Since inflation came in hotter than expected in September and the economy expanded in the third quarter, the Federal Reserve seems to be on track to approve another 75-bps rate hike this week.
The current inflationary environment is being fed by geopolitics-led supply-side issues, specifically for energy. However, interest rate hikes are primarily meant to rein in demand-driven inflation. Hence, there are concerns that such indiscriminate hawkishness by the central banks could stifle growth, restrict supply, perpetuate further inflation, and push economies into the abyss of recession.
Amid ongoing macroeconomic turbulence, it could be wise to invest in fundamentally strong companies providing essential services, such as Waste Management, Inc. (WM), since the demand for its services is immune to an economic downturn.
However, underperforming businesses like Roku Inc. (ROKU), which depend on consumers’ disposable income to sustain and grow themselves, are best avoided now.
Stock to Buy:
Waste Management, Inc. (WM)
WM, through its subsidiaries, provides waste collection, transfer, disposal services, and recycling and resource recovery and operates and owns landfill gas-to-energy facilities in the United States. Through its offerings, the company serves residential, commercial, industrial, and municipal customers throughout North America.
On September 23, WM paid its shareholders a quarterly cash dividend of $0.65 per share. The company currently pays a $2.60 dividend annually, which translates to a yield of 1.65% at the current price. Its 4-year average dividend yield is 1.73%, and the current payout ratio is 45.50%. The company has kept increasing its dividends for the past 18 years.
On September 13, WM announced that it had agreed to acquire a controlling interest in Avangard Innovative’s U.S. business, which will operate as Natura PCR. Natura PCR is expected to scale and grow its recycling capacity to produce an estimated 400 million pounds per year of post-consumer resin (PCR) in five years.
Through this acquisition, the company expects to deliver new recycling capabilities for its customers and provide commercially used circular solutions for films and clear plastic wrap.
For the third quarter of the fiscal year 2022 ended September 30, WM’s revenue increased 8.8% year-over-year to $5.08 billion. The company’s adjusted income from operations increased 19.9% year-over-year to $950 million, while its adjusted net income grew 21.7% year-over-year to $645 million. As a result, WM’s adjusted EPS for the quarter rose 23.8% year-over-year to $1.56.
Analysts expect WM’s revenue and EPS for the current fiscal year (ending December 2022) to increase 10.1% and 18% year-over-year to $19.74 billion and $5.71, respectively. Moreover, WM’s impressive earnings surprise history is testified by the company surpassing EPS estimates in three of the trailing four quarters.
Amid widespread market volatility, the stock has declined marginally over the past six months to close the last trading session at $158.37.
WM’s stable performance and steady growth have earned it an overall POWR Ratings of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
WM also has a grade B for Quality and Stability. It is ranked #3 among 15 stocks in the A-rated Waste Disposal industry.
Click here for additional ratings for Growth, Value, Momentum, and Sentiment for WM.
Stock to Avoid:
Roku Inc. (ROKU)
ROKU is primarily a TV streaming platform operating in the United States and internationally. The company operates through two segments: Platform and Player.
For the fiscal 2022 second quarter ended June 30, ROKU’s reported an operating loss of $110.51 million, compared to an operating income of $69.10 million in the prior-year quarter, due to a slowdown in the TV advertising expenditure due to macroeconomic headwinds.
During the same period, ROKU reported a net loss of $112.32 million, compared to a net income of $73.47 million in the previous year's quarter. As a result, the company’s loss per share amounted to $0.82.
Analysts expect ROKU to report a loss of $1.13 per share in the fourth quarter of the fiscal year (ending December 2022) compared to an EPS of $0.17 in the previous-year period. For the entire fiscal year, the company’s loss per share is expected to come in at $3.33, compared to an EPS of $1.71 in the previous year.
The stock has slumped 76.2% year-to-date to close the last trading session at $55.54.
ROKU’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
ROKU has a grade of F for Growth and a D for Stability and Sentiment. It is ranked #56 of 59 stocks in the Consumer Goods industry.
To see additional POWR Ratings for Value, Quality, and Momentum for ROKU, click here.
WM shares were trading at $156.06 per share on Tuesday afternoon, down $2.31 (-1.46%). Year-to-date, WM has declined -5.36%, versus a -18.08% 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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