The recent bank failures causing broader financial turmoil and uncertainty about the Fed's next move, as it weighs strong economic data against jittery capital markets, have induced immense volatility in the stock market lately. However, it could be wise to buy fundamentally sound stocks Marathon Petroleum (MPC), Extreme Networks (EXTR), and Celestica (CLS), which have significant upside potential in 2023. Read on….
Despite the Fed's consistent efforts over the past year, recent economic data still points to strong wage and price pressures, strengthening the case for further rate hikes. However, the recent bank failures complicate the Fed's bumpy path to control stubborn inflation.
Regardless of uncertain macroeconomic conditions, one could consider investing in quality stocks Marathon Petroleum Corporation (MPC), Extreme Networks, Inc. (EXTR), and Celestica Inc. (CLS), which have plenty of room to run this year.
Before discussing why these stocks could survive the uncertainties and emerge as winners, let's discuss what keeps investors worried.
The Consumer Price Index (CPI) rose 0.4% month-over-month and 6% year-over-year in February. Both readings were in line with Dow Jones estimates. However, the monthly core inflation came in higher than expected at 0.5% month-over-month and 5.5% year-over-year, indicating that inflation remains persistently high. Despite the Fed's best efforts over the past year, inflation remains far above its target of 2%.
Furthermore, the employment market continues to remain strong. Nonfarm payrolls increased by 311,000 in February, surpassing the 225,000 Dow Jones estimate. Recent upbeat economic data indicates that the Fed may need to raise interest rates aggressively to temper stubborn inflation.
However, the Fed faces a tough decision on rate increase with new worries about bank failures. Amid the banking industry turbulence, some investors anticipate that the Fed will pause the rate hike for now, while others still expect a rate increase by a quarter percentage point this week.
"Financial crises create demand destruction. Banks reduce credit availability. Consumers hold off large purchases," said former Boston Fed President Eric Rosengren on Twitter. "Interest rates should pause until the degree of demand destruction can be evaluated," he added.
On the other hand, Michael Feroli, chief economist at JPMorgan Chase, said, "A pause now would send the wrong signal about the seriousness of the Fed's inflation resolve." According to CME Group data, investors assigned more than 75% probability of a 25-basis-point hike, taking the fed funds rate to a 4.75%-5% range.
The recent crisis in the banking sector and concerns over the Fed's forthcoming rate hike have dampened investor sentiment lately. With market volatility expected to persist, quality stocks V, MRK, and CRM could be solid buys with significant upside potential over the next 12 months.
Let's have a closer look at the featured stocks:
Marathon Petroleum Corporation (MPC)
MPC operates as an integrated downstream energy company in the United States. The company operates through two segments: Refining & Marketing; and Midstream.
On March 8, 2023, MPC announced the acquisition of a 49.9% interest in LF Bioenergy, an emerging producer of Renewable Natural Gas (RNG) in the United States, from Cresta Fund Management for $50 million. This acquisition might create an opportunity for further integration and advances MPC's goal to lower the carbon intensity of its operations and product offerings.
For the fourth quarter that ended December 31, 2022, MPC's total revenues and other income increased 12.6% year-over-year to $40.09 billion. Its income from continuing operations was $4.74 billion, an increase of 166.5% year-over-year. Also, the company's adjusted EBITDA rose 107.6% from the year-ago value to $5.80 billion.
Furthermore, the company's adjusted net income increased 291.9% year-over-year to $3.11 billion, while its adjusted EPS came in at $6.65, up 411.5% year-over-year.
In terms of forward non-GAAP P/E, MPC is trading at 6.30x, 18.9% lower than the industry average of 7.76x. The stock's forward EV/Sales multiple of 0.55 is 67.2% lower than the industry average of 1.68. Moreover, its forward Price/Sales of 0.39x is 67.5% lower than the industry average of 1.19x.
Analysts expect MPC's EPS for the first quarter (ending March 2023) to increase 279.2% year-over-year to $5.50. Also, the company has surpassed the revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Shares of MPC have gained 29.9% over the past six months and 57.9% over the past year to close the last trading session at $126.25. Also, the stock is currently trading above its 50-day and 200-day moving averages of $125.02 and $108.51, respectively, indicating an uptrend.
MPC's POWR Ratings reflect this promising outlook. The stock has an overall A rating, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MPC has an A grade for Momentum and Quality and a B for Growth and Sentiment.
In the 90-stock B-rated Energy – Oil & Gas industry, it is ranked #1. Click here to see additional POWR Ratings for MPC for Value and Stability.
Extreme Networks, Inc. (EXTR)
EXTR offers software-driven networking solutions globally. The company designs, develops, and manufactures wired and wireless network infrastructure equipment. It also develops software for network management, policy, analytics, security, and access controls.
On February 16, 2023, EXTR announced the completion of Wi-Fi 6 network deployments at five NASCAR racetracks, including Darlington Raceway, Daytona International Speedway, Martinsville Speedway, Richmond Raceway, and Talladega Superspeedway.
These five NASCAR speedways now deliver high-capacity Wi-Fi to up to 125,000 people simultaneously, improving Raceday experiences and helping the company's growth.
On February 8, EXTR announced the integration of network fabric capabilities into its ExtremeCloud™ SD-WAN platform, allowing customers to securely connect diverse environments, including data centers, campuses, and branch sites, from a single platform.
Additional enhancements are automated workflows as part of a simplified user interface and experience (UI/UX) and improved control for superior application performance. This reflects the continued optimization of the company's portfolio.
EXTR's total revenue increased 13.3% year-over-year to $318.3 million in the second quarter that ended December 31, 2022. The company's gross profit grew 14.4% from the prior-year period to $181.66 million. In addition, its non-GAAP rose 28.5% year-over-year to $36.50 million, while its non-GAAP net income per share came in at $0.27, up 28.6% year-over-year.
EXTR's forward non-GAAP P/E of 17.45x is 14.3% lower than the industry average of 20.35x. Likewise, its forward EV/Sales multiple of 1.91 is 28.1% lower than the industry average of 2.66.
The consensus revenue estimate of $1.27 billion for the fiscal year (ending June 2023) indicates a 14% increase year-over-year. The company's EPS for the current year is expected to grow 34.1% year-over-year to $1.03. Moreover, it topped the consensus EPS estimates in all four trailing quarters.
In addition, the company's revenue and EPS for fiscal 2024 are expected to increase 13.4% and 40.1% from the previous year to $1.44 billion and $1.45, respectively.
Over the past six months, the stock has gained 37.6% and 43.9% over the past year to close the last trading session at $18.02. It is currently trading above its 200-day moving average of $15.39, indicating an uptrend.
EXTR's solid prospects are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
EXTR has an A grade for Growth and Quality and a B for Momentum.
The stock is ranked #2 of 49 in the B-rated Technology-Communication/Networking industry.
In addition to the POWR Ratings I've highlighted, you can see EXTR's Sentiment, Stability, and Value ratings here.
Celestica Inc. (CLS)
Headquartered in Toronto, Canada, CLS provides hardware platform and supply chain solutions in North America, Europe, and Asia. The company's segments are Advanced Technology Solutions; and Connectivity & Cloud Solutions. It serves aerospace and defense, health tech, industrial, original equipment manufacturers (OEMs), and communications and enterprise markets.
On March 14, 2023, CLS announced Onex's intention to convert its multiple voting shares (MVS) in Celestica to subordinate voting shares (SVS) on a one-for-one basis in a nearly six months period.
Rob Mionis, CLS' President and CEO, said, "In 2022, Celestica posted its highest annual non-IFRS operating margin and highest non-IFRS adjusted EPS in the company's history. Celestica is a much different company than it was just five years ago and we view this as the next logical phase in the company's transformation."
On December 8, 2022, CLS announced the Toronto Stock Exchange (TSX) acceptance of the Normal Course Issuer Bid. Under the Bid, CLS repurchased on the open market in December and completed a purchase of up to 8 million subordinate voting shares. The company considers the purchases to be in its best interests and wise use of funds.
Also, on October 18, CLS launched the DS1000 high-performance Gigabit Ethernet Layer 3 switch. It utilizes OCP's ONIE, a powerful interface to the platform hardware, and is both robust and compact, making it flexible for the data center and the Edge. This latest addition to CLS' Hardware Platform Technologies (HPS) portfolio should bode well for the company.
For the fourth quarter that ended December 31, 2022, CLS' revenue increased 35.1% year-over-year to $2.04 billion. Its adjusted gross profit grew 31.6% year-over-year to $191.80 million. In addition, the company's adjusted EBIAT grew 45.1% from the year-ago value to $107.80 million.
Furthermore, CLS' adjusted net earnings increased 23.9% year-over-year to $68.40 million, and its adjusted EPS came in at $0.56, up 27.3% year-over-year.
In terms of forward non-GAAP P/E, CLS is currently trading at 6.04x, 70.3% lower than the industry average of 20.35x. The stock's forward EV/Sales multiple of 0.25 is 90.7% lower than the industry average of 2.66x. Also, its forward Price/Sales of 0.20x compares with the 2.60x industry average.
Analysts expect CLS' revenue to increase 4.9% year-over-year to $7.60 billion for the fiscal year ending December 2023. The company's EPS for the ongoing year is expected to grow 6.6% year-over-year to $2.03. Moreover, CLS has an impressive earnings surprise history as it surpassed the consensus EPS in all four trailing quarters.
Shares of CLS have gained 33.6% over the past six months to close the last trading session at $12.24. The stock is currently trading above its 200-day moving average of $10.99, indicating an uptrend.
CLS' POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and Momentum. It also has a B grade for Momentum and Sentiment. Within the Technology – Services industry, it has topped among 81 stocks.
To access additional POWR Ratings for Quality and Stability for CLS, click here.
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MPC shares were trading at $128.92 per share on Tuesday morning, up $2.67 (+2.11%). Year-to-date, MPC has gained 11.42%, versus a 3.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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