2 Value Stock Picks Emerge as Saas-SOX Correlation Persists
Here is a pair of lesser-known names that are delivering for investors.
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Hyperscalers Meta Platforms (META) and Microsoft (MSFT) went in different directions in trading Thursday after both tech giants reported quarterly results after the bell on Wednesday.
Meta dropped 8% during the day as its soaring capex cost cut free cash flow by just over 90% on a year-over-year basis, causing the company to badly miss bottom-line expectations. Microsoft rose in the mid-teens after impressive growth from Azure and solid progress growing Co-Pilot’s user base.
The Philadelphia Semiconductor Index (SOX) gained 8% in a bounce-back rally. The index had dropped by a quarter as of Wednesday’s close from its June 22 high. Time will tell whether this is just a bear market rally or the start of the next leg up. I have noticed a significant correlation developing between the trading in the SOX and SaaS concerns recently. When the index rallies, SaaS names drop. When it falls, stocks like Adobe (ADBE) and Salesforce, Inc. (CRM) move higher.
There has been a slew of earnings reports coming across the wire this week. In today’s column, I highlight a couple of lesser-known names that delivered for investors last quarter.
We start with a SaaS concern named Blackbaud, Inc. (BLKB) that rose 17% Wednesday after posting quarterly results and then pulled back 6% in trading Thursday as the (SOX) surged higher.
Blackbaud offers AI-powered solutions for fundraising, engagement and online education. The company has been around since the early 1980s. Growth is nothing to write home about in the low single digits. That said, this feels more than priced in at under eight times forward earnings. Blackbaud had a nice bottom-line beat in the quarter and saw a big rise in free and operating cash flow. And that is really the story around this name. The stock has an approximately market cap of $1.8 billion with $850 million left on an existing stock buyback authorization. Management has put out cash flow guidance of between $280 million to $290 million for this fiscal year.
GE HealthCare Technologies Inc. (GEHC) is another value pick expecting low single-digit organic revenue growth and is priced accordingly. The company easily beat the top- and bottom-line consensus when it posted its second quarter results on Wednesday, powering a nice rally in the stock. Net income margins rose nicely as did the firm’s order backlog. Its book-to-bill ratio moved up to 1.15x, exceeding expectations of 1.06.
The company has a history going back to the 19th century and was spun off from General Electric (GE) a few years back. The firm provides advanced medical technology, pharmaceutical diagnostics, AI enhanced imaging and software solutions to hospitals and other medical facilities. This is not a sexy pick but a defensive one that should hold up well in a market downturn. Earnings should grow in the high-single digits in the coming years, making the valuation of around 14 times forward earnings reasonable. At these prices, investors are also getting a free cash flow yield of around 5%.
At the time of publication, Jensen was long ADBE, BLKB, CRM and GEHC.
