A sharp slowdown in US bank lending after the failure of the major banks, coupled with the probability of another rate hike and sticky inflation, has created recessionary fears. However, I think quality growth stocks Ziff Davis, Inc. (ZD), Xerox Holdings Corporation (XRX), and Yext, Inc. (YEXT) might be solid buys.
The Fed has spent the past 15 months locked in an aggressive war against inflation, raising interest rates above 5% in an attempt to get price increases back down to a more normal pace.
While Fed officials announced that they were skipping a rate increase in June last week, giving themselves more time to see how the already enacted changes are playing out across the economy, Deutsche Bank predicts at least one more 25-basis-point increase to the Fed funds rate in July.
On the other hand, economic activity seems to be holding up. US economic growth in the first three months of the year was better than previously estimated. “The argument that we're definitely going into a recession is dubious,” Blackrock’s CIO of fixed income Rick Rieder said. “The question is, can inflation come down enough to hit the target, and that’s the one that is not clear at this point.”
Let's take a look at the above-mentioned stocks:
Ziff Davis, Inc. (ZD)
ZD provides internet information and services in the United States, Canada, Ireland, and internationally. It operates in two segments, Digital Media; and Cybersecurity and Martech.
ZD’s revenue grew at a CAGR of 3.9% over the past five years. In addition, its EBITDA grew at a CAGR of 1.6% over the past five years.
ZD’s trailing-12-month EBITDA margin of 32.42% is 79.6% higher than the 18.05% industry average. Its trailing-12-month gross profit margin of 85.89% is 72.6% higher than the 49.76% industry average.
ZD’s total revenues came in at $307.14 million in the fiscal first quarter that ended March 31, 2023, and its total operating costs and expenses decreased 1.3% year-over-year to $280.83 million. It reported an adjusted EPS of $1.23. Also, it reported an adjusted EBITDA of $94.33 million.
ZD’s revenue is expected to come in at $324.40 million for the fiscal second quarter ending June 2023. The company’s EPS for the same quarter is expected to be $2.16. Additionally, the stock has topped consensus EPS estimates in three of the trailing four quarters, which is impressive.
ZD has gained 5.3% over the past month to close its last trading session at $65.91.
ZD’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
ZD also has a B grade for Growth and Quality. It is ranked #3 out of 20 stocks in the Advertising industry.
For additional ratings for ZD’s Value, Momentum, Sentiment, and Stability, click here.
Xerox Holdings Corporation (XRX)
XRX is a workplace technology company that designs, develops, and sells document management systems and solutions in the Americas, Europe, the Middle East, Africa, India, and internationally.
On May 15, 2023, XRX launched a new advertising campaign, "We Make Work, Work." The company’s most significant brand and demand generation initiative in recent history, the new campaign demonstrates Xerox’s deep understanding of its clients’ pain points and the workflow solutions they require to succeed in today’s dynamic hybrid workplace.
On April 24, XRX announced the donation of the Palo Alto Research Center (PARC) to SRI International, a nonprofit research institute behind some of the world’s most impactful deep tech advancements.
The move enables XRX to focus entirely on delivering new innovations around its own print, digital, and IT service offerings, while allowing the PARC team to join a leading research institution to usher in its next evolution of growth.
XRX’s revenue grew at a CAGR of 2.3% over the past year. In addition, its normalized net income grew at a CAGR of 53.5% over the past year.
XRX’s trailing-12-month EBIT margin of 4.7% is 10% higher than the 4.31% industry average. Its trailing-12-month return on total capital of 2.63% is 57.8% higher than the 1.66% industry average.
On May 25, XRX announced a quarterly dividend of $0.25, payable on July 31, 2023.
XRX pays $1 annually as dividends which translates to a yield of 6.91% at the current price. Its 4-year average dividend yield is 5.32%. Its dividend payouts have grown at 4.2% CAGR over the past three years.
XRX’s revenue increased 2.8% year-over-year to $1.72 billion in the fiscal first quarter, which ended March 31, 2023. Its total profit for the period came in at $118 million, compared to a loss of $3 million in the previous-year quarter. Also, its earnings per share came in at $0.43, compared to negative $0.38 in the previous-year quarter.
XRX’s revenue is expected to rise marginally year-over-year to $1.76 billion for the fiscal second quarter ending June 2023. The company’s EPS for the same quarter is expected to increase 134.6% year-over-year to $0.31.
The stock has gained marginally intra-day to close the last trading session at $14.51.
XRX’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
XRX also has an A grade for Growth and a B in Value and Quality. It is ranked #15 out of 81 stocks in the Technology - Services industry.
Click here to access additional POWR Ratings for XRX’s Value, Stability, Momentum, and Sentiment.
Yext, Inc. (YEXT)
YEXT organizes business facts to provide answers to consumer questions in North America and internationally.
YEXT’s revenue grew at a CAGR of 16.9% over the past five years. In addition, its total assets grew at a CAGR of 21% over the past five years.
YEXT’s trailing-12-month asset turnover ratio of 0.77x is 26.6% higher than the 0.61x industry average. Its trailing-12-month gross profit margin of 74.95% is 52.2% higher than the 49.24% industry average.
During the fiscal first quarter that ended April 30, 2023, YEXT’s revenue increased marginally year-over-year to $99.45 million. The company’s non-GAAP net income came in at $10.60 million, compared to a loss of $7.75 million in the previous-year quarter. Also, non-GAAP net income per share attributable to common shareholders came in at $0.09, compared to negative $0.06 in the previous-year quarter.
Street expected EPS to be $0.06 for the fiscal second quarter ending July 2023. The company’s revenue estimate of $102 million for the current quarter indicates a 1.1% improvement from the prior-year quarter. Additionally, YEXT has topped consensus revenue and EPS estimates in three of the trailing four quarters.
The stock has gained 164.5% over the past nine months, closing the last trading session at $11.92.
It is no surprise that YEXT has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system.
It has an A for Quality and a B in Sentiment and Growth. YEXT is ranked #4 out of 52 stocks in the Software - Business industry.
In addition to the POWR ratings above, we have also rated YEXT for Value, Stability, and Momentum. Get all the YEXT ratings here.
What To Do Next?
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ZD shares were trading at $65.71 per share on Thursday afternoon, down $0.20 (-0.30%). Year-to-date, ZD has declined -16.93%, versus a 14.62% 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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