Amid rising risks of an economic expansion and declining market sentiment, it could be wise to avoid fundamentally weak stocks Viad Corp (VVI), NewtekOne, Inc. (NEWT), and SuperCom Ltd. (SPCB) that seem bad for business services industry lovers.

In recent news, IMF slashed its GDP forecasts from 3.4% in 2022 to 2.8% in 2023. The global growth is forecasted to be 3% in 2024. The weaker growth prospects stem from the tight policy stances needed to quell inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geo-economic fragmentation.

With demand cooling, the U.S. services sector slowed more than expected in March as non-manufacturing PMI fell to 51.2 from 55.1 in February, while a measure of prices paid by service businesses fell to  59.5 from 65.6 in February, the lowest in nearly three years. The softer-than-expected reading, coming on the heels of continued weakness in manufacturing activity last month, increases the risk of a recession this year.

Moreover, after last month’s banking turmoil and another interest rate hike from the Federal Reserve, the non-farm payrolls increased by 236,000 in March. However, it remained below the year-to-date average increase of 344,000, tapping into the gloomier data mood.

Deutsche Bank strategist Jim Reid warned, “Risk-off sentiment has continued to grow in markets thanks to another round of weak data that’s added to fears about a potential U.S. recession.”

Considering the market sentiment, fundamentally weak stocks VVI, NEWT, and SPCB could be best avoided.

Viad Corp (VVI)

VVI operates as an experiential leisure travel, live events, and marketing services company. It operates through three segments: Pursuit; Spiro; and GES Exhibitions.

In terms of forward non-GAAP P/E, VVI is trading at 33.72x, 104.7% higher than the industry average of 16.48x. Likewise, its forward Price/Book multiple of 27.41 compares to the industry average of 2.49x.

VVI’s trailing-12-month gross profit margin of 6.14% is 79.3% lower than the industry average of 29.70%. Its trailing-12-month net income margin of 2.06% is 68.3% lower than the industry average of 6.50%. Also, its trailing-12-month ROTC and ROTA of 4.32% and 2.13% are 38.5% and 59.1% lower than the industry averages of 7.02% and 5.20%, respectively.

For the fiscal fourth quarter that ended December 31, 2022, VVI’s non-GAAP loss before other items widened 13.4% year-over-year to $25.47 million. Its non-GAAP loss before other items per common share came in at $1.33, widening 11.8% year-over-year. The company’s attributable net loss and adjusted EBITDA loss amounted to $5.74 million and $2.01 million, respectively, in the same period.

Analysts expect the company’s EPS and revenue to decline 20.9% and 3.8% year-over-year to $0.59 and $307.16 million for the second quarter (ending June 2023). It failed to surpass the EPS estimates in three of the trailing four quarters. The stock has declined 42.9% over the past six months and 21.2% year-to-date to close the last trading session at $19.22.

VVI’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has a D grade for Stability and Quality. Within the B-rated Outsourcing – Business Services industry, it is ranked #37 of 52 stocks. Click here to see the other ratings of VVI for Growth, Value, Momentum, and Sentiment.

NewtekOne, Inc. (NEWT)

NEWT is a financial holding company that provides a range of business and financial solutions to the small- and medium-sized business market. Its business and financial solutions include banking services, business lending, electronic payment processing, etc.

On January 24, the company announced the completion of an exempt private offering of $50 million aggregate principal amount of its 8.125% notes due 2025. While the management aims to use the debt raise for general corporate purposes, it might increase the overall debt burden for NEWT.

In terms of trailing-12-month Price/Sales, NEWT is trading at 3.67x, 52.2% higher than the industry average of 2.41x. Also, its forward Price/Book multiple of 1.45 is 48.2% higher than the industry average of 0.98.

NEWT’s trailing-12-month CAPEX/Sales of 0.01% is 99.3% lower than the industry average of 1.84%. Its trailing-12-month ROTC of 1.40% is 72% lower than the industry average of 5.01%.

During the fourth quarter that ended December 31, 2022, NEWT’s total investment income decreased 6.9% year-over-year to $23.09 million. The company’s total expenses increased 23% from the year-ago value to $28.49 million. Also, its adjusted net investment income came in at $1.55 million and $0.06 per share, representing a 90.4% and 90.9% decline year-over-year, respectively.

The consensus EPS estimate of $0.21 represents a 71.5% year-over-year decline in the to-be-reported quarter that ended on March 31, 2023. Also, its EPS for the current quarter (ending June 2023) is expected to decrease 60% year-over-year to $0.30. The stock has declined 34.8% over the past nine months and 47.9% over the past year to close the last trading session at $13.07.

NEWT’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, which translates to Sell in our proprietary rating system.

It has an F grade for Sentiment and a D for Growth. In the same industry, it is ranked #38 of 52 stocks. To see the other ratings of NEWT for Value, Momentum, Stability, and Quality, click here.

SuperCom Ltd. (SPCB)

SPCB provides digital identity, Internet of Things and connectivity, and cyber security products and solutions to governments, and private and public organizations globally.

SPCB’s trailing-12-month gross profit margin of 41.19% is 18.2% lower than the industry average of 50.35%. Also, its trailing-12-month net income margin and ROCE of negative 81.57% and 211.25% compares to the industry averages of 2.71% and 2.65%, respectively.

In the third quarter that ended September 30, 2022, SPCB’s total operating expenses increased 3.5% year-over-year to $2.98 million. The company’s operating loss amounted to $849 thousand, while its non-GAAP net loss widened 23% from the year-ago value to $1.02 million. Also, its non-GAAP loss per share stood at $0.02 in the same period.

Analysts expect SPCB’s EPS to remain negative for the fiscal years 2023 and 2024.  The stock has lost 73.8% over the past year to close the last trading session at $1.25.

SPCB’s POWR Ratings reflect this weak outlook. It has an overall rating of D, equating to Sell in our proprietary rating system. It has a D grade for Momentum and Stability. Out of 52 stocks in the same industry, it is ranked #44.

Beyond what is stated above, we have also given SPCB grades for Growth, Value, Sentiment, and Quality. Get all the SPCB ratings here.

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VVI shares were trading at $18.85 per share on Wednesday afternoon, down $0.37 (-1.93%). Year-to-date, VVI has declined -22.71%, versus a 7.94% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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