A good portion of the steep drop in the markets last year was due to multiple compression thanks to fast rising interest rates as the Federal Reserve ratcheted up its Fed Funds rates to combat inflation. This compression particularly impacted growth stocks, which is one reason the Nasdaq dropped by approximately one third, while the S&P 500 managed to hold its decline to around 20% for the year.
As rates stabilize a bit, the next leg down for equities in my view will be triggered by negative earnings growth thanks in a large part to higher rates. With just over one half of S&P 500 companies reporting fourth quarter results, earnings collectively are down 2.8% from the same period a year ago. This is slightly better than the consensus at the beginning of the year.
This is likely the start of a negative year for earnings growth when 2023 goes into the books. This is one reason we are seeing significant and widespread layoff announcements across sectors of the economy, particularly in technology. Companies are increasingly desperate to maintain margins and buck up earnings in an increasingly uncertain economy.
Today I’m highlighting a couple of companies that managed to produce solid results in a difficult fourth quarter and whose stocks are still reasonably valued.
Let’s start with OneMain Holdings (OMF) , a holding in my portfolio I added to significantly in the back half of 2022 as equities swooned. This company originates, underwrites, and services personal loans to near prime customers secured by automobiles, other titled collateral, as well as unsecured debt. It also offers insurance and credit cards and has a significant digital footprint.
Despite a challenged customer, OneMain posted solid fourth quarter numbers on Tuesday. The company’s sales were in line with expectations and the bottom line beat the consensus by a nickel a share. Credit performance stabilized late in the year and the company boosted its dividend payout by just over 5% as well. Even with a 10% rally in the shares yesterday, the stock is more than reasonably valued at seven times earnings with a now north of 9% dividend yield.
Extreme Networks (EXTR) is one of the few tech names that has significantly exceeded expectations this quarter and I managed to increase my stake in this holding after the stock suffered a knee jerk 20% selloff after it announced its CFO was leaving in January.
The equity has since recovered almost all of that selloff. The company posted quarterly results two weeks ago. Earnings per share rose over 28% on a year-over-year basis to 27 cents a share as revenues were up over 13%. Both top and bottom line numbers easily exceeded the consensus.
Gross operating margins gained 100bps to 7.4%. Management now sees FY2023 revenue growth at the top end of its previous 10% to 15% guidance. The company’s fiscal year ends on June 30 it should be noted. Similar growth is expected in FY2024 as leadership has seen noticeable improvement within its supply chain. EXTR goes for approximately 13.5 times FY2024’s estimated earnings. Not a screaming bargain, but more than reasonable given the company’s growth prospects.
