Given the Federal Reserve’s willingness to keep raising interest rates until the inflation rate can be brought down to around 2%, the risk of a recession has increased significantly.
Jerome Powell also stated that the economy has yet to feel the cumulative effect of interest rate hikes. With businesses and consumers beginning to feel the bite of high borrowing costs, investors have started preparing for negative earnings surprises.
Morgan Stanley’s chief investment officer and U.S. equity strategist Mike Wilson argued that although the economy will likely weather rising interest rates and high inflation, or at a minimum, avoid a “balance sheet recession” and “systemic financial risk,” the real problem is fading economic growth and corporate earnings.
Given that brief rallies have occurred 6.5 times on average per bear market and the broad market may not stabilize before the dust settles on interest rate hikes, fundamentally strong stocks with enduring competitive advantages have seen rising volumes as investors seek refuge from what Jamie Dimon has described as an ‘economic hurricane.’
To that end, UnitedHealth Group Incorporated (UNH) and Taiwan Semiconductor Manufacturing Company Limited (TSM) may be worth investing in for adequate and consistent risk-adjusted returns.
UnitedHealth Group Incorporated (UNH)
UNH is a diversified healthcare company. The company operates through four segments: Optum Health; OptumInsight; OptumRx; and UnitedHealthcare. It offers consumer-oriented health benefit plans and services, software and information products, health care coverage, and well-being services. Additionally, UNH provides access to networks of care provider specialists, consumer engagement, and financial services.
On November 16, UNH and Life Time Group Holdings, Inc. (LTH) announced an expansion of their relationship to include access to all Life Time locations, helping even more people stay active and improve their physical and mental well-being.
This will help UNH deliver additional value to its customers, thereby driving appreciation of brand equity and expansion of market share.
On November 4, UNH announced its quarterly cash dividend of $1.65 per share, payable on December 13. The company pays $6.60 annually as dividends, translating to a yield of 1.27% at the current price. Its 4-year average dividend yield is 1.36%. Moreover, dividend payouts have increased for 13 consecutive years.
On September 21, UNH and Peloton Interactive Inc. (PTON) renewed and expanded their relationship to extend subscription and preferred pricing benefits to the commercial member. This engagement is set to provide additional value to UNH’s customers, further securing its client base.
On September 7, UNH and Walmart Inc. (WMT) announced the beginning of a 10-year wide-ranging collaboration. Optum, a UNH subsidiary, would provide proven clinical abilities to assist select Walmart Health locations and improve people’s health outcomes by advancing value-based care. The collaboration is expected to expand further to include additional products and services over time.
For the fiscal 2022 third quarter ended September 30, 2022, UNH’s revenues increased 11.8% year-over-year to $80.89 billion. The company’s earnings from operations rose 30.6% from the year-ago value to $7.46 billion. In addition, its adjusted earnings attributable to UNH common shareholders came in at $5.49 billion and $5.79, up 27.2% and 32.1% year-over-year, respectively.
Analysts expect UNH’s revenue for the fiscal year 2022 (ending December 2022) to come in at $323.93 billion, indicating a 12.6% rise from the last year. Street expects the company’s EPS for the current fiscal to grow 15.8% year-over-year to $22.03. The company has also impressed by exceeding the consensus EPS estimates in each of the trailing four quarters.
UNH’s shares have registered a 10-day average trading volume of 3.07 million. It has gained 7.5% over the past year to close the last trading session at $520.21.
UNH’s POWR Ratings reflect its fundamental strength. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
UNH has a B grade for Sentiment, Quality, Growth, and Stability. In the A-rated Medical – Health Insurance industry, it is ranked #2 of 11 stocks.
Beyond what we’ve stated above, we have also given UNH grades for Value and Momentum. Get all UNH ratings here.
Taiwan Semiconductor Manufacturing Company Limited (TSM)
Headquartered in Hsinchu City, Taiwan, TSM provides integrated circuit manufacturing services internationally. This involves manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices.
On December 6, TSM updated that in addition to its first fab in Arizona, which is scheduled to begin production in 2024, it has also started the construction of a second fab, scheduled to begin production in 2026.
The overall investment for these two fabs will be approximately US$40 billion. When complete, TSMC Arizona’s two fabs will manufacture over 600,000 wafers annually, with an estimated end-product value of more than US$40 billion.
On October 27, TSM announced the Open Innovation Platform (OIP) 3DFabric Alliance at the 2022 Open Innovation Platform Ecosystem Forum. TSM’s first-of-its-kind alliance in the semiconductor industry will help customers achieve speedy silicon and system-level innovations and enable next-generation HPC and mobile applications using TSM’s 3DFabric technologies.
For the third quarter of fiscal 2022 ended September 30, TSM’s net sales increased 47.9% year-over-year to NT$613.14 billion ($19 billion), while its income from operations increased 81.5% year-over-year to NT$310.32 billion ($9.62 billion).
During the same period, TSM’s net income increased 79.7% to NT$280.87 billion ($8.70 billion) or NT$10.83 per share, up 79.8% year-over-year.
Analysts expect TSM’s revenue for the fiscal year 2022 to increase 30% year-over-year to $74.63 billion, while its EPS is expected to increase 56.8% year-over-year to $6.46. It has also impressed by surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock has registered an average 10-day trading volume of 13.99 million. It has dipped 5.6% over the past month to close the last trading session at $75.62.
TSM has an overall rating of B, equating to a Buy in our proprietary rating system. It has an A grade for Sentiment and Quality.
TSM is ranked #9 of 93 stocks within the B-rated Semiconductor & Wireless Chip industry.
Click here for the additional POWR Ratings for Growth, Momentum, Stability, and Value for TSM.
UNH shares were trading at $525.46 per share on Wednesday afternoon, up $5.25 (+1.01%). Year-to-date, UNH has gained 5.98%, versus a -17.35% 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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