With the data released by the Labor Department last week showing better-than-expected employment growth from a resilient economy during November, concerns of wage increases driving prices higher are rising. This may cause the inflation the Fed is trying so hard to tame to go out of control.

As a result, albeit slowly, the Fed could be more determined to go further with interest rate hikes, leading to decreased discretionary expenditure by consumers, increased borrowing costs, and margin compression for businesses.

In such a scenario, shares of fundamentally strong businesses belonging to sectors whose demand is immune to an economic slowdown seem ideal investments to cushion one’s portfolio. On the other hand, companies that experience cyclical demand are best avoided, given the foreseeable macroeconomic turbulence.

To that end, Microsoft Corporation (MSFT) and Eli Lilly & Co. (LLY) appear solid buys now. At the same time, Advanced Micro Devices, Inc. (AMD) is best given a wide berth until the macroeconomic environment sorts itself out.

Stocks to Buy:

Microsoft Corporation (MSFT)

Being one of the global technology giants, MSFT needs no introduction. The company operates through three segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.

On November 16, MSFT and Lockheed Martin Corporation (LMT) announced a landmark expansion of their partnership to help power the next generation of technology for the Department of Defense (DOD).

The agreement would span four critical areas: Classified Cloud Innovations; Artificial Intelligence/Machine Learning (AI/ML), Modeling and Simulation Capabilities; 5G.MIL Programs; and Digital Transformations. Both companies expect to infuse immersive experiences and other advanced commercial technologies into the most capable defense systems.

On November 14, MSFT announced the Microsoft Supply Chain Platform, which would help organizations maximize their supply chain data estate investment with an open approach. It would enable organizations to make the most of their existing investments to gain insights and act quickly.

Furthermore, MSFT declared a quarterly dividend of $0.68 per share in September, reflecting a 10% sequential increase. The dividend is payable on December 8, 2022. MSFT pays $2.72 per share annually as a dividend, representing a yield of 1.07% at the current price, better than the 4-year average dividend yield of 1.05%. The company raised its dividends for 18 consecutive years.

For the first quarter of the fiscal year 2023 ended September 30, MSFT’s total revenue increased 10.6% year-over-year to $50.12 billion, while its operating income grew 6.3% from the year-ago value to $21.52 billion.

Analysts expect MSFT’s revenue for the fiscal year ending June 2023 to come in at $212.95 billion, representing an increase of 7.4% year-over-year, while the company’s EPS is expected to increase 3.5% year-over-year to $9.53. The company has an impressive earnings surprise history since it surpassed the consensus EPS estimates in three of the trailing four quarters.

The stock has gained 12.6% over the past month to close the last trading session at $255.02.

MSFT’s POWR Ratings reflect its promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.

MSFT has a grade of B for Stability, Sentiment, and Quality. Within the Software – Business industry, it is ranked #9 of 53 stocks.

Click here for MSFT’s additional POWR Ratings for Growth, Value, and Momentum.

Eli Lilly & Co. (LLY)

LLY discovers, develops, and markets human pharmaceuticals worldwide. The company provides diabetes, oncology, neuroscience, and other products.

On December 1, LLY announced the successful completion of its acquisition of Akouos, Inc. (AKUS). It would expand LLY’s efforts in genetic medicines to include AKUS’s portfolio of potential first-in-class adeno-associated viral gene therapies for treating inner ear conditions, including sensorineural hearing loss.

On November 7, LLY announced that the rollout Tempo Personalized Diabetes Management Platform will begin in the United States before the end of this year. This technology would help adults suffering from Type 1 or Type 2 diabetes and clinicians make informed, data-backed decisions to manage treatment with LLY insulins.

This launch is expected to help LLY deliver greater value to those relying on insulin and positively impact its topline.

For the third quarter of fiscal 2022, ended September 30, LLY’s revenue increased 2.5% year-over-year to $6.94 billion, primarily driven by volume growth of key growth products. The company’s non-GAAP net income increased 10.8% year-over-year to $1.79 billion during the same period. This translated to a non-GAAP quarterly EPS of $1.98, up 11.8% year-over-year.

The consensus revenue estimate of $30.02 billion for fiscal 2023, ending December 2023, represents a 4.7% improvement year-over-year. Also, Street expects LLY’s EPS to grow 16% year-over-year to $9.08 during the same period.

The stock has gained 4.6% over the past month and 37.9% year-to-date to close the last trading session at $374.76.

LLY has an overall rating of B, which translates to a Buy in our POWR Ratings system. It also has a grade of B for Stability and Quality.

LLY is ranked #23 of 162 stocks in the Medical – Pharmaceuticals industry.

Additional ratings for LLY’s Growth, Value, and Sentiment can be found here.

Stock to Avoid:

Advanced Micro Devices, Inc. (AMD)

AMD operates as a global semiconductor company. The company’s two segments are computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers (OEMs), public cloud service providers, original design manufacturers, system integrators, independent distributors, online retailers, and add-in-board manufacturers.

AMD and Analog Devices, Inc. (ADI) were involved in litigation regarding patent infringement which got resolved only on November 17.

On October 7, the U.S. imposed export restrictions on advanced semiconductors and chip-manufacturing equipment to prevent American technology from advancing China’s military power. This follows August 31 instructions to AMD from U.S. officials to stop exporting its top artificial intelligence chip to China. This prohibition is expected to have a material impact on the company’s sales in China.

In the last week of September, AMD’s arch-rival, Intel Corporation (INTC), launched its 13th generation core processors, designed to put INTC in the performance lead over AMD. INTC may corner a greater share of the desktop performance market amid a slump in PC sales following massive growth during the early days of the pandemic.

Reduced processor shipments due to a weaker-than-expected PC market and significant inventory correction actions across the PC supply chain resulted in lower-than-expected Client segment revenue.

During the third quarter ended September 24, 2022, AMD’s revenue increased 29% year-over-year, lower than the 55% predicted earlier, to $5.57 billion. Reduced processor shipments due to a weaker-than-expected PC market and significant inventory correction actions across the PC supply chain resulted in lower-than-expected Client segment revenue.

AMD reported an operating loss of $64 million, compared to an operating income of $948 million in the year-ago quarter. The loss was primarily due to the amortization of intangible assets associated with the Xilinx acquisition and increased R&D investments. The company’s operating income decreased 92.8% year-over-year to $66 million during the same period. AMD’s non-GAAP quarterly EPS decreased 8.2% year-over-year to $0.67.

As of June 25, 2022, AMD’s long-term debt stood at $2.47 billion, compared to $1 million as of December 31, 2021. A significant increase in expenses incurred by the company for servicing this debt is expected due to rising interest rates.

Analysts expect AMD’s EPS for the fourth quarter to decrease 27.2% year-over-year to $0.67. The stock has plummeted 50.1% year-to-date to close the last trading session at $74.98.

AMD’s POWR Ratings reflect its poor prospects. It has an overall grade of F, which indicates a Strong Sell in our proprietary rating system. It has an F grade for Stability and a D for Growth, Sentiment, and Quality.

AMD is ranked #90 of 93 stocks in the Semiconductor & Wireless Chip industry. Click here to access the additional POWR Ratings for AMD’s Value and Momentum.

MSFT shares were trading at $248.88 per share on Monday afternoon, down $6.14 (-2.41%). Year-to-date, MSFT has declined -25.31%, versus a -15.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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