The September consumer price index report showed an 8.2% year-over-year increase in inflation, beating market estimates. Michelle Meyer, a chief economist at the Mastercard Economics Institute, said, “The more inflation comes in above expectations, the more they're going to have to prove that commitment, which means higher interest rates and cooling in the underlying economy.”
With the Fed’s fourth consecutive 75-bps interest rate hike in its meeting next month seeming almost certain amid alarmingly and persistently high inflation numbers, the market volatility may not soon lessen. The CBOE Volatility Index has climbed more than 80% year-to-date.
The Fed’s hawkish stance is raising the odds of the economy sliding into a recession. According to economist Daniil Manaenkov of the University of Michigan, “Soft landing will likely remain a mythical outcome that never actually comes to pass.”
Amid the volatile market backdrop, we think fundamentally strong stocks Microsoft Corporation (MSFT) and Verizon Communications Inc. (VZ), currently trading at attractive valuations, could be ideal investments.
Microsoft Corporation (MSFT)
MSFT, the ubiquitous software behemoth, needs no introduction. The company operates in three segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.
On September 20, 2022, MSFT declared a quarterly dividend of $0.68 per share, reflecting a 10% sequential increase. The dividend is payable on December 8, 2022. MSFT pays $2.72 annually as a dividend, representing a yield of 1.19% at the current price. The 4-year average dividend yield is 1.07%, and the company’s dividends have grown for 17 consecutive years.
On September 6, MSFT emerged as one of the frontrunners for the acquisition of Aurora Innovation, Inc. (AUR), a self-driving tech company. Materialization of this acquisition would augment MSFT’s automation portfolio and is expected to strengthen its financial performance in the long run.
For the fourth quarter of the fiscal year 2022 ended June 30, MSFT’s total revenue increased 12.4% year-over-year to $51.87 billion, while its operating income grew 8% from the year-ago value to $20.50 billion. During the same period, the company’s net income increased 2% year-over-year to $16.74 billion, while its EPS came in at $2.23, up 2.8% year-over-year.
In terms of forward P/E, MSFT is currently trading at 22.5x, 22.5% lower than its 5-year average. The stock’s forward EV/Sales multiple of 7.64 is 12.1% below its 5-year average of 8.7. Also, its forward Price/Sales multiple of 7.76 compares with its 5-year average of 9.01.
For the fiscal year ending June 2023, analysts expect MSFT’s revenue to come in at $219.63 billion, representing an increase of 10.8% year-over-year, while its EPS is expected to increase 10% year-over-year to $10.13. The company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive.
MSFT’s shares have dipped 9.8% over the past month to close the last trading session at $228.56.
MSFT’s POWR Ratings reflect its promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.
Also, the stock has grade B for Stability and Quality. Within the Software – Business industry, it is ranked #10 out of 51 stocks.
Click here for MSFT’s additional POWR Ratings for Growth, Value, Sentiment, and Momentum.
Verizon Communications Inc. (VZ)
VZ offers communication, information, and entertainment products and services to consumers, businesses, and governmental agencies. The company provides wireless and wireline communications services and products in the United States through Consumer Group and Business Group segments.
On October 13, 2022, VZ announced that it had begun moving customer traffic onto the new cloud-native, containerized 5G core. The company expects this to positively impact customer experience by providing the most advanced, secure, and robust network to support the remarkable new solutions developed on 5G technology.
On October 5, VZ bagged a new Enterprise Infrastructure Solutions (EIS) contract, worth $1.58 billion over the next ten years, to modernize the global communications infrastructure and provide IT services for each of the Department of State’s (DOS) U.S. embassies, consulates, and other key locations totaling to around 260 around the globe.
During the second quarter of the fiscal year 2022 ended June 30, VZ’s total operating revenues grew marginally year-over-year to $33.79 billion. The company’s wireless equipment revenues rose 20.4% from the year-ago value to $6.67 billion. Also, its total assets came in at $370.15 billion as of June 30, 2022, compared to $366.60 billion as of December 31, 2021.
In terms of forward P/E, VZ is currently trading at 7.04x, 47% lower than the industry average of 13.29x. The stock’s forward EV/Sales multiple of 2.43 is 12.3% lower than its 5-year average of 2.77. Also, its forward Price/Sales multiple of 1.12 compares favorably with the industry average of 1.13.
For fiscal 2023 (ending December 31, 2023), VZ’s revenue is expected to increase 1.4% year-over-year to $138.33 billion, while EPS is expected to increase 1% year-over-year to $5.22. The company has topped the consensus EPS estimates in three of the trailing four quarters.
The stock has declined 13% over the past month to close the last trading session at $36.38.
VZ’s overall POWR Rating of B equates to a Strong Buy, which reflects this promising outlook. It also has a grade of B for Stability. It is ranked #3 among 20 stocks in the Telecom – Domestic industry.
To see the additional ratings of VZ for Growth, Value, Momentum, Sentiment, and Quality, click here.
MSFT shares rose $0.36 (+0.15%) in after-hours trading Monday. Year-to-date, MSFT has declined -28.91%, versus a -21.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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