The probability of more rate hikes in 2023 to tame the sticky inflation has induced a fresh bout of anxiety among investors and aggravated fears of an economic slump. Against this backdrop, let us explore some growth stocks The Sherwin-Williams Company (SHW), SMART Global Holdings, Inc. (SGH), and Steelcase Inc. (SCS) now.
But let us first discuss what’s happening on the economic front before we delve deeper into the fundamentals of the stocks mentioned above.
Robust employment data could coerce Fed officials to announce more rate hikes this year. Moreover, although inflation is slowing down, it is still higher than the Fed’s 2% target.
On the other hand, fears of the U.S. economy tipping into a recession, previously triggered amid banking sector jitters and the Fed’s monetary policy tightening, have been further aggravated after Fed Chair Jerome Powell’s hawkish statements.
However, in addition to clearly stating that the central bank’s tightening policy is far from being over, Powell’s assurance of proceeding with caution could positively impact investor sentiments.
Where on the one side, some believe such persistent rate hikes might result in an economic slowdown, with a slump in corporate earnings; on the contrary, some experts believe the U.S. economy is "not yet on the brink of recession."
Capital Economics recently wrote, "We now suspect that the economy is unlikely to fall into recession as soon as the third quarter, as we had previously anticipated, and that it will take longer for a meaningful downturn in the labor market to materialize."
The resultant market volatilities are anticipated to hover for quite some time. On the bright side, it gives an opportunity for long-term investors to track some quality growth stocks.
SPDR Portfolio S&P 500 Growth ETF (SPYG) grew 19% year-to-date, outperforming the broader S&P 500, which gained 13.7%. This substantiates investors’ interest in growth stocks.
Given this backdrop, growth stocks SHW, SGH, and SCS with notable fundamental strength could be watched in June.
The Sherwin-Williams Company (SHW)
SHW develops, manufactures, and distributes paints, coatings, and related products to its customers. It operates through three segments: The Americas Group; Consumer Brands Group; and Performance Coatings Group.
SHW paid a regular quarterly dividend of $0.605 per share to its shareholders on June 2, 2023. This reflects its cash generation abilities. Its annualized dividend rate of $2.42 per share yields 0.98% on prevailing prices.
The company’s four-year average dividend yield is 0.84%. Its dividend payouts have grown at a CAGR of 13.5% over the past three years and 16.2% over the past five years. Moreover, SHW grew its dividend payments for 44 consecutive years.
SHW’s trailing-12-month levered FCF margin of 5.31% is 49.4% higher than the industry average of 3.55%. Likewise, its trailing-12-month ROCE, ROTC, and ROTA of 78.75%, 12.74%, and 9.19% are 642.6%, 109.4%, and 96.4% higher than the industry averages of 10.61%, 6.08%, and 4.68%, respectively.
SHW’s revenue has grown at 7.9% and 6.9% CAGRs over the past three and five years, respectively. Moreover, its EBIT and net income have grown at 7.8% and 9.6% CAGRs over the past three years, respectively.
For the fiscal first quarter that ended March 31, 2023, SHW’s net sales increased 8.9% year-over-year to $5.44 billion, while its gross profit stood at $2.42 billion, up 17.9% year-over-year.
The company’s net income and adjusted net income per share grew 28.7% and 26.7% year-over-year to $477.40 million and $2.04, respectively, for the same quarter.
The consensus revenue and EPS estimates for the fiscal second quarter ending June 2023 of $6.02 billion and $2.63 represent 2.6% and 9.3% improvements year-over-year, respectively. The company surpassed EPS estimates in three of the four trailing quarters.
SHW has gained 11.3% over the past year to close its last trading session at $246.28. Moreover, over the past three months, it has gained 16.5%.
SHW’s POWR Ratings reflect a promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
It also has a B grade for Growth, Sentiment, and Quality. Within the 57-stock B-rated Home Improvement & Goods industry, SHW is ranked #16.
To see SHW’s ratings for Value, Momentum, and Stability, click here.
SMART Global Holdings, Inc. (SGH)
SGH designs and manufactures specialty solutions for the computing, memory, and LED markets internationally. The operational segments of the company are Memory Solutions; Intelligent Platforms Solutions; and LED Solutions segments.
SGH’s trailing-12-month asset turnover ratio of 1.14x is 87.7% higher than the industry average of 0.61x. Likewise, its trailing-12-month ROCE and ROTA of 6.48% and 1.33% are significantly higher than the industry averages of 0.50% and 0.02%, respectively.
SGH’s revenue has grown at CAGRs of 19.3% and 12.2% over the past three and five years, respectively. Furthermore, the company’s EBITDA and EBIT grew at 42% and 54.9% CAGRs over the past three years, respectively.
For the fiscal second quarter that ended February 24, 2023, SGH’s total net sales stood at $429.17 million, while its non-GAAP gross profit increased 6% year-over-year to $123.92 million. The non-GAAP operating income for the same quarter came in at $51.43 million.
Moreover, non-GAAP net income attributable to SGH and non-GAAP earnings per share stood at $37.65 million and $0.76, respectively. Also, the company’s adjusted EBITDA came in at $63.48 million.
The consensus revenue and EPS estimates of $1.78 billion and $2.45 for the fiscal year ending August 2024 represent increases of 8.2% and 5.3% year-over-year, respectively. In addition, the company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 75.5% year-to-date to close the last trading session at $26.11. Over the past three months, it has gained 66.7%.
SGH’s promising prospects are reflected in the POWR Ratings. The company has an overall B rating, equating to Buy in our proprietary rating system.
SGH has a B grade for Growth and Value. In the Semiconductor & Wireless Chip industry, it is ranked #28 out of 91 stocks.
Click here to see the additional POWR Ratings for SGH (Momentum, Stability, Sentiment, and Quality).
Steelcase Inc. (SCS)
SCS provides a comprehensive portfolio of furniture and architectural products designed to help customers create workplaces. Its furniture portfolio includes furniture systems, seating, storage, fixed and height-adjustable desks, benches, etc. In addition, its interior architectural products comprise full and partial-height walls and architectural pods.
SCS’ Board of Directors declared a quarterly dividend of $0.10 per share to be paid to shareholders on or before July 17, 2023. SCS’ annual dividend of $0.40 per share translates to a 5.11% yield on the prevailing prices. Its four-year average dividend yield is 4.34%.
In February, SCS was named in FORTUNE 2023 World’s Most Admired Companies list for the 17th year and listed as fourth in the Home Equipment and Furnishings category. This recognition reflects the company’s consistently strong performance within the industry.
SCS’ trailing-12-month asset turnover ratio of 1.50x is 80.5% higher than the industry average of 0.80x.
SCS’ revenue has grown 1.1% CAGR over the past five years. Moreover, its total assets and levered free cash flow have grown at 3.9% and 20.9% CAGRs over the past five years, respectively.
For the fiscal first quarter that ended May 26, 2023, SCS’ revenue increased 1.5% year-over-year to $751.90 million, while its gross profit rose 22.4% from the year-ago value to $234.60 million. The company’s adjusted operating income for the quarter stood at $19.70 million, compared to an adjusted operating loss of $4.60 million in the previous-year quarter.
The company’s net income amounted to $1.50 million, compared to a net loss of $11.40 million in the year-ago quarter, while its adjusted earnings per share came in at $0.09, compared to an adjusted loss per share of $0.05.
The consensus EPS estimate of $0.66 for the fiscal year 2024 (ending February 2024) represents a 17% improvement year-over-year. For the same period, Street expects its revenue to come in at $3.22 billion. The company surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock gained 8.2% intraday to close the last trading session at $7.83. Over the past month, it has gained 11.5%.
It’s no surprise that SCS has an overall rating of B, which equates to Buy in the POWR Ratings system.
It has a B grade for Growth, Value, and Sentiment. Within the Home Improvement & Goods industry, it is ranked #13.
In addition to the POWR Ratings we stated above, we have also given SCS ratings for Momentum, Stability, and Quality. Get all SCS ratings here.
What To Do Next?
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SHW shares were trading at $246.47 per share on Friday afternoon, up $0.19 (+0.08%). Year-to-date, SHW has gained 4.41%, versus a 14.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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