Still-elevated inflation, the Fed’s monetary tightening, and recent bank failures are raising the probability of an economic downturn this year. Amid an uncertain macroeconomic backdrop, it could be wise to add quality stock Science Applications International Corporation (SAIC) to your watchlist.
However, given the financial weakness and bleak growth prospects, OncoCyte Corporation (OCX) and Flora Growth Corp. (FLGC) could be best avoided now.
Before delving deeper into the fundamentals of these stocks, let us discuss various factors affecting investor sentiment lately.
Last month, the Federal Reserve approved another 25-basis-point interest-rate hike to tame stubborn inflation while expressing caution about the recent turmoil in the financial sector. The decision marked the Fed’s ninth consecutive rate hike since March 2022 and took its benchmark federal funds rate to a range between 4.75% and 5%, the highest level since 2007.
The Federal Open Market Committee’s (FOMC) post-meeting statement noted that “some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” while a phrase about the need for “ongoing increases” that appeared in the last eight statements was dropped from this one.
With the Fed’s steady interest rate increases and growing risks of tighter credit conditions amid recent bank collapses, the odds of the economy backsliding into a recession are increasing. According to the latest Bloomberg monthly survey of economists, the likelihood of an economic downturn in the next 12 months stands at 65%, an increase from 60% odds in February.
Furthermore, the University of Michigan consumer sentiment for the United States slid to 62 last month from 67 in February. Consumer sentiment fell for the first time in four months in March as consumers increasingly expect a recession ahead.
Against the backdrop, adding fundamentally sound stock SAIC to your watchlist could be wise as it could navigate a volatile market and survive a potential recession. However, struggling stocks OCX and FLGC could be best avoided now.
Let us discuss these featured stocks:
Stock to Buy:
Science Applications International Corporation (SAIC)
SAIC offers technical, engineering, and enterprise IT services primarily in the United States. The company’s offerings include engineering, technology integration, IT modernization, logistics, maintenance of ground and maritime systems, training and simulation, operation and program support services, and end-to-end-services.
On March 23, SAIC signed a definitive agreement to sell its logistics and supply chain management business to ASRC Federal Holding Company, LLC, for $350 million in cash.
Nazzic Keene, SAIC’s CEO, said, “The agreement allows for seamless transition and continued support for the logistics and supply chain management business and their important customer missions, while enabling SAIC to concentrate resources in our Growth & Technology Accelerant areas of focus. These areas include Secure Cloud, Enterprise IT and Systems Integration & Delivery which now account for more than 30% of SAIC revenue.”
Also, on March 6, SAIC announced a $5 million investment in Morpheus Data, a provider of cloud automation and platform engineering solutions. Morpheus’ software will be the orchestration engine within CloudScendTM, SAIC’s cohesive suite of solutions for customers exploring, migrating, and operating within the cloud environment. This strategic investment should allow SAIC to address a growing pipeline of Secure Cloud opportunities.
SAIC’s net revenue increased marginally year-over-year to $1.91 billion in the third quarter that ended October 28, 2022. Its operating income rose 16.7% from the year-ago value to $133 million. Also, the company’s net income grew 12.7% from the prior-year period to $80 million, and its earnings per share were $1.45, up 18.9% year-over-year.
SAIC pays a $1.48 per share dividend annually, translating to a 1.38% yield on the current price. Its four-year average dividend yield is 1.67%. The company’s dividend payouts have grown at a 3.6% CAGR over the past five years.
Analysts expect SAIC’s revenue to increase 4.5% year-over-year to $1.86 billion for the fourth quarter that ended January 2023. The company’s EPS for the same period is expected to rise 10.2% year-over-year to $1.65. Moreover, SAIC has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in all four trailing quarters.
The stock has gained 21.5% over the past six months and 16.6% over the past year to close the last trading session at $107.46.
SAIC’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
SAIC has a B grade for Growth and Value. In the 80-stock Technology-Services industry, it is ranked #6.
In addition to the POWR Ratings grades I’ve just highlighted, you can see the SAIC’s ratings for Momentum, Sentiment, Quality, and Stability here.
Stocks to Avoid:
OncoCyte Corporation (OCX)
OCX is a molecular diagnostics company. It researches, develops, and commercializes proprietary laboratory-developed tests for the detection of cancer internationally. It provides DetermaRx, a molecular test for early-stage adenocarcinoma of the lung, and DetermalO, a proprietary gene expression assay.
OCX’s trailing-12-month gross profit margin of negative 1.67% is significantly lower than the industry average of 55.83%. Likewise, the stock’s trailing 12-month ROCE, ROTC, and ROTA of negative 72.76%, 35.65%, and 40.55% compare to the industry averages of negative 40.21%, 21.80%, and 31.63%, respectively.
On March 31, the company reported preliminary fourth-quarter and full-year 2022 financial results. For the year that ended December 31, 2022, OCX’s net revenue decreased 56.4% year-over-year to $958,000, while its gross margin stood at negative $18,000, compared to $1.42 million in the prior-year period. The company reported a loss from operations of $18 million for the year.
Furthermore, the company’s net loss widened 13.4% from the year-ago value to $72.90 million, and its net loss per share stood at $1. In addition, as of December 31, 2022, OCX’s cash and cash equivalents were $19.99 million, compared to $32.95 million as of December 31, 2021.
Analysts expect OCX’s revenue for the first quarter (ended March 2023) to come in at $1.03 million, indicating a decrease of 27.8% year-over-year. The company is expected to report a loss per share of $0.09 for the same quarter. Furthermore, analysts expect the company to report a loss per share of $0.33 and $0.29 for the fiscal years 2023 and 2024, respectively.
Shares of OCX have declined 51.5% over the past six months and 76.2% over the past year to close the last trading session at $0.35.
OCX’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to Sell in our proprietary rating system.
The stock has an F grade for Quality and a D for Momentum. Within the D-rated Medical-Diagnostics/Research industry, OCX is ranked #46 of 54 stocks. To see additional POWR Ratings of OCX for Growth, Sentiment, Stability, and Value, click here.
Flora Growth Corp. (FLGC)
FLGC engages in the growth, cultivation, and development of medicinal cannabis and medicinal cannabis derivative products for pharmacies, medical clinics, and cosmetic companies globally. The company sells its products under the JustCBD, Vessel, Mind Naturals, Stardog, Mambe, Tonino Lamborghini, and Kalaya brands.
In January, FLGC received an extension of 180 calendar days from the Nasdaq Stock Market LLC to regain compliance with the Nasdaq’s minimum $1 bid price requirement. If, at any time before July 3, the bid price of the company’s common shares closed at or above $1 per share for a minimum of 10 straight business days, Nasdaq would provide written notification that the company has achieved compliance with the Bid Price Requirement.
Suppose the company chooses to implement a reverse stock split to regain compliance. In that case, it must complete a reverse stock split no later than ten business days prior to the expiration of the 180 calendar day period.
FLGC’s trailing-12-month EBITDA margin of negative 88.43% stands out in contrast to the industry average of 10.74%. Also, its trailing-12-month net income and levered FCF margins of negative 172.45% and 110.24% compare to the respective industry averages of 3.68% and 2.65%.
FLGC’s operating expenses increased 216% year-over-year to $67.72 million for the year that ended December 31, 2022. Its operating loss widened 180.5% from the year-ago value to $53.31 million. Additionally, net loss for the period and loss per share attributable to FLGC worsened by 146.4% and 41.7% year-over-year to $52.63 million and $0.68, respectively.
The company is expected to report a loss per share of $0.10 for the current fiscal year (ending December 2023). Over the past month, FLGC has plunged 20.6% to close the last trading day at $0.29. It has declined 58.4% over the past six months.
FLGC’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to Sell in our proprietary rating system.
FLGC has a D grade for Stability, Quality, and Sentiment. In the Agriculture industry, it is ranked #25 of 29 stocks.
Click here to access the additional POWR Ratings for FLGC (Momentum, Growth, and Value).
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SAIC shares were unchanged in premarket trading Monday. Year-to-date, SAIC has declined -2.79%, versus a 7.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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