The possibility of the Federal Reserve returning to raise interest rates aggressively has significantly dampened investor sentiment lately. Amid the uncertain macroeconomic environment, the best approach is to bet on quality financials. I think the fundamental strength of Walmart Inc. (WMT), United Microelectronics Corporation (UMC), and Overseas Shipholding Group, Inc. (OSG) makes their shares safe investments now.
Before evaluating these stocks, let’s discuss what might keep the market under pressure in the near term.
The 0.6% sequential and 5.4% year-over-year rise in the Personal Consumption Expenditure (PCE), along with the hotter-than-expected jobs report from January, surprised the Street and indicated that the Fed needs to be aggressive again in raising interest rates.
Hargreaves Lansdown’s Head of Money and Markets, Susannah Streeter, in a note, said, “Investor optimism had already been hit by a slow puncture this week, but it’s deflating more rapidly as the latest data indicates that the work in taming inflation is far from over.”
Minutes from the Fed’s policy meeting showed that any upside risk to inflation would remain a key factor for participants in shaping the policy outlook. The officials believe that interest rates would need to move higher and stay elevated until inflation reaches 2%.
The central bank announced a quarter of a percentage point rate increase, its smallest hike since the beginning of the tightening cycle in March 2022, bringing the fed funds rate to a target range of 4.5% to 4.75%.
While the Fed’s aggressive monetary policy tightening has led to the fall of inflation from its peak, it still remains at uncomfortable levels. Fed officials believe it would take some time to achieve its inflation target. This has led many analysts to believe that the Fed will raise the fed funds rate above 5% this year.
Therefore, the market is expected to remain highly volatile in the upcoming months. Let’s see why WMT, UMC, and OSG could be smart buys for investors to survive the market volatility.
Walmart Inc. (WMT)
WMT engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club.
On January 5, 2023, WMT announced that it was now operating 36 drone delivery hubs across seven states. It completed more than 6,000 deliveries over the past year in as little as 30 minutes. The company is well positioned to offer drone delivery at scale; with its 4,700 stores located within 90% of the U.S. population, it will be able to deliver more items through drones helping it cut costs and drive higher revenues.
In terms of the trailing-12-month Return on Common Equity, WMT’s 14.60% is 48.2% higher than the 9.85% industry average. Its 4.80% trailing-12-month Return on Total Assets is 35.5% higher than the 3.54% industry average. Likewise, its 2.50x trailing-12-month asset turnover ratio is 199.8% higher than the industry average of 0.84x.
WMT’s revenue grew at a CAGR of 5.3% over the past three years. Its Tang Book Value grew at a CAGR of 8.1% over the past three years.
WMT’s total revenues for the fourth quarter ended January 31, 2023, increased 7.3% year-over-year to $164.05 billion. Its adjusted operating income rose 6.9% year-over-year to $6.41 billion. The company’s consolidated net income attributable to WMT increased 76.2% year-over-year to $6.28 billion. In addition, its adjusted EPS came in at $1.71, representing an 11.8% increase from the year-ago quarter.
WMT’s revenue for the quarter ending April 30, 2023, is expected to increase 5% year-over-year to $147.24 billion. Its EPS for fiscal 2025 is expected to increase 10.7% year-over-year to $6.81. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 14.8% to close the last trading session at $142.47.
WMT’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
Within the A-rated Grocery/Big Box Retailers industry, it is ranked #3 out of 39 stocks. It has an A grade for Stability and a B for Growth, Value, and Quality. Click here to see the other POWR ratings of WMT for Momentum and Sentiment.
United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC operates as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally.
In terms of the trailing-12-month net income margin, UMC’s 31.29% is 983.5% higher than the 2.89% industry average. Likewise, its 52.25% trailing-12-month EBITDA margin is 363% higher than the industry average of 11.28%. Furthermore, the stock’s 28.75% trailing-12-month Capex/Sales is significantly higher than the industry average of 2.47%.
UMC’s revenue grew at a CAGR of 23.4% over the past three years. Its net income grew at a CAGR of 120.3% over the past three years. In addition, its EBIT grew at a CAGR of 176.1% in the same time frame.
UMC’s operating revenues increased 14.8% year-over-year to NT$67.84 billion ($2.21 billion) for the fourth quarter ended December 31, 2022. Its operating income grew 34.2% year-over-year to NT$23.64 billion ($770.65 million). The company’s net income attributable to shareholders of the parent increased 19.6% year-over-year to NT$19.07 billion ($621.67 million). Also, its EPS came in at NT$1.54, representing an increase of 18.5% year-over-year.
For fiscal 2024, UMC’s EPS and revenue are expected to increase 22.4% and 9.8% to $0.92 and $8.70 billion, respectively. The stock has gained 23% year-to-date to close the last trading session at $8.03.
UMC’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value and Momentum. Within the B-rated Semiconductor & Wireless Chip industry, it is ranked #8 out of 92 stocks. To see the other ratings of UMC for Growth, Stability, and Sentiment, click here.
Overseas Shipholding Group, Inc. (OSG)
OSG owns and operates a fleet of oceangoing vessels engaged in transporting crude oil and petroleum products in the U.S. flag trade. The company serves independent oil traders, refinery operators, and government entities.
On December 8, 2022, OSG announced that it had exercised options to extend its six bareboat charter agreements with American Shipping Company ASA for an additional three-year term commencing in December 2023.
OSG’s President and CEO, Sam Norton, said, “We believe the market continues to support attractive commercial opportunities for these vessel leases to supplement the strong and stable cash flow generation from our niche businesses.”
In terms of the trailing-12-month levered FCF margin, OSG’s 15.41% is 128.7% higher than the 6.74% industry average.
OSG’s revenue grew at a CAGR of 8.4% over the past three years. Its EBITDA grew at a CAGR of 17.9% over the past three years. In addition, its EBIT grew at a CAGR of 33.3% in the same time frame.
OSG’s shipping revenues increased 31% year-over-year to $123.06 million for the third quarter ended September 30, 2022. Its net income came in at $13.25 million, compared to a net loss of $16.01 million in the year-ago period. Also, its EPS came in at $0.15, compared to a loss per share of $0.18 in the year-ago period.
Over the past year, OSG’s stock has gained 94.8% to close the last trading session at $3.74.
Unsurprisingly, OSG has an overall rating of A, equating to a Strong Buy in our POWR Ratings system.
It is ranked first out of 46 stocks in the B-rated Shipping industry. OSG has an A grade for Momentum and a B for Growth, Value, Sentiment, and Quality. Click here to see OSG’s rating for Stability.
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WMT shares were unchanged in premarket trading Monday. Year-to-date, WMT has gained 0.48%, versus a 3.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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