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2 Missed Growth Opportunities as the Fed Raises Rates by Half a Point

You’d think that when we’ve been talking about a 50bp hike for weeks now, the market would be able to absorb the news with a bit of equanimity. But that’s just not happening. The Fed’s hawkish tone, its determination to stick with a 2% inflation target and the acceptance of unemployment rising from the current level of 3.7% to 4.6% have turned out to be too much for the market, which is going belly up temporarily.

Interest rates have jumped 4.25% this year and current expectations are for their further increase to 5% in 2023 before dropping back to 4.1% in 2024. These are, of course, rough estimates and there are many factors in play here.

Globalization is a part of it, supply chains are a part of it and geopolitical factors are now also a part of it. National security and the location of chipmaking are also playing into it. A 2% inflation target may be too ambitious, all things considered, so there just may be a reprieve somewhere down the line. But it will mean that rates will also remain elevated for years ahead. And there will be implications for rate-dependent sectors and stocks.

The Fed sounds definitively pessimistic right now. They’re expecting just 0.5% GDP growth next year. But as the wise investor knows already, every downturn is an opportunity to buy in. So here, I’ve picked a couple of stocks that investors appear to be missing out on. Let’s get some details-

Sprinklr, Inc. CXM

Sprinklr is a technology services provider focusing on customer experience management. The company’s Customer Experience Management platform enables clients to analyze unstructured customer experience data at all stages of the customer journey and across traditional and modern communication channels. Its products help clients plan, create, publish, optimize and analyze their organic/owned marketing content; listen to, triage, engage and analyze conversations on social channels; and listen to, route, resolve and analyze customer service issues.

Zacks #2 (Buy) ranked Sprinklr shares have been beaten down 44.0% this year, which is far greater than the S&P 500’s 17.5% decline. Consequently, the shares are now trading at 3.76X forward sales, a 24.0% discount to their median level over the past year.

However, the company’s performance has been great. Sprinklr has topped the Zacks Consensus Estimate in each of the last four quarters at an average rate of 102.8%. The company has grown revenue steadily in every quarter since 2020 when it began trading. Total revenue has grown nearly 69% during this time. And losses have also been declining through this period. Analysts currently expect the company to generate a small loss in the year ending January 2023 and turn profitable in the following year.

Revenue growth expectations support this view. After growing 25.0% in the current year, analysts are projecting another 14.9% growth in 2024. From a loss of 24 cents in 2022, the company is expected to generate a 4 cent loss in 2023 and a 9 cent profit the following year. That’s 83.3% growth for this year and 320.8% growth for 2024.

Investors appear to be missing an opportunity here as they’ve dumped these shares along with many other riskier tech names.

Midwest Holding Inc. MDWT

Midwest Holding is a financial services company offering life and annuity insurance in the U.S. The company has multi-year guaranteed and fixed indexed annuity products through independent distributors comprising independent marketing organizations. It also provides asset management services to third-party insurers and reinsurers; and other services, including policy administration services.

The rising rate environment is generally positive for insurers as market uncertainties push people toward investments with stable returns. The increased focus on distribution and pricing is also paying off as Midwest is seeing strong business trends. Its investment portfolio is also doing well.

Zacks #1 (Strong Buy) ranked Midwest has still not eclipsed the surge in business during the March quarter of 2020 when the pandemic first hit, but its revenues have surged more than 350% from the plunge in the June 2020 quarter. While business has fluctuated in some quarters, profitability has been relatively stable and growing since then.

There is only one analyst providing estimates, so you might consider taking cautiously the current projections of 87.2% revenue growth and 304.0% earnings growth for 2022, or the 39.7% revenue growth and 16.1% earnings growth for 2023. However, its worth noting that Midwest has solidly beaten the analyst’s estimates in the last two quarters, for a four-quarter positive surprise of 196.0%.

The shares are clearly undervalued on the P/S basis. They are currently trading at 0.76X, which in itself shows that investors are discounting its potential sales. But the multiple is also more than 27% off the median value over the past year, indicating that it is also undervalued relative to its own performance over the past year.

The shares are down 28.7% year to date, as investors appear to have lost steam after accumulating a few shares over the last quarter or so. But the valuation clearly shows that they are missing an opportunity.

Price Performance Year-to-Date

Zacks Investment Research
Zacks Investment Research

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