The Federal Reserve’s aggressive policy measure to bring down rampant inflation, which has surged to a 40-year high, and looming recession fears have created bearish sentiments in investors' minds lately.
Earlier this month, the Fed raised its benchmark interest rate by 75 basis points, the largest increase since 1994. The S&P 500 has lost 19.9% year-to-date, while the Dow and the Nasdaq fell 14.6% and 28.6%, respectively.
The S&P 500 is also on track to its worst first half since 1970. George Ball, chairman of Sanders Morris Harris, said, “We see the S&P 500 bottoming at around 3,100, as the Federal Reserve’s aggressive but necessary inflation-fighting measures are likely to depress corporate earnings and push stocks lower.”
Cleveland Federal Reserve Bank President Loretta Mester said that if economic conditions do not change, she will support a 75 basis points (bps) hike in interest rates at the central bank's July policy meeting.
Therefore, we think high-quality stocks Vertex Pharmaceuticals Incorporated (VRTX), United Microelectronics Corporation (UMC), and Sanderson Farms, Inc. (SAFM) could be ideal additions to one’s portfolio, given their ability to stay resilient. These stocks are rated Strong Buy in our POWR Ratings system.
Vertex Pharmaceuticals Incorporated (VRTX)
VRTX, a biotechnology company, develops and commercializes therapies for treating cystic fibrosis. The company markets SYMDEKO/SYMKEVI, ORKAMBI, and KALYDECO to treat cystic fibrosis patients with specific mutations in their cystic fibrosis transmembrane conductance regulator gene; and TRIKAFTA for the treatment of patients with CF 6 years of age or older who have at least one F508del mutation.
This month, VRTX announced that the U.S. Food and Drug Administration (FDA) had granted inaxaplin (VX-147) Breakthrough Therapy Designation for APOL1-mediated focal segmental glomerulosclerosis (FSGS) and the European Medicines Agency (EMA) has granted inaxaplin Priority Medicines (PRIME) designation for APOL1-mediated chronic kidney disease (AMKD). Inaxaplin is the first investigational therapy aimed at treating the underlying cause of AMKD.
Also, this month, VRTX announced new late-breaking clinical data accepted for oral presentation at the 2022 European Hematology Association (EHA) Congress. The company also announced three abstracts accepted for poster presentation at EHA.
VRTX’s 38.52% trailing-12-months EBITDA margin is 864.3% higher than the 3.99% industry average. Its 0.60% trailing-12-months asset turnover ratio is 70.9% higher than the 0.35%.
In the first quarter ending March 31, 2022, VRTX's revenue increased 22% year-over-year to $2.10 billion. Its non-GAAP operating income grew 17% from its year-ago value to $1.17 billion, while its non-GAAP net income improved 16% from its prior-year quarter to $907.00 million. The company's non-GAAP EPS rose 18% from its previous period to $3.52.
Analysts expect VRTX's revenue to increase 18.5% year-over-year to $2.13 billion for the second quarter ending June 2022. The consensus EPS estimate of $3.54 for the second quarter ending June 2022 represents a 13.8% improvement year-over-year.
In addition, it has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 39.6% over the past year and 52.1% over the past nine months.
VRTX's POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VRTX is also rated an A for Quality and a B for Sentiment and Growth. Within the Biotech industry, it is ranked #1 of 386 stocks.
To see additional POWR Ratings for Stability, Momentum, and Value for VRTX, click here.
United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC functions as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. The company offers circuit design, mask tooling, wafer fabrication, and assembly and testing services.
In April, DENSO Corporation, one of the largest mobility suppliers, and United Semiconductor Japan Co., Ltd. (USJC), a subsidiary of UMC, announced that the companies have agreed to collaborate on the production of power semiconductors at USJC’s 300mm fab to cater the growing demand in the automotive market.
UMC’s 28.41% trailing-12-months net income margin is 449.4% higher than the 5.17% industry average. Its 48.21% trailing-12-months EBITDA margin is 262.2% higher than the 13.31%. In addition, its 23.37% trailing-12-months levered FCF margin is 151.4% higher than the 9.30% industry average.
UMC's operating revenue increased 34.7% year-over-year to NT$63.42 billion ($2.13 billion) for the first quarter of 2022. Its operating income grew 193% from its year-ago value to NT$22.33 billion ($751.20 million), while its net income amounted to NT$19.81 billion ($666.42 million), up 89.9% from its prior-year quarter. The company's EPS improved 89.4% year-over-year to NT$0.08.
The $0.33 consensus EPS estimate represents an 85.2% improvement year-over-year for the second quarter ending June 2022. Analysts expect UMC's revenue to increase 26.7% year-over-year to $2.31 billion for the second quarter ending June 2022.
UMC's strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Quality and a B for Growth and Value. Within the B-rated Semiconductor & Wireless Chip industry, it is ranked #1 of 96 stocks.
In total, we rate UMC on eight different levels. Beyond what we've stated above, we have also given UMC grades for Sentiment, Momentum, and Stability. Get all the UMC ratings here.
Sanderson Farms, Inc. (SAFM)
SAFM, an integrated poultry processing company, produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. The company sells ice-packed, chill-packed, bulk-packed, and frozen chicken primarily under the Sanderson Farms brand name to retailers, distributors, and casual dining operators in the southeastern, southwestern, northeastern, and western United States.
SAFM’s 15.34% trailing-12-months net income margin is 208% higher than the 4.98% industry average. Its 23.87% trailing-12-months EBITDA margin is 224.4% higher than the 12.11% industry average. In addition, its trailing-12-months ROE, ROC, and ROA are 44.1%, 36.8%, and 30.52% higher than their industry averages, respectively.
In the first quarter ending March 31, 2022, SAFM's net sales increased 35.8% year-over-year to $1.54 billion. Its operating income grew 230% from its year-ago value to $421.49 million, while its net income amounted to $321.19 million, up 231.1% from its year-ago value. The company's EPS improved 231.6% year-over-year to $14.39.
The consensus EPS estimate of $13.78 for the third quarter ending July 2022 represents an 88.7% year-over-year growth. Analysts expect revenue to increase 30.8% year-over-year to $1.77 billion for the third quarter ending July 2022.
Also, it has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in all of the trailing four quarters.
The stock has gained 16.1% over the past year and 19.3% over the past three months.
It is no surprise that SAFM has an overall A rating, equating to Strong Buy in our POWR Ratings system. SAFM has an A grade for Growth and Quality and a B for Value. In the B-rated Food Makers industry, it is ranked #4 of 88 stocks
Click here to see the additional POWR Ratings for SAFM ( Stability, Momentum, and Sentiment).
VRTX shares were trading at $283.60 per share on Thursday afternoon, up $3.25 (+1.16%). Year-to-date, VRTX has gained 29.14%, versus a -19.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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