Cooling inflation has raised signals of a slowdown in the interest rate hikes. According to most economists in a Reuters poll, the Federal Reserve will end its tightening cycle after 25-basis-point hikes in February and March. It will likely hold interest rates steady for at least the rest of the year.
Last year, the Federal Reserve launched a series of seven rate hikes, bringing the benchmark rate from near zero to a range of 4.25% to 4.5%. Despite that, inflation remains above the Fed’s 2% target, leaving a slim chance of rate cuts anytime soon. Fed Vice Chair Lael Brainard pressed on staying ‘sufficiently restrictive’ for some time to curb price growth.
In addition, Bank of America CEO Brian Moynihan expects a ‘mild’ recession is likely. Moreover, economists surveyed by Bloomberg see a 70% chance of a recession in 2023.
In such an environment, it would be wise to invest in shares of fundamentally strong businesses which have been flying under the radar and are well-positioned to weather an economic slowdown and yield big gains.
To that end, fundamentally sound stocks, Corcept Therapeutics Incorporated (CORT) and Arcos Dorados Holdings Inc. (ARCO), could be ideal picks now.
Corcept Therapeutics Incorporated (CORT)
CORT is a commercial-stage company engaged in the discovery and development of drugs that treat severe metabolic, oncologic, and neuropsychiatric disorders by modulating the effects of the hormone cortisol. It operates through the discovery; development; and commercialization of the pharmaceutical products segment.
In terms of forward P/E, CORT is trading at 25.06x, 5.8% lower than the industry average of 26.60x. Also, its forward EV/EBIT multiple of 15.54 compares to the industry average of 17.73.
CORT’s trailing-12-month gross profit margin of 98.68% is 78.5% higher than the 55.29% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.71% is 108.7% higher than the industry average of 0.34%.
For the fiscal third quarter that ended September 30, 2022, CORT’s revenues increased 5.8% to $101.73 million. Its net income and net income per common share came in at $34.61 million and $0.30, increasing 13.4% and 25% year-over-year, respectively.
Street expects CORT’s EPS and revenue to increase 26.7% and 14.1% year-over-year to $0.25 and $106.93 million, respectively, for the fiscal first quarter ending March 31, 2023. It surpassed the EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 37% to close the last trading session at $23.93.
CORT’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which equates 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.
It has an A grade for Value and Quality. Out of the 400 stocks in the Biotech industry, it is ranked #13. To see the other ratings of CORT for Growth, Momentum, Stability, and Sentiment, click here.
Arcos Dorados Holdings Inc. (ARCO)
Headquartered in Montevideo, Uruguay, ARCO functions as a franchisee of McDonald’s restaurants. The company has the exclusive right to own, operate, and grant franchises of McDonald’s restaurants in 20 countries and territories.
In terms of forward non-GAAP PEG, ARCO is trading at 0.86x, 38.3% lower than the industry average of 1.40x. The stock’s forward EV/Sales multiple of 0.87 is 27.4% below the industry average of 1.20. Also, its forward Price/Sales multiple of 0.52 compares to the industry average of 0.93.
ARCO’s trailing-12-month ROCE of 61.46% is 375.3% higher than the 12.93% industry average. Likewise, its trailing-12-month levered FCF margin of 3.33% is 147.4% higher than the industry average of 1.35%.
For the fiscal third quarter that ended September 30, 2022, ARCO’s total revenues increased 27% year-over-year to $921.70 million. The company’s adjusted EBITDA increased 14.9% year-over-year to $102.60 million, while its net income came in at $46.90 million, up 89.7% year-over-year. Also, its adjusted EPS increased 83.3% year-over-year to $0.22.
Analysts expect ARCO’s EPS and revenue to increase 5.5% and 27.6% year-over-year to $0.23 and $996 million, respectively, for the fourth quarter (ended on December 31, 2022). It surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive. Over the past year, the stock has gained 54.1% to close the last trading session at $8.69.
ARCO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It also has an A grade for Value and Sentiment. Within the B-rated Restaurants industry, it is ranked #5 out of 46 stocks. Click here to see the other ratings of ARCO for Growth, Momentum, Stability, and Quality.
CORT shares were trading at $23.93 per share on Monday morning, down $0.00 (0.00%). Year-to-date, CORT has gained 17.82%, versus a 4.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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