2022 was a rough year for the stock market and the economy. However, signs of cooling inflation, a less hawkish Fed, recent strong economic data, and easing bank system fears have put the stock market on a recovery path this year, with a few quality stocks leading the way.
As the stock market recovers, investor sentiment turns positive for M/I Homes, Inc. (MHO), China Automotive Systems, Inc. (CAAS), and Bassett Furniture Industries, Incorporated (BSET). These stocks could be ideal investments for significant returns.
2022 was a painful year for the stock market, and all three major market indices suffered their worst losses since 2008, with the benchmark S&P 500 declining more than 19%, while the Nasdaq and the Dow tumbled 33.1% and 8.8%, respectively. Multi-decade high inflation, monetary policy tightening, geopolitical concerns, and volatile economic data weighed on investor sentiment throughout the year.
While a volatile equity market environment persists this year, stocks have recovered some of the ground lost earlier. The S&P 500 gained nearly 5.6% year-to-date, while the Nasdaq Composite is up 13.3%.
Over time, inflation numbers have improved significantly. The Labor Department reported that the Consumer Price Index (CPI) increased 5% year-over-year in March, down from 6% in February and a peak of 9.1% last June. Moreover, annual inflation has dropped for the ninth consecutive month.
With the constant moderation in inflation, the Federal Reserve downshifted to smaller interest-rate increases. In late March, the Fed raised rates by 25 basis points (bps), taking the federal funds rate to a 4.75%-5% range. The decision was haunted by turmoil in the banking sector, which is potentially related to a higher interest rate environment.
To keep inflation on a sustained downward path to 2%, the central bank will likely increase interest rates by 25 bps at the May meeting, with a possible pause in view as lending slows.
Despite aggressive efforts from the Fed to cool off the economy, employees still have plenty of demand for workers. Payrolls rose by 236,000 in March, and the unemployment rate dropped to 3.5%. The economy added 472,000 jobs in January and 326,000 in February. While there are signs of a gradually cooling hiring trend, the labor market is still strong.
Furthermore, business activity climbed this month to nearly a 12-month high, boosted by stronger services and manufacturing. The S&P Global’s flash April composite purchasing managers index rose 1.2 points to 53.5, exceeding the expectations of economists surveyed by Bloomberg.
Recently, market sentiment is also improved by easing bank system fears. The failure of Silicon Valley Bank and other regional banks last month sparked worries about a financial crisis that could potentially harm the economy; however, the threat appears to be fading as governments stepped in to help stem withdrawals and offer stability to banking systems.
As the stock market appears to recover, it could be an excellent time to invest in quality stocks MHO, CAAS, and BSET for potential gains.
Let’s discuss the fundamentals of these stocks in detail:
M/I Homes, Inc. (MHO)
MHO operates as a builder of single-family homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Texas, North Carolina, and Tennessee. The company operates through three segments: Northern Homebuilding; Southern Homebuilding; and Financial Services. In addition, it designs, constructs, and sells single-family homes and attached townhomes to first-time, move-up, and luxury buyers.
On January 25, MHO commenced operations in the Fort Myers/Naples, Florida market and announced that Kevin Brown had been named Area President. The company’s existing operations in Orlando, Tampa, and Sarasota, Florida, have been successful for many years. And opening in Fort Myers/Naples would allow MHO to build upon that success as it expands along the Southwest coast of Florida.
In terms of forward non-GAAP P/E, MHO’s 5.76x is 57.6% lower than the 13.57x industry average. Also, the stock’s forward EV/EBIT multiple of 5.14 is 59.2% lower than the industry average of 12.60.
MHO’s total revenue increased 16.2% year-over-year to $1 billion in the first quarter that ended March 31, 2023. Its gross margin rose 10.1% from the year-ago value to $234.63 million. The company’s operating income was $134.59 million, up 9.5% year-over-year. Also, its adjusted EBITDA grew 8.7% from the prior-year period to $146.82 million.
In addition, the company’s net income increased 12.2% from the year-ago value to $193.07 million, and its earnings per share were $3.64, an increase of 15.2% year-over-year.
Analysts expect MHO’s revenue to increase 6.3% year-over-year to $3.67 billion for the fiscal year ending December 2024. The company’s EPS for the same period is expected to rise 10.1% from the previous year to $12.24. Moreover, MHO has an impressive earnings surprise history as it surpassed the consensus EPS estimates in all four trailing quarters.
The stock has gained 49.5% over the past six months and 43.2% over the past year to close the last trading session at $64.01. It is currently trading above its 50-day and 200-day moving averages of $60.30 and $49.26, respectively.
MHO’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
MHO has an A grade for Value, Sentiment, and Momentum. It topped among 24 stocks in the B-rated Homebuilders industry.
Click here to access the other ratings of MHO for Growth, Quality, and Stability.
China Automotive Systems, Inc. (CAAS)
Headquartered in Jingzhou, the People’s Republic of China, CAAS manufactures and sells automotive systems and components. It produces rack and pinion power steering gears for cars and light-duty vehicles; integral power steering gears for heavy-duty vehicles; power steering parts for light-duty vehicles; and sensor modules, among other systems and parts.
On December 12, 2022, CAAS introduced a new series of Electric Power Steering (EPS) systems for BYD Company Limited (BYDDF), China’s largest EV producer. After 18 months of preparation and close collaboration between both R&D teams, CAAS won design contracts for C-EPS, DP-EPS, and R-EPS from BYDDF for all its series of products.
Moreover, on November 29, CAAS announced a strategic partnership with BYDDF for future autonomous driving. CAAS’ Chairman, Mr. Hanlin Chen, said, “Together with our leadership in electric power steering systems, electric motors, and electric control software, we provide a total solution to empower leading OEMs like BYD to introduce state-of-the-art experiences to the marketplace.”
In terms of forward non-GAAP P/E, CAAS’ 9.06x is 33.2% lower than the 13.57x industry average. Likewise, its forward EV/EBITDA of 1.37x is 85.3% lower than the 9.29x industry average.
For the fiscal year that ended December 31, 2022, CAAS’ net product sales increased 6.3% year-over-year to $529.55 million, and its gross profit grew 15.7% year-over-year to $83.39 million. Also, the company’s operating income came in at $7.95 million, an increase of 44.1% year-over-year.
In addition, net income attributable to CAAS’ common shareholders was $21.18 million and $0.69 per share, up 91.7% and 91.7%, respectively.
The consensus revenue estimate of $593.11 million for the fiscal year 2024 reflects a 4.7% year-over-year growth. The consensus EPS estimate of $0.64 for the next year indicates a 33.3% increase from the previous year. In addition, CAAS has topped its consensus revenue estimates in three of the trailing four quarters.
Shares of CAAS have gained 5.3% over the past six months and 58.8% over the past year to close the last trading session at $4.35.
CAAS’ strong outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
CAAS has an A grade for Value and Sentiment. The stock has a B grade for Growth, Momentum, and Quality. It is ranked first among 46 stocks in the China industry. You can access all CAAS ratings here.
Bassett Furniture Industries, Incorporated (BSET)
BSET manufactures, markets, and retails home furnishings in the United States and internationally. It operates in two segments: Wholesale and Retail. In addition, the company provides warehousing services to customers in the furniture industry; and owns and leases retail store properties. It operates a network of more than 92 company-and licensee-owned stores.
In terms of forward non-GAAP P/E, BSET is currently trading at 11.93x, 12.1% lower than the industry average of 13.57x. Likewise, the stock’s forward EV/Sales and Price/Sales multiples of 0.28 and 0.29 are 65.3% and 64.9% lower than the industry averages of 1.10 and 0.83, respectively.
BSET’s retail sales of furniture and accessories increased 1.3% year-over-year to $107.70 million in the first quarter that ended February 25, 2023. Cash inflows from operating activities were $563,000. As of February 25, 2023, the company’s current assets and total assets stood at $183.75 million and $391.62 million, respectively.
Analysts expect BSET’s revenue and EPS for the fiscal year (ending November 2024) to increase 3.4% and 60.9% year-over-year to $450.53 million and $1.92, respectively. Over the past five days, the stock has plunged 5% to close the last trading session at $14.20.
BSET’s POWR Ratings reflect its promising 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 Sentiment and a B for Value and Quality. Within the 59-stock Home Improvement & Goods industry, it is ranked #2.
Beyond what we stated above, we also have BSET’s ratings for Growth, Stability, and Momentum. Get all BSET ratings here.
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REVISED: 2023 Stock Market Outlook >
MHO shares were unchanged in premarket trading Thursday. Year-to-date, MHO has gained 38.61%, versus a 6.14% 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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