With inflation remaining well above the Federal Reserve’s target of 2%, the Fed is unlikely to end its restrictive monetary policy this year. With the Fed expected to keep raising interest rates, it could be worth buying discounted stocks ARC Document Solutions, Inc. (ARC), CPI Aerostructures, Inc. (CVU), and Rave Restaurant Group, Inc. (RAVE).

Value stocks have historically outperformed growth stocks when interest rates are high.

Before analyzing these stocks’ cheap valuation and strong fundamentals, let’s see which factors are currently plaguing investor sentiment.

Annual inflation fell for the seventh straight month in January, but it showed a monthly rise of 0.5%, marking the fastest monthly gain since October 2021. Moreover, the Fed’s closely tracked inflation metric, the Personal Consumption Expenditure (PCE), showed a 0.6% sequential and 4.7% year-over-year rise in January.

Federal Reserve Chairman Jerome Powell has cautioned that interest rates are likely to head higher than central bank policymakers previously anticipated as inflation and the labor market remain strong. Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

The switch last month to a smaller quarter-percentage point increase could be short-lived if inflation data continues to run hot. This could keep the stock market volatile in the upcoming months.

Keeping in mind the market uncertainty, it could be strategic to invest in stocks that are currently trading at a discount to their peers. Investors’ interest in value stocks is evident from the Vanguard Value ETF’s (VTV) 1.7% return over the past six months.

Let’s find out why investing in fundamentally strong value stocks ARC, CVU, and RAVE could be promising.

ARC Document Solutions, Inc. (ARC)

ARC, a digital printing company, provides digital printing and document-related services in the United States. It provides managed print services, and cloud-based document management software, and other digital hosting services.

The company also provides professional services and software services to re-produce and distribute documents of different formats, and specialized graphic color printing.

In terms of forward non-GAAP P/E, ARC’s 10.29x is 40.8% lower than the 17.39x industry average. Its forward P/S of 0.48x is 65.7% lower than the 1.38x industry average. Also, the stock’s 4.50x forward EV/EBITDA is 59% lower than the 10.97x industry average.

In terms of the trailing-12-month gross profit margin, ARC’s 33.56% is 15.6% higher than the 29.03% industry average. Likewise, its 9.84% trailing-12-month levered FCF margin is 161.2% higher than the industry average of 3.77%.

For the fiscal fourth quarter ended December 31, 2022, ARC’s gross profit increased 4.1% year-over-year to $23.19 million. Its net cash provided by operating activities increased 42.5% year-over-year to $10.83 million. The company’s net income attributable to ARC came in at $2.12 million. In addition, its adjusted EPS came in at $0.06, representing no change from the prior-year quarter.

Analysts expect ARC’s EPS and revenue for fiscal 2023 to increase 10.7% and 1.3% year-over-year to $0.31 and $289.60 million, respectively. Over the past six months, the stock has gained 8.9% to close the last trading session at $3.19.

ARC’s POWR Ratings reflect this positive outlook. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It is ranked first out of 40 stocks in the B-rated Outsourcing – Business Services industry. In addition, it has an A grade for Value, Sentiment, and Quality.

To see the other ratings of ARC for Growth, Momentum, and Stability, click here.

CPI Aerostructures, Inc. (CVU)

CVU engages in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in the commercial and defense markets. The company also offers aerosystems and supplies parts for maintenance, repair, and overhaul (MRO), as well as kitting contracts.

In terms of trailing-12-month EV/Sales, CVU’s 0.84x is 51.2% lower than the 1.72x industry average. Its trailing-12-month P/S of 0.53x is 60.9% lower than the 1.37x industry average.

In terms of the trailing-12-month levered FCF margin, CVU’s 5.03% is 33.4% higher than the 3.77% industry average. Likewise, its 1.64x trailing-12-month asset turnover ratio is 106.7% higher than the industry average of 0.79x.

On November 30, 2022, CVU announced its pricing agreement with Collins Aerospace to provide highly integrated airborne pod structures in support of Collins’ MS-110 Multispectral Airborne Reconnaissance System.

CVU’s CEO and president, Dorith Hakim, said, “This three-year deal paves the way for the program to be successful for CPI Aero over the next several years. Our achievements on the DB-110 pod laid the foundation for us to pursue more complex and integrated structures. It is those very structures that comprise our aerosystems segment – the fastest growing part of our business.”

CVU’s gross profit increased 45.9% year-over-year to $5.33 million for the third quarter that ended September 30, 2022. Its income from operations increased 191.6% year-over-year to $2.58 million. Additionally, its net income and EPS came in at $1.86 million and $0.15, respectively.

Over the past year, the stock has gained 39.1% to close the last trading session at $3.70.

CVU’s strong fundamentals are reflected in its POWR Ratings. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. In addition, it has a B grade for Value, Sentiment, and Quality. Within the Air/Defense Services industry, it is ranked #2 of 73 stocks.

Click here to see the additional POWR Ratings of CVU for Growth, Momentum, and Stability.

Rave Restaurant Group, Inc. (RAVE)

RAVE operates and franchises pizza buffet, delivery/carry-out, and express restaurants under the Pizza Inn trademark worldwide. It operates through three segments: Pizza Inn Franchising; Pie Five Franchising; and Company-Owned Restaurants.

In terms of trailing-12-month EV/Sales, RAVE’s 1.72x is 42.9% lower than the 1.20x industry average. Its trailing-12-month EV/EBITDA of 9.62x is 5.2% lower than the 10.15x industry average. Likewise, its trailing-12-month P/S of 2.29x is 155.4% lower than the 0.89x industry average.

In terms of the trailing-12-month net income margin, RAVE’s 70.13% is significantly higher than the 4.62% industry average. Likewise, its 100.31% trailing-12-month Return on Common Equity is 744.9% higher than the industry average of 11.87%.

For the fiscal second quarter that ended December 25, 2022, RAVE’s revenues increased 6.3% year-over-year to $2.87 million. The company’s adjusted EBITDA increased 8.8% year-over-year to $615K. Additionally, its net income and EPS came in at $348K and $0.02, respectively.

The stock has gained 57.9% over the past nine months to close the last trading session at $1.50.

Its no surprise that RAVE has an overall rating of A, which translates to Strong Buy. It is ranked #4 out of 46 stocks in the B-rated Restaurants industry. It has an A grade for Quality and a B for Value and Sentiment.

We have also given RAVE grades for Growth, Momentum, and Stability. Get all RAVE ratings here.

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ARC shares were unchanged in premarket trading Thursday. Year-to-date, ARC has gained 10.48%, versus a 4.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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