The current market tumult, triggered by the financial system failures and incessant rate hikes by the Fed, has soared fears of an upcoming recession. Therefore, investors seeking higher returns might choose aggressive stocks of fundamentally strong companies.
Against this backdrop, let us explore the stocks Granite Construction Incorporated (GVA) and Arhaus, Inc. (ARHS) with considerable hedge fund interest.
The Fed’s aggressive rate hike stance and the recent regional banking failures have stoked fears of an economic slowdown, which also triggered market volatilities. Jamie Dimon, the chief executive of JPMorgan Chase & Co. (JPM), has warned that the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.
The early-year stock market rally kicked off with a state of euphoria where investors purchased shares with enthusiasm and chased the momentum as the S&P 500 climbed. However, the market lost its steam gradually, and now individual investors are losing their appetite for U.S. stocks, leaving equity markets after a volatile first quarter.
While it may be tempting to leave the market when market turmoil hits, investors might benefit from staying invested in equities. According to Stacy Francis, a certified financial planner, president, and CEO of Francis Financial in New York, investors could reap gains if they stick with investing in this “rocky” market scenario.
Moreover, according to UBS’ CIO daily updates, the biggest threat to real wealth is being under-invested in the long run. Therefore, investors willing to stay invested for long periods could opt for aggressive stocks with strong financial growth, GVA and ARHS now. Hedge funds seem to have significant interest in these stocks.
Granite Construction Incorporated (GVA)
GVA is a construction materials manufacturer and infrastructure contractor in the United States. Transportation; Water; Specialty; and Materials are the business segments through which the company operates. As of the fourth quarter of the fiscal year 2022, 61 hedge funds hold a position in GVA, with a collective holding of 24.33 million shares.
On April 4, GVA announced that it had been awarded an approximately $126 million contract by Naval Facilities Engineering Systems Command (NAVFAC) Pacific for the construction of buildings and infrastructure which will support the relocation of U.S. Marines to Marine Corps Base (MCB) Camp Blaz, Guam.
The project would be funded by NAVFAC Pacific and be included in GVA’s 2023 first-quarter CAP. The project is set to begin in April 2023 and is expected to be completed by December 2025.
GVA’s VP of Regional Operations, Curt Haldeman, said, "This project diversifies our Federal portfolio, and we are extremely excited to continue our partnership with NAVFAC and strengthen our commitment to the Department of Defense's Guam buildup initiative."
On March 24, GVA’s board of directors declared a quarterly dividend of $0.13 per common share, payable to all shareholders on April 14, 2023. This reflects its cash generation abilities.
In terms of forward EV/Sales, GVA is trading at 0.43x, 72.2% lower than the industry average of 1.55x. Its forward EV/EBITDA multiple of 5.18 is 49.5% lower than the industry average of 10.25.
GVA’s revenue has grown at 4.2% and 2.2% CAGRs over the past three and five years, respectively. Moreover, its EBITDA has grown at a 108.3% CAGR over the past three years.
GVA’s trailing-12-month levered FCF margin and CAPEX/Sales of 4.85% and 3.68% are 18.9% and 30% higher than the industry averages of 4.08% and 2.83%, respectively.
During the fiscal fourth quarter that ended December 31, 2022, GVA’s total revenue came in at $789.21 million. The company’s gross profit increased 55% year-over-year to $96.78 million. It reported an adjusted EBITDA of $49.94 million, representing an increase of 55.7% from the prior-year quarter.
Moreover, for the fiscal fourth quarter that ended December 31, 2022, adjusted net income attributable to GVA and adjusted earnings per share attributable to common shareholders stood at $24.61 million and $0.56, respectively, rising significantly year-over-year.
The company’s EPS is expected to grow 153.5% year-over-year to $0.96 in the fiscal second quarter ending June 2023. Analysts expect GVA’s revenue to increase 17.6% year-over-year to $903.39 million for the same quarter. The company surpassed consensus EPS and revenue estimates in three of the trailing four quarters.
The stock has gained 23.3% over the past year and 44.1% over the past six months to close its last trading session at $38.72.
GVA’s fundamental strength is reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an A grade for Growth. Within the A-rated 78-stock Industrial – Services industry, it is ranked #30.
In addition to the POWR Ratings grades we have highlighted, one can see the GVA rating for Value, Momentum, Stability, Sentiment, and Quality here.
Arhaus, Inc. (ARHS)
ARHS is a lifestyle brand and omnichannel retailer of premium home furnishings. The company provides merchandise collections across various categories, including furniture, textiles, décor, lighting, and outdoor. As of the fourth quarter of 2022, 36 hedge funds hold a position in ARHS with a collective holding of 7.95 million shares.
On March 22, ARHS debuted its Outdoor 2023 Collection, 'Currents.' Paying homage to inspiring shores and coastlines from Costa Rica to New England, 'Currents' presents the brand's assortment of new and enduring creations through a lens of natural beauty.
John Reed, ARHS Co-Founder and CEO, said, "At Arhaus, we share the fresh outlooks we gain during our travels by partnering with artisans across the globe who craft authentic collections that bring the best experiences and design to outdoor living at home. Within the pages of 'Currents', we aim to transport you to our favorite shores and coastlines while encouraging you to cultivate a paradise that is uniquely yours."
In terms of forward EV/Sales and EV/EBITDA, ARHS is trading at 1.02x and 6.85x, 5.4% and 26.5% lower than the industry averages of 1.08x and 9.31x, respectively.
ARHS’ revenue has grown at 35.5% CAGR over the past three years. Moreover, its EBITDA and EBIT have grown at 66.2% and 83.9% CAGRs, respectively, over the past three years.
ARHS’ trailing-12-month gross profit margin of 48.64% is 38.9% higher than the industry average of 35.03%. Also, its trailing-12-month net income margin of 11.12% is 144% higher than the 4.56% industry average.
Moreover, ARHS expects showroom enhancements in 2023 that include 17 separate real estate projects. The company is also planning to add a record number of new showrooms during the year, with 12 new showroom openings and five renovation, relocation, and expansion projects, most in the second half of the year.
ARHS’ net revenue increased 49.6% year-over-year to $356.33 million in the fiscal fourth quarter that ended December 31, 2022. Its income from operations rose to $64.40 million from a loss from operations of $2.72 million in the year-ago quarter. The company’s adjusted EBITDA grew 126.4% from the year-ago value to $74.19 million.
Its adjusted net income and adjusted net income per share came in at $47.60 million and $0.34, registering a rise of 175.3% and 142.9% year-over-year, respectively.
Analysts expect ARHS’ EPS to grow 4.2% year-over-year to $0.29 for the fiscal second quarter ending June. Its revenue for the same quarter is expected to increase 12% from the prior-year quarter to $343.02 million. The company surpassed consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
ARHS’ shares gained 4% intraday to close its last trading session at $7.86.
ARHS’ POWR Ratings reflect this promising outlook. It has an overall grade of B, equating to Buy in our proprietary rating system.
ARHS has a B grade for Growth, Sentiment, and Quality. Within the Home Improvement & Goods industry, it is ranked #14 of 55 stocks.
To see additional POWR Ratings (Value, Momentum, and Stability) for ARHS, click here.
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
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GVA shares were trading at $39.03 per share on Tuesday morning, up $0.31 (+0.80%). Year-to-date, GVA has gained 11.65%, versus a 7.56% 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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