The Fed’s recent approval to increase the interest rate by 75 basis points has once again raised recession fears. However, given the possibility of a lower pace of rate hike in the future, a bull market might be on the horizon. Amid this, we think quality stocks Microsoft (MSFT), PepsiCo (PEP), and Waste Management (WM) might be solid buys now. Read on….
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On Wednesday, the Federal Reserve, for the fourth consecutive time, increased the short-term borrowing rate by 75 basis points to a target range of 3.75%-4% to curb the sky-high inflation.
Amid the Fed’s relentless fight against inflation, investor sentiments have been hit, and stocks have been pushed to a bear market. The S&P 500 index is down more than 20% this year.
In addition, UNCTAD has warned that the world might be on the brink of recession, and the economic adversities could be worse than what was faced during COVID-19 and the financial crisis of 2008.
But on the other hand, the U.S. economy has shown signs of positivity in the third quarter of 2022. GDP increased at an annual rate of 2.6% for the said period after a six-month contraction. This turnaround underscores the economy’s resilience and raises hopes of the stock market recovering.
Hence, investors could add fundamentally strong stocks, Microsoft Corporation (MSFT), PepsiCo, Inc. (PEP), and Waste Management, Inc. (WM), to await an upcoming bull market.
Microsoft Corporation (MSFT)
Tech giant MSFT is a pioneer in the software field. The company operates in three segments: Productivity and Business Processes; More Personal Computing; and Intelligent Cloud.
On November 3, it was reported that aerospace and defense company Raytheon Technologies Corporation (RTX) and MSFT had deepened their collaboration to co-develop capabilities. MSFT could benefit from helping RTX execute its digital transformation.
In September, a quarterly dividend of $0.68 per share was declared by MSFT, reflecting a six-cent or 10% increase over the previous quarter’s dividend. This is payable to shareholders on December 8 and reflects the company’s strong cash generation ability.
For the fiscal first quarter that ended September 30, MSFT’s EPS came in at $2.35. Its total revenue increased 10.6% year-over-year to $50.12 billion. Its gross margin rose 9.5% from the prior-year quarter to $34.67 billion. Operating income grew 6.3% from the prior-year period to $21.52 billion.
For the fiscal year ending June 2023, the consensus EPS estimate of $9.52 indicates a 3.4% improvement year-over-year. Revenue is expected to rise 7.2% year-over-year to $212.57 billion for the same year. In addition, MSFT topped consensus EPS estimates in three of the trailing four quarters, which is impressive.
The stock lost 2.7% intraday to close its last trading session at $214.25.
MSFT’s POWR Ratings reflect a promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MSFT is also rated a B in Stability and Quality. Within the Software – Business industry, it is ranked #12 of 52 stocks.
To see additional POWR Ratings for Momentum, Growth, Sentiment, and Value for MSFT, click here.
PepsiCo, Inc. (PEP)
PEP is a popular food and beverage company that operates through its seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia and New Zealand; and China Region.
On September 14, PEP and agriculture company Archer-Daniels-Midland Company (ADM) announced a 7.5-year strategic commercial partnership. This collaboration aims to enhance regenerative agriculture across the companies’ shared North American supply chains and is a commendable step toward sustainable development.
PEP has paid consecutive quarterly cash dividends since 1965, and this year marked the company’s 50th consecutive annual dividend increase. In July, PEP declared a quarterly dividend of $1.15 per share of common stock, indicating a 7% increase year-over-year, which was payable on September 30.
PEP’s net revenue came in at $21.97 billion for the third quarter that ended September 3, 2022, up 8.8% year-over-year. Its non-GAAP gross profit increased 8.4% year-over-year to $11.73 billion.
Also, its non-GAAP operating profit came in at $3.60 billion, up 10.9% year-over-year. The company’s non-GAAP net income attributable to PEP per common share grew 10.1% year-over-year to $1.97.
For the fiscal fourth quarter ending December 2022, analysts expect PEP’s revenue to increase 5.3% year-over-year to $26.59 billion. Its EPS is estimated to grow 7.1% year-over-year to $1.64. It has surpassed EPS estimates in all four trailing quarters.
Over the past year, the stock has gained 8.2% to close the last trading session at $177.78. it gained 7.6% over the past month.
It’s no surprise that PEP’s POWR Ratings reflect a promising outlook. It has an overall rating of A, indicating a Strong Buy in our proprietary rating system.
PEP has an A grade for Quality and a B for Stability, Growth, and Sentiment. In the A-rated Beverages industry, it is ranked #9 out of 33 stocks.
Click here for the additional POWR Ratings for Momentum and Value for PEP.
Waste Management, Inc. (WM)
WM provides waste collection, transfer, disposal services, and recycling and resource recovery. It operates and owns landfill gas-to-energy facilities in the United States. The company serves residential, commercial, industrial, and municipal customers in North America.
On September 13, WM announced that it had agreed to acquire a controlling interest in Avangard Innovative’s U.S. business, which is expected to operate as Natura PCR. This is expected to scale the company’s potential in the post-consumer resin (PCR) space.
In August, WM announced a quarterly dividend of $0.65 per share, which was payable to shareholders on September 23. This reflects on the company’s ability to pay back its shareholders.
For the fiscal third quarter 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% from its year-ago value to $950 million, while its adjusted net income grew 21.7% year-over-year to $645 million. WM’s adjusted EPS rose 23.8% from the prior-year period to $1.56.
Analysts expect WM’s revenue and EPS for the fiscal fourth quarter ending December 2022 to increase 6.5% and 13.3% year-over-year to $4.98 billion and $1.43, respectively. Furthermore, WM has an impressive earnings surprise history, surpassing consensus EPS estimates in three of the trailing four quarters.
The stock gained 1.2% intraday to close the last trading session at $157.13.
WM’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system.
WM also has a grade B for Stability and Quality. It is ranked #4 among 15 stocks in the A-rated Waste Disposal industry.
In addition to the above, to see the POWR Ratings for Growth, Value, Momentum, and Sentiment for WM, click here.
MSFT shares were trading at $216.01 per share on Friday morning, up $1.76 (+0.82%). Year-to-date, MSFT has declined -35.35%, versus a -20.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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