The big news Wednesday was that Fitch Ratings, one of the big three credit ratings agencies, downgraded the US credit worthiness from AAA to AA+.
Fitch noted several variables led to the decision to downgrade the US:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
The broad stock indexes are selling off today following this news, although with the Nasdaq down just -2% and the S&P 500 -1.3% it may not be as serious as it sounds. And if that is the case, this small correction may have just created a fantastic buying opportunity.
CrowdStrike CRWD, Block SQ, and Moody’s MCO are three top ranked, high quality businesses investors may want to consider buying on this pullback.
CrowdStrike
CrowdStrike Holdings is a leading cybersecurity company that provides cloud-based endpoint security solutions. Their platform leverages artificial intelligence and machine learning to protect organizations from cyber threats and breaches. CrowdStrike’s advanced threat detection and response capabilities have gained widespread recognition, making it a prominent player in the cybersecurity industry.
CrowdStrike currently boasts a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions. Earnings for CRWD are expected to grow at an extremely impressive 29.9% annually over the next 3-5 years.
Because of that extremely high earnings growth CRWD has a premium valuation. CrowdStrike is trading at a one year forward sales multiple of 13x, which is well above the industry average of 2.5x, but below its three-year median of 26.2x.
Block
Block is a financial services and mobile payment company headquartered in San Francisco, California. It was founded by Jack Dorsey and Jim McKelvey in 2009. Square offers a wide range of products and services, including point-of-sale systems, payment processing solutions, business analytics tools, and cash app services for individuals. It has become a prominent player in the fintech industry and has been instrumental in revolutionizing the way small businesses and individuals handle transactions and payments.
Block too has a Zacks Rank #1 (Strong Buy) rating, indicating upward trending earnings revisions. It also has very high forecasted earnings growth rates. Earnings are expected to grow 20.2% annually over the next 3-5 years, while sales are forecast to grow in the high teens.
However, Block has a far more reasonable valuation. SQ is trading at a one year forward sales multiple of 2.3x, which is below the industry average of 5x, and below its three-year median of 4.1x.
Moody’s
Moody’s is one of the other three US ratings agencies and the only one to not have downgraded US credit worthiness. S&P Global SPGI, the third agency did so in 2011.
Nonetheless Moody’s is a fantastic business, and its stock has put on an incredible performance over the last decade. Over the last 10 years MCO has compounded at an annual rate of 18.6%, considerably outperforming the broad market average.
Analysts have revised current quarter earnings estimates 4% higher and FY23 earnings 3% higher over the last two months, giving Moody’s a Zacks Rank #1 (Strong Buy). Earnings are expected to grow by 12.8% annually over the next 3-5 years.
MCO trades at a one year forward earnings multiple of 35x, which is above the market average of 21.5x, and above its five-year median of 28.2x. Additionally, the stock has a dividend yield of 0.9% and has raised the payment by an average of 12.1% annually over the last five years.
Bottom Line
While a downgrade of the US credit worthiness sounds like a dire situation, it will likely pass without too much more volatility. JP Morgan’s CEO Jamie Dimon stated today that, “It doesn’t really matter that much because it is the market, and not rating agencies, that determine borrowing costs.”
He also noted that the US is the most prosperous and secure nation on the planet, and believes it is ridiculous that there are other nations with higher credit ratings than the US. I tend to agree with Dimon, and thus this temporary pullback should be used as an opportunity to pick high-quality stocks.
Moody’s Corporation (MCO): Free Stock Analysis Report
Block, Inc. (SQ): Free Stock Analysis Report
CrowdStrike (CRWD): Free Stock Analysis Report
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This article originally appeared on Zacks
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