Rising inflation and interest rates resulted in vast cost pressures on a variety of companies throughout 2022.

Huge tech companies like Meta (META) saw their workforce reduced by 25% to mitigate macroeconomic headwinds. But the layoffs aren’t just in tech….

Companies like Disney (DIS) reduced their 220,000 global workforce by 3.2% in 2022 to achieve about $5.5 billion in cost savings.

And it seems layoffs are here to stay for longer. The wave of layoffs that dominated 2022 has bled into 2023.

Video game and software developer Epic Games is one the latest companies to announce layoffs. Management at the company is looking to reduce headcount by about 16%, which will affect 830 employees.

But it doesn’t stop with Epic Games. Companies like CVS (CVS), T-Mobile (TMUS), Roku (ROKU), Binance, and Farmers Insurance have all announced recent plans to cut jobs.

Layoffs have indeed slowed down recently from a height of about 85,000 cuts in January to 10,000 in August.

But the talk around inflation and interest rates is heating up once again with the Fed announcing its “higher for longer” policy going forward.

With interest rates and inflation still high, layoffs are not going away anytime soon.

These mass layoffs have also happened very recently. Thus there are still thousands of people looking for jobs with thousands more being let go.

For instance, 55% of workers who were laid off in December or January reported having found a new job by the end of January. As a result, there were still 45% of those workers left still looking for work.

Ultimately, if there’s a company poised to thrive from these workforce shifts, it’s ZipRecruiter (ZIP).

ZipRecruiter is a leading online employment platform that connects employers with job seekers. Through its user-friendly interface, companies can post job listings, and applicants can swiftly search and apply for positions.

Leveraging advanced matching technology, ZipRecruiter streamlines the hiring process by sending the most relevant applications directly to employers.

The high demand for its services amid layoffs in 2022 resulted in high profitability for the company.

ZipRecruiter’s return on assets (“ROA”) jumped from 24% in 2021 to 59% in 2022.

The chart shows that the company performed incredibly well during a time of large waves of company layoffs. Clearly, as these layoffs continue, ZipRecruiter should continue performing well.

And yet, the market fails to recognize this opportunity.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s ROA to fall below 12%, assuming the demand will collapse.

Given the continuance of layoffs, the number of workers still looking for jobs, and the company’s essential position in the job-seeking market, these expectations seem overly pessimistic.

ZipRecruiter has substantial potential to scale its operations and continue benefiting from these continuous company layoffs.

That is why ZipRecruiter showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

Today’s highlight, ZipRecruiter (ZIP) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.