The Federal Reserve’s interest rate hikes have helped bring a noticeable drop in consumer prices. Annual inflation dropped for the ninth consecutive month in March. However, the risks of a recession this year loom amid tighter lending standards and the high-interest rates.
Amid the macroeconomic uncertainty and market turbulence, it could be wise to invest in fundamentally strong stocks Centrica plc (CPYYY), Graham Corporation (GHM), and Heritage Insurance Holdings, Inc. (HRTG) to capitalize on their strong momentum. These stocks are also ‘Buy’ rated in our proprietary rating system, POWR Ratings.
Before delving deeper into their fundamentals, let’s discuss what’s expected to keep the stock market under pressure.
March’s consumer price index (CPI) data showed that inflation is on its downward path as prices rose 0.1% sequentially and 5% annually in March. However, the core consumer prices, which exclude food and energy items, rose 0.4% sequentially and 5.6% year-over-year. In addition, the U.S. economy added 236,000 jobs in March, indicating strong job growth.
Post the quarter-percentage-point interest rate increase last month, the benchmark federal funds rate is now in a range between 4.75% and 5%, the highest level since September 2007. The Federal Reserve will likely proceed with another rate increase at the next month's policy meeting.
A Fed governing board member, Christopher Waller, said that inflation is still too high and more interest rate hikes are needed to bring prices under control. He believes the “monetary policy needs to be tightened further” as job growth remains strong and inflation is above the Fed’s 2% target.
Minutes from the Fed’s March meeting show that the staff believes there could be a mild recession this year. The meeting summary said, “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
Let’s take a closer look at the fundamentals of CPYYY, GHM, and HRTG.
Centrica plc (CPYYY)
Headquartered in Windsor, the United Kingdom, CPYYY operates as an integrated energy company in the U.K., Ireland, Scandinavia, and North America. It operates through British Gas Services & Solutions, British Gas Energy, Centrica Business Solutions, Bord Gáis Energy, Marketing & Trading, and Upstream segments. It supplies gas and electricity to residential, commercial, and industrial customers and offers energy-related services.
On April 5, 2023, CPYYY announced that it had started work on a 20MW hydrogen-ready gas-fired peaking plant in Worcestershire. The company will install eight UK-assembled containerized engines to burn natural gas at a previously decommissioned power plant in Redditch. The plant is expected to be operational later this year.
In terms of forward EV/EBITDA, CPYYY’s 2.25x is 80% lower than the 11.27x industry average. Its 3.01x forward EV/EBIT is 84.9% lower than the 19.87x industry average. Likewise, its 0.17x forward Price/Sales is 92.5% lower than the 2.24x industry average.
CPYYY’s group revenue for the fiscal year ended December 31, 2022, increased 61% year-over-year to £23.74 billion ($29.41 billion). Its gross profit rose 25.5% over the prior-year period to £2.05 billion ($2.54 billion). The company’s total assets increased 7.2% year-over-year to £29.04 billion ($35.98 billion).
Analysts expect CPYYY’s revenue for fiscal 2023 to increase 17.5% year-over-year to $47.38 billion. Over the past six months, the stock has gained 79.4% to close the last trading session at $5.80.
CPYYY’s stock is trading 10.6% above its 50-day moving average of $5.06.
CPYYY’s POWR Ratings reflect this positive outlook. CPYYY 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.
It is ranked first among 55 stocks in the B-rated Utilities – Foreign industry. It has an A grade for Growth and a B for Value, Momentum, Stability, Sentiment, and Quality. Click here to see all the ratings of CPYYY.
Graham Corporation (GHM)
GHM is engaged in designing and manufacturing fluid, power, heat transfer, and vacuum technologies for the defense, space, energy, and process industries. It offers products for power plant systems, torpedo ejection and power systems, thermal management systems, power generation systems, chemical and petrochemical processing, and cooling systems.
On April 6, 2023, GHM announced that it was awarded a follow-on order to support the MK48 Mod 7 Heavyweight Torpedo program valued at approximately $23 million. GHM’s President and CEO Daniel J. Thoren said, “We believe the combination of our engineering know-how, highly skilled workforce, and precision machining and manufacturing expertise enabled us to win this follow-on contract award.”
“We have made significant investments to provide the high quality and reliability required to supply these critical components for the U.S. Navy and other foreign militaries. Additionally, we are further investing to expand our capacity to address growing demand and ensure timely delivery of our products,” he added.
On February 22, 2023, GHM announced that it was awarded a multi-million dollar renewable energy vacuum system for the Hell’s Kitchen Stage 1 Project in the Imperial Valley of California.
In terms of forward EV/Sales, GHM’s 1.01x is 37.8% lower than the 1.62x industry average. Likewise, its 0.97x forward Price/Sales is 25.9% lower than the 1.31x industry average.
For the third quarter ended December 31, 2022, GHM’s net sales increased 38.6% year-over-year to $39.87 million. Its gross margin came in at 15.6%, compared to 1.9% in the year-ago quarter. The company’s adjusted EBITDA came in at $2.24 million, compared to an adjusted EBITDA loss of $2.60 million in the year-ago period.
Its adjusted net income came in at $857K, compared to an adjusted net loss of $2.90 million in the prior-year quarter. Additionally, its adjusted EPS came in at $0.08, compared to an adjusted loss per share of $0.27 in the year-ago period.
For the quarter ending June 30, 2023, GHM’s revenue is expected to increase 8.1% year-over-year to $38.99 million. For fiscal 2023, its EPS is expected to increase 102.4% year-over-year to $0.02. Over the past nine months, the stock has gained 102.1% to close the last trading session at $13.70.
GHM’s stock is trading 1.6% above its 50-day moving average of $13.50.
GHM’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to Buy in our proprietary rating system.
GHM is ranked #4 out of 43 stocks within the B-rated Energy- Services industry. It has an A grade for Sentiment and a B for Growth, Value, and Momentum. To see the other ratings of GHM for Stability and Quality, click here.
Heritage Insurance Holdings, Inc. (HRTG)
HRTG is a property and casualty insurance holding company that primarily provides personal and commercial residential insurance products through its insurance company subsidiaries. It is vertically integrated and controls or manages all aspects of insurance underwriting, customer service, actuarial analysis, distribution, claims processing, and adjusting.
In terms of forward Price/Book, HRTG’s 0.62x is 37.1% lower than the 0.99x industry average. Its 0.11x forward Price/Sales is 94.8% lower than the 2.12x industry average.
HRTG’s revenue increased 4.7% year-over-year to $174.59 million for the fourth quarter ended December 31, 2022. The company’s adjusted net income rose 10.8% over the prior-year quarter to $12.50 million. Its adjusted EPS came in at $0.48, representing an increase of 17.1% year-over-year.
Analysts expect HRTG’s revenue for the quarter ended March 31, 2023, to increase 4.5% year-over-year to $165.81 million. Its EPS for fiscal 2024 is expected to increase 525% year-over-year to $0.63. Over the past six months, the stock has gained 108.2% to close the last trading session at $3.06.
HRTG’s stock is trading 5.2% above its 50-day moving average of $2.81.
HRTG’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Value and Momentum. It is ranked #6 out of 56 stocks in the B-rated Insurance – Property & Casualty industry. Click here to see the other ratings of HRTG for Growth, Stability, and Quality.
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CPYYY shares were unchanged in premarket trading Tuesday. Year-to-date, CPYYY has gained 27.19%, versus a 9.14% 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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