ChatGPT took the tech world by storm, contributing to the significant outperformance of technology stocks this year. However, the Fed is not yet done raising the interest rate, as inflation still remains far from its target of 2%.
As companies are preparing to publish their latest earnings report, investors are assessing the effects of high inflation and interest rates on the economy.
While I think investing in quality tech stock Science Applications International Corporation (SAIC) is ideal ahead of its earnings release, Digital Ally, Inc. (DGLY) might be best avoided.
Despite a banking crisis, cryptocurrency meltdowns, and economic uncertainty, US stocks gained during the first quarter of 2023.
Coming to the tech industry, the tech-heavy Nasdaq Composite made a remarkable resurgence in the first quarter of 2023, soaring nearly 17% in the quarter, the best quarterly gain since the fourth quarter of 2020.
The technology industry is a catalyst for change and innovation, and the competition among tech companies to be at the top should boost the industry’s growth. Despite ongoing concerns about the global economy, enterprise technology spending is expected to remain stable, with its projection to increase 2.4% year-over-year to $4.5 trillion this year.
However, the nine rate hikes delivered by the central bank since March 2022 have pushed the benchmark overnight interest rate from the near-zero level to the current 4.75%-5.00% range. The surge in the interest rates negatively affected the tech industry’s performance last year and might blow a hard hit to the corporate earnings this year as well.
Stock to Buy:
Science Applications International Corporation (SAIC)
SAIC provides technical, engineering, and enterprise information technology services. The company serves the U.S. military and various intelligence community agencies, as well as U.S. federal civilian agencies.
On March 23, SAIC announced that it had signed a definitive agreement to sell its logistics and supply chain management business to ASRC Federal Holding Company, LLC (ASRC Federal), a subsidiary of Arctic Slope Regional Corporation, for $350 million in cash.
Nazzic Keene, Chief Executive Officer at SAIC, said, “Today’s announcement represents a milestone in SAIC’s priority to shape our portfolio and advance our strategy.”
SAIC’s trailing-12-month asset turnover ratio of 1.30x is 63% higher than the 0.80x industry average. Its trailing-12-month ROTC of 7.30% is 5% higher than the 7% industry average.
On March 29, SAIC announced a quarterly dividend of $0.37 per share of common stock payable on April 28.
SAIC pays $1.48 annually as dividends. This translates to a yield of 1.38% at the current price, compared to the 4-year average dividend yield of 1.67%. Its dividend payments have grown at a CAGR of 3.6% over the past five years. Also, it has paid dividends for eight years.
SAIC’s revenue increased marginally year-over-year to $1.91 billion during the third quarter that ended October 28, 2022. Its adjusted operating income grew 7.9% from the year-ago quarter to $136 million. Also, the company’s adjusted EPS increased 2.7% year-over-year to $1.90.
Analysts expect SAIC’s revenue for the fourth fiscal quarter that ended January 2023 to come in at $1.86 billion, indicating a 4.5% year-over-year growth. The company’s EPS is expected to increase 10.2% year-over-year to $1.65.
The stock has gained 21.5% over the past six months to close the last trading session at $107.46. It has a 24-month beta of 0.55.
SAIC’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SAIC also has a B grade in Growth and Value. It is ranked #6 out of 80 stocks in the Technology - Services industry.
For additional ratings for SAIC’s Sentiment, Stability, Quality, and Momentum, click here.
Stock to Sell:
Digital Ally, Inc. (DGLY)
DGLY produces and sells digital video imaging, storage, disinfectant, and related safety products for law enforcement, security, and commercial applications internationally. It operates through Video Solutions; Revenue Cycle Management; and Ticketing segments.
Its trailing-12-month asset turnover ratio of 0.50x is 17.7% lower than the 0.60x industry average. Its trailing-12-month gross profit margin of 16.16% is 67.9% lower than the 50.35% industry average.
DGLY’s gross profit declined 57.4% year-over-year to $595,500 during the third quarter that ended September 30, 2022. Its net loss attributable to common shareholders came in at $1.90 million compared to a net income of $8.07 million in the previous-year quarter.
Also, its net loss per share came in at $0.04, compared to net income per share of $0.16 in the previous-year quarter.
Street expects DGLY’s EPS to come in at a negative $8.10 for the current fiscal year 2023. Its revenue is expected to come in at $46.54 million for the same year. The company has failed to surpass the revenue estimates in three of the trailing four quarters, which is disappointing.
The stock has declined 78.8% over the past year to close its last trading session at $4.62. Its 24-month beta is 1.24.
DGLY’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.
DGLY has an F grade in Momentum, Growth, and Quality and a D in Stability. It is ranked #20 out of 22 stocks in the D-rated Software - Security industry.
Beyond the POWR Rating grades we’ve stated above, DGLY’s rating for Sentiment and Value can be seen here.
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SAIC shares were trading at $110.30 per share on Monday morning, up $2.84 (+2.64%). Year-to-date, SAIC has declined -0.22%, versus a 7.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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