buys now, it is crucial to understand the larger economic forces at play.

Why 10-Year Treasury Yield Is Rising

The Federal Reserve has implemented an 11th benchmark rate increase, announcing a 25-basis-point rise in July, escalating the interest rates to a 22-year high of 5.25% to 5.5%. Despite inflation notably declining from a 9.1% peak in June 2022 to 3.2% in July 2023, it still remains above the Fed’s 2% target.

In job market, the U.S. Bureau of Labor Statistics reported an increase in August's unemployment rate to 3.8%, up from July's 3.5% and reaching the highest since February 2022. Despite this, positive signals came from average hourly earnings, which showed a 0.2% increase for the month and a year-over-year increase of 4.3%. Furthermore, the U.S. economy outstripped forecasts with 187,000 new jobs.

In addition, American consumer spending showcased resilience, with sales at U.S. retailers picking up 0.7% month-over-month in July. Retail sales grew 3.2% year-over-year. Private consumption, which makes up nearly 70% of the U.S. GDP, remains strong, bolstered by sustained low unemployment and solid wage growth.

Some analysts had mooted that the Fed's rate hike spree might end. However, recent robust economic data have cast doubt on these assumptions, and uncertainty about its future monetary policy continues. Officials expressed concern in minutes from the Fed's July meeting that further rate increases could be a necessity due to the potential for persistent price rises.

As is generally understood, bond yields and bond prices follow an inverse relationship. Therefore, as interest rates increase, current bond prices tend to fall, consequently raising yields.

Respected market analyst Ed Yardeni predicts the 10-year Treasury yield could further escalate, spurred by increasing anxieties over the U.S. debt levels. He speculates that this yield could exceed 4.5% this year, potentially triggering a sell-off in the S&P 500 of up to 10%.

Why Are Treasury Securities Screaming Buys Now?

The government backs Treasury securities. Historically, the U.S. has always paid its debts, which helps to ensure that Treasurys are the lowest-risk investments one can own. 10-year Treasury bonds make interest payments every six months.

The market for U.S. Treasurys is the largest, most liquid market in the world, making them easy to sell if one needs access to their cash before the maturity date.

Chase Lawson, author of ‘Financial Freedom: Breaking the Chains to Independence and Creating Massive Wealth,’ believes that there’s consistent income potential with Treasury bonds, and one’s investment likely would not decline if the stock market tanks, like other investment vehicles, can do.

Since interest rates could remain high for a while, the 10-year treasury yield is anticipated to maintain momentum.

Stocks That Could Perform Well Even When Treasury Yields Are Rising…

High bond yields might potentially signal warning signs for stocks. Bonds compete for the same investor dollars as equities, and when yields surge, equities often go down. This trend arises because bonds, especially those with higher yields than stocks, usually become more attractive. Furthermore, while stocks carry inherent risk, bonds offer a safer option.

When the 10-year Treasury bond yield is strong, investing in stocks less influenced by interest rates is typically wise. Enterprises involved in utilities, consumer staples, and healthcare sectors tend to present stable earnings and cash flows and are less vulnerable to interest rate fluctuations.

Defensive stocks provide stable earnings and consistent returns, even amid an economic downturn. These stocks are nearly always in demand because they provide essential products and services.

Below, we look into the fundamentals of three stocks worth considering under current market conditions:

UnitedHealth Group Incorporated (UNH)

The U.S. ranks among the nations with the highest healthcare expenses globally. Compounded by the fact that these costs are increasing at a rate that exceeds inflation, health insurance has transitioned from an optional safeguard to a fundamental necessity.

With a robust market capitalization of $443.40 billion, the Minnesota-based health insurer UNH operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.

The corporation reigns as the largest healthcare company in the United States, eclipsing even the biggest banks in the country. Its substantial stature is deemed a bellwether within the extensive health insurance sector. The company's robust performance stems from the contributions of two major business units, UnitedHealthcare and Optum.

These entities continually endeavor to deliver patient-centric healthcare services at reasonable prices across numerous American communities and follow a strategic alliance with reputable care systems.

UNH recently announced a dividend payout of $1.88 per share, payable on September 19, maintaining its commitment to stockholder returns.

UNH’s revenue grew at 12% and 10.3% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 7.9% and 7.3%, respectively.

For the second quarter that ended June 30, 2023, the healthcare giant saw $92.90 billion in revenue, a 15.6% surge. This escalation was chiefly driven by double-digit expansions within its insurance division and Optum Health Services wing. Its earnings from operations rose 13% from the year-ago value to $8.06 billion.

Moreover, adjusted net earnings attributable to UNH common shareholders grew 9.1% year-over-year to $5.77 billion, whereas adjusted EPS increased 10.2% from the prior year’s quarter to $6.14, topping analyst expectations of $5.99.

Year-to-date, the total number of people served by UnitedHealthcare with medical benefits has increased by over 1.1 million. Growth across the company’s commercial benefit offerings indicated the corporation's emphasis on innovative and reasonably priced benefit plans.

Meanwhile, the number of people catered to by the company's senior and community offerings grew by 625,000 due to product and benefit customizations to meet the unique needs of the aging population and economically disadvantaged individuals.

UNH’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently changed their UNH stock holdings.

Institutions hold roughly 87.3% of UNH shares. Of the 3,307 institutional holders, 1,623 have increased their positions in the stock. Moreover, 155 institutions have taken new positions (1,445,591 shares).

Costco Wholesale Corporation (COST)

With a market cap of $241.18 billion, COST, the prominent warehouse club operator, continues to exhibit strong performance driven by strategic growth plans, optimized pricing policies, and substantial membership trends. These elements have been instrumental in bolstering the solid sales figures for the company.

COST’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.

Sales momentum continued through August, with net sales showcasing a 5% year-over-year increase to $18.42 billion for the retail month, an impressive follow-up to the 4.5% enhancement witnessed in July.

As the U.S. observed Labor Day, budget-minded shoppers looked forward to making the most of the annual sales. COST had put forth Labor Day promotions on an array of products, a move likely to boost the company’s sales figures further.

COST's business model of leveraging economies of scale and maintaining low-profit margins creates a virtuous cycle that perpetuates customer loyalty and fosters a competitive edge. This deliberate choice of prioritizing customer satisfaction over immediate profits has proven fruitful, significantly contributing to customer retention and repeat business–crucial elements in today’s highly competitive retail industry.

The catalysts driving COST's growth include its ongoing global expansion and remarkable renewal rates. The company continues to amplify shareholder value with shareholder-friendly management, reliable dividend payouts, and efficient capital reinvestments.

Its unique membership business model and pricing power distinguish it from its traditional counterparts. As of the third quarter of 2023, it revealed an encouraging 92.6% renewal rate within the U.S. and Canada, which testifies to robust customer loyalty levels and satisfaction.

The impressive renewal rate guarantees consistent revenue flow from membership fees, increases customer lifetime value, and enhances overall profitability. As the quarter concluded, COST reported having 69.1 million paid household members and 124.7 million cardholders.

Changes have been observed concerning institutions' holdings of COST shares. Approximately 68.1% of COST shares are presently held by institutions. Of the 3,168 institutional holders, 1,456 have increased their positions in the stock. Moreover, 212 institutions have taken new positions (1,307,195 shares), reflecting confidence in the company’s trajectory.

NextEra Energy, Inc. (NEE)

With a market cap of $135.33 billion, NEE stands as a leading utilities provider in the industry. The company focuses on generating renewable, clean, and sustainable power, serving millions of customers across North America.

Highlighted by its robust historical performance, NEE has presented a compelling case for investor interest with consistent, long-term dividend growth that offers shareholders stability and income. Particularly noteworthy is the company's anticipation to increase its dividend per share by approximately 10% annually through 2024, based on dividends from 2022. This strategy confirms confidence in potential cash-flow growth that supports these higher dividends.

NEE's impressive financial figures testify to its efficient management and ability to maintain regular profit generation even in a highly competitive sector. The growing earnings base allows it to return significant cash to its shareholders.

NEE’s revenue grew at 13.5% and 11% CAGRs over the past three and five years, respectively. The company’s EBITDA and net income rose at CAGRs of 15.8% and 17.4%, respectively.

For the fiscal second quarter that ended June 30, 2023, the company’s operating revenues stood at $7.35 billion for the quarter, up 41.8% year-over-year, exceeding analyst projections. Its adjusted earnings per share stood at $0.88, up 8.6% year-over-year.

NEE's long-term financial expectations remain unchanged. For 2023 and 2024, it expects adjusted EPS to be in the ranges of $2.98 to $3.13 and $3.23 to $3.43, respectively. For 2025 and 2026, adjusted EPS is expected to come between $3.45 to $3.70 and $3.63 to $4.00, respectively.

As a result of its dedication to environmental sustainability and consistent shareholder value creation, NEE has captured the attention of investors and market analysts. Ownership data indicates institutional holders have a significant interest in NEE, accounting for approximately 77.7% of NEE shares. Of the 2,557 institutional holders, 1,206 have increased their positions in the stock. Moreover, 134 institutions have taken new positions (5,266,359 shares), reflecting confidence in the company’s trajectory.

Conclusion

In conclusion, the U.S. stock market seems to have a strong foundation of sturdy economic growth and investor credibility in defensive equities, particularly those offering dividends, as a safeguard against inflation. Even though rising bond yields could potentially destabilize specific sectors, stocks less sensitive to interest rate variations and displaying consistent earnings and cash flow are optimally positioned to yield substantial returns.