New Trade for June 1st, 2022

Equities ticked higher to kick off the first day of a new month.  After a whiplash-inducing May, the major indices were little changed.  The S&P 500 and the Dow finished the month slightly higher, while the Nasdaq shed 2%.  Positive retail earnings reports, selling exhaustion, and hints of Fed flexibility all helped stocks rebound at the end of the month, according to some – a signal that equity markets may have reached a turning point heading into June.

“The market has now discounted a lot of the negative news, a lot (of which) hit all at once.  Now we have absorbed that news and the actions the Fed is going to take, and we’re wrapping up earnings season,” said Keith Buchanan, portfolio manager at GLOBALT.  “The signs are lining up, and the boxes are being checked that we expect to develop when the market starts to form a bottom,” he continued.

Today we’re featuring a mid-cap tech company poised for a robust fundamental rebound over the next year few years.

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DXC Technology Co. (DXC) Technology is a provider of information technology services and products. DXC targets IT modernization, including both on-premises and cloud services, as well as data-driven operations and workplace modernization. The company serves 6,000 customers across the private and public sectors globally. 

For its fourth quarter of 2022, which ended March 31, DXC Technology reported $4 billion in revenue, down 8.6% year-over-year and just shy of the $4.1 billion Wall Street expected.  The company reported $0.84 earnings per share for the quarter, missing the consensus estimate of $0.99 by 15%.

In the days following the May 25th call, Investors showed that they were overlooking the lackluster quarter and focused on the bigger picture for the mid-cap tech firm, snapping up shares.  Most analyst firms maintained their positive view of DXC, and the consensus price target of $38.50 per share remains well above the current price.  

Credit CEO Mike Salvino, who joined the company from Accenture in September 2019 for the positive move higher.  The company’s top executive has made progress on DXC’s operating issues, setting the company for a robust fundamental rebound over the next few years.  Salvino has replaced about 75% of the senior management team, many of them from Accenture. 

Further to his credit, Salvino also successfully convinced investors that DXC’s transformation — which includes a plan to shrink its total revenue while at the same time de-risking its balance sheet — is still on track. The term “better place” was used nine times during last Wednesday’s call about the company’s self-imposed overhaul. Hence the 17% rise in share price over the past week.

DXC shares had fallen 18% from August’s high as of Wednesday morning, leaving them priced at only around seven times this year’s projected earnings.  Short-term, prolonged market weakness could continue to weigh heavily on the stock, but those with a longer-term outlook will likely appreciate a further pull-back as an opportunity to place their bets on a great management team at a better price.