Investor sentiments have been impacted by fears of a recession as the Fed is expected to continue its fight against inflation with interest rate hikes. The economy’s ups and downs should not deter investors from investing in high-quality stocks for the long term.
I think buying high-quality stocks like Cisco Systems, Inc. (CSCO) and Autodesk, Inc. (ADSK) could help generate significant returns in the coming years.
Before analyzing the fundamentals of these stocks to justify why they could generate solid returns in the long term, let’s discuss what could keep the market volatile in the months ahead.
The Personal Consumption Expenditure (PCE) increased by 0.6% in January and 4.7% year-over-year. Moreover, the surge in labor costs and retreating jobless claims signal the likelihood of the Fed raising its benchmark interest rate by 25 basis points later this month.
The Federal Reserve is committed to keeping interest rates elevated to bring inflation down to its 2% target.
The fed funds rate is likely to climb above the 5% mark. This is a cause of concern for investors as further rate hikes could push the economy into a recession. Amid this backdrop, the market is expected to be volatile in the near term.
Now let’s evaluate why buying high-quality stocks CSCO and ADSK for the long term could help generate significant returns.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry worldwide.
In terms of the trailing-12-month gross profit margin, CSCO’s 61.92% is 25.9% higher than the 49.19% industry average. Likewise, its 27.92% trailing-12-month Return on Common Equity is considerably higher than the industry average of 4.75%.
On February 27, 2023, CSCO announced its partnership with Mercedes-Benz to provide an optimal mobile office experience in its new Mercedes-Benz E Class vehicles.
CSCO’s Executive Vice President & General Manager, Security & Collaboration, Jeetu Patel, said, “The mobile office cannot progress without the reliable and secure collaboration technology that only Cisco can provide. This partnership with Mercedes-Benz, a leader in automotive luxury, marks a big step forward in delivering the flexibility that the hybrid workforce demands.”
For the fiscal second quarter that ended January 28, 2023, CSCO’s total revenue increased 6.9% year-over-year to $13.59 billion. The company’s gross margin increased 4.7% from the prior-year quarter to $8.43 billion. Its non-GAAP net income rose 2.6% year-over-year to $3.64 billion.
In addition, its non-GAAP EPS came in at $0.88, representing a 4.8% increase from the prior-year quarter.
Analysts expect CSCO’s EPS and revenue for the quarter ending April 30, 2023, to increase 11.6% and 12.2% year-over-year to $0.97 and $14.40 billion, respectively. It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 11.1% to close the last trading session at $49.42.
CSCO’s strong fundamentals are reflected in its POWR Ratings. 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 B-rated Technology - Communication/Networking industry, it is ranked #3 out of 49 stocks. The company has an A grade for Quality and a B for Stability and Sentiment.
We have also given CSCO grades for Growth, Value, and Momentum. Get all CSCO ratings here.
Autodesk, Inc. (ADSK)
ADSK provides 3D design, engineering, and entertainment software and services worldwide. The company offers AutoCAD Civil 3D, BIM 360, AutoCAD, and AutoCAD LT, among other software and tools.
In terms of the trailing-12-month gross profit margin, ADSK’s 91.57% is 86.2% higher than the 49.19% industry average. Its 28.53% trailing-12-month levered FCF margin is 323.7% higher than the 6.73% industry average. Likewise, its 8.72% trailing-12-month Return on Total Assets is significantly higher than the industry average of 1.54%.
ADSK’s total net revenue for the fourth quarter ended October 31, 2022, increased 8.8% year-over-year to $1.32 billion. The company’s gross profit increased 8.6% year-over-year to $1.19 billion. Its non-GAAP income from operations increased 13.8% from the year-ago value to $479.00 million.
In addition, its net income rose 229.2% from the prior-year period to $293 million. Moreover, its non-GAAP EPS came in at $1.86, representing a 24% increase from the prior-year quarter.
ADSK’s EPS and revenue for the quarter ending April 30, 2023, are expected to increase 8.7% and 8.4% year-over-year to $1.55 and $1.27 billion, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters. The stock has gained 11.5% year-to-date to close the last trading session at $208.33.
ADSK’s POWR Ratings reflect this positive outlook. ADSK has an overall rating of B, which translates to a Buy. It is ranked #12 out of 136 stocks in the Software - Application industry. It has an A grade for Quality and a B for Growth.
We have also given ADSK grades for Value, Momentum, Stability, and Sentiment. Get all ADSK ratings here.
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CSCO shares were trading at $48.77 per share on Tuesday afternoon, down $0.65 (-1.32%). Year-to-date, CSCO has gained 3.19%, versus a 4.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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