With inflation coming in lower-than-expected for October, the market widely expects a 50-bps rate hike in December, a shift away from a 0.75% rate hike campaign. A majority of Fed officials also believe that a slowdown in the current pace of interest rate hikes would be appropriate soon. However, despite slowing rate hikes, interest rates need to rise higher than forecasts until they reach a “sufficiently restrictive” level.
Moreover, analysts projecting that U.S. fourth-quarter earnings will decline for the first time in two years, contracting business activities and a cooling labor market are all hinting towards a weakening economic momentum.
Although according to strategists at Goldman Sachs Group Inc. and Deutsche Bank, stock markets don’t yet reflect the risk of a U.S. recession. Many still believe the Federal Reserve can pull off a soft landing for the U.S. economy.
While we believe investors should consider buying quality small-cap stock CSW Industrials, Inc. (CSWI), WeWork Inc. (WE) might be best avoided, given the company’s bleak fundamental positioning.
Stock to Buy:
CSW Industrials, Inc. (CSWI)
CSWI operates as a diversified industrial company in the United States and internationally through three segments- Contractor Solutions; Engineered Building Solutions; and Specialized Reliability Solutions. The company has a market cap of $1.80 billion.
On October 14, CSWI declared a quarterly dividend of $0.17 per common share, payable to shareholders on November 14. CSWI pays a $0.68 per share dividend annually, which translates to a 0.58% yield on the current price. Its dividend payouts have grown at a CAGR of 34.7% over the past three years.
CSWI’s total revenues increased 23% year-over-year to $191.20 million in the second quarter ended September 30, 2022. The company’s net income increased 34% year-over-year to $24.30 million. Its EBITDA increased 29% year-over-year to $43.90 million, while its EPS rose 37% year-over-year to $1.57.
Street EPS estimate of $0.75 for the third fiscal quarter ending December 2022 reflects a rise of 43.3% year-over-year. Likewise, its revenue estimate of $165.70 million for the same quarter indicates an improvement of 21.6% from the prior-year quarter. Additionally, CSWI has topped consensus EPS estimates in three of the trailing four quarters.
CSWI’s forward P/E multiple of 21.02 is 15.5% higher than the industry average of 18.21. However, in terms of its forward non-GAAP PEG, the stock is trading at 1.45x, 2.3% lower than the industry average of 1.48x.
CSWI’s stock has gained 9.5% over the past six months, closing its last trading session at $118.15.
CSWI’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CSWI also has a B grade for Quality. It is ranked #21 out of 87 stocks in the A-rated Chemicals industry.
To see the additional POWR Ratings for CSWI (Growth, Value, Momentum, Stability, and Sentiment), click here.
Stock to Avoid:
WeWork Inc. (WE)
WE provide flexible workspace solutions to individuals and organizations worldwide. It delivers technology-driven turnkey solutions, flexible spaces, and community experiences. Its product offerings include Core space-as-a-service, WeWork On Demand, WeWork All Access, and WeWork Workplace. It has a market cap of $2.18 billion.
For the nine months ended September 30, WE’s net cash provided by financing activities decreased 71.3% year-over-year to $407 million. Its cash, cash equivalents, and restricted cash at the end of the period came in at $467 million, down 4.5% from the prior-year period.
Moreover, its total current assets for the period ended September 30, 2022, came in at $866 million compared to $1.47 billion for the period ended December 31, 2021.
WE’s EPS is expected to come in at a negative $0.49 for the fiscal fourth quarter ending December 2022. Its EPS is also expected to remain negative for the year ending December 2023.
Over the past year, the stock has lost 69.8% to close the last trading session at $2.71. It has declined 64.1% over the past six months.
WE’s poor prospects are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system.
WE also have an F grade for Stability, Sentiment, and Quality and a D for Value. In the F-rated Real Estate Services industry, it is ranked 41 among 42 stocks.
Click here to access the additional POWR Ratings for Momentum and Growth for WE.
CSWI shares were trading at $119.53 per share on Tuesday afternoon, up $1.38 (+1.17%). Year-to-date, CSWI has declined -0.53%, versus a -16.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Komal Bhattar
Komal's passion for the stock market and financial analysis led her to pursue investment research as a career. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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