The Russell 3000 Value Index (IUSV) is trading at all-time highs following a typical September crisis of confidence followed by a strong October. While earnings haven’t been spectacular, the season is clearly strong enough to keep our end of the market flying high.

Because we focus on value and eschew speculation wherever we can, it’s important to cut through all possible hype. Earnings growth is slowing as the pandemic recedes and inflation continues to cut into once-robust margins. Positive target revisions have receded to the lowest level in several quarters.

However, even existing targets are “good enough” to keep hopes alive for another 8% to 10% increase in earnings in 2022. And with the bond market cooperating for now, stocks can continue on their current course as long as earnings are decent and interest rates remain in check. Ironically, the rally has played out in part because some bond investors believe the economy can not tolerate even the slightest of rate increases and so are crowding into the relative safety of fixed-income securities.

The market as a whole, on the other hand, is currently overbought. I expect we will see a minor 2% to 3% pullback relatively soon. However, while stocks are not cheap, I continue to find pockets of value. As I was going through the Buy List this morning, I was encouraged by where we stand, and the prospects for our stocks for 2022.

Let the market as a whole go its own way. Our stocks have relatively attractive valuations and generally reported good earnings in the recent quarter. While the ride could get bumpy in the next few weeks, I am optimistic we will see positive results for the next 12 months.

A Favorite SONa

Founded in 1899, Sonoco Products (SON) is a global provider of consumer, industrial, healthcare and protective packaging for many of the world’s most recognized brands in markets such as appliances and electronics, automotive, beverages, food and pet care.

Sonoco’s operations consist of:

— global consumer packaging businesses (46% of 2020 sales) including rigid paper and closures, flexibles and plastics
— industrial businesses, (36% of 2020 sales) including tubes and cores, reels and spools, uncoated recycled paperboard and Sonoco Recycling, one of the world’s largest recyclers
— display and packaging (9% of 2020 sales), including high-impact retail displays and packaging supply chain management
— Protective Solutions (9% of 2020 sales) including custom-designed protective, temperature-assurance and retail security packaging solutions and highly engineered components.

Innovation is important to Sonoco, as the company believes it helps their customer’s create strong brands. The company’s I6 Innovation Process and industry-leading packaging and services portfolio create impactful customized solutions. To show its commitment to innovation the company in 2016 opened a $12 million innovative Packaging Solutions Studio. The studio features a Consumer Interaction Space that enables direct observation of consumers interacting with packaging in a variety of home applications in order to gain insights. The center features collaborative spaces which bring together people who work in different areas of packaging to develop ideas that drive innovation.

The company is international in nature, with more than 300 facilities in 33 countries. Sonoco’s financial performance in recent years has been steady with moderate growth. Revenues increased from $4.85 billion to $5.23 billion from 2013 through 2020, while EPS increased to $2.31 from $3.36 over the same period. The company generated free cash flow that was close to net income during this period, with which it paid dividends and made close to $1 billion in acquisitions to strengthen the company.

Coming off a flattish year in terms of revenues and earnings with the pandemic in 2020, Sonoco returned to growth this year, although results have been somewhat mixed. Through the first nine months of 2021, EPS has increased to $2.66 to $2.59 on a 7.5% increase in revenues. However, operating profit in the company’s key consumer packaging segment has declined on higher costs, and the company will likely end the year close to the mid-range of their $3.40 t0 $3.60 EPS guidance for 2021 to start the year. While this is a not a poor result, investors may have expected better with easy comparisons from 2020

Like many value stocks, SON share price peaked in early May this year, at close to $70 a share. This time frame was just before interest rates topped, COVID cases rose, and it became apparent that the supply chain was becoming an issue, all of which drove a preference for growth shares.

However, recent price increases have not been fully reflected in results, and this should lead to an acceleration in growth in 2022, and I expected the company to earn $3.85 a share as provided the economy remains sound. This, along with a better supply chain situation, should help the stock recover the ground it has lost since May and achieve my $70 target.

In summary, SON is a high-quality company selling at a discount, even though record earnings are ahead for 2022. The stock is a buy under $63.

Review of our Positions

3M (MMM) reported third-quarter EPS of $2.45, flat compared to the prior year and $0.25 better than expectations. However, the surprise was largely driven by a lower-than-expected tax rate . . . operating income actually fell 6.3% as inflation negatively impacted results. On the plus side, the top line remains strong, with organic revenue growth of 6.3%.

With inflationary pressures expected to continue in the fourth quarter, the company’s full-year EPS guidance of $9.70 to $9.90 feels conservative. However, there should be some improvement next year and ultimately an EPS target of $10.40is probably more realistic. At 18X next year’s earnings and a dividend yield of 3.3%, the stock remains attractively valued versus other large industrial companies. Buy 3M under $175. My target is $200.

Cognizant Technology Solutions (CTSH) had a solid third quarter, with EPS of $1.06 vs. $0.97 on a 12% increase in revenues. Results were $0.01 above expectations even as higher wages for the company’s consultants lowered margins. Sales were strong across all industrial verticals and digital revenues (now 44% of the overall mix) were up 18%.

Bookings were up over 20% for the quarter, and this along with continued success recruiting and retaining consultants, speaks well for earnings growth over the next several quarters. EPS of $4.05 this year should turn into at least $4.50 next year, with upside possible as the company amortizes higher costs.

If the company can continue to execute, the stock will go higher. CTSH is a buy below $75. My target is now $90.

Fulton Financial (FULT) shares reacted well to third-quarter earnings. EPS of $0.45 vs. $0.38 came in $0.13 better than expectations. While loan reserve releases drove a lot of the earnings gains, a surprising 9 basis-point gain in interest margins, higher yields on loans and lower deposit costs also helped results.

Taking away the released reserves and some non-recurring revenue items, FULT still earned $0.42 in the quarter. Based on this run rate, I am slightly raising my EPS estimates for next year to $1.35 from $1.30, which assumes the company resumes reserving for loan losses. Buy FULT when market weakness sends the stock below $16. My target is $18.50.

Fidelity Information Services (FIS) has seen its shares come under significant pressure along with other payment processors including Paypal (PYPL) and Square (SQ). Concerns about increased competition, slowing growth from on-premise Visa use and the advent of “buy now pay later” payment systems have made for a tough environment for the stocks.

To combat this negativity, FIS did something unusual. The night before it released earnings, management released a new capital allocation plan to show confidence in the business. While the company will continue to invest in growth, it will also raise its dividend 20% a year until dividends are 35% of net income.

Earnings were solid, with revenues up 10% and strong results through all of the company’s businesses. EPS increased 22% to $1.73, which was $0.05 better than expectations. Payment volume growth was strong even if you make the comparisons back to the pre-pandemic third quarter of 2019.

Either way, FIS has started to come back, but at only 15.3X next year’s EPS estimate with solid growth, it has a long way to go. FIS is a buy under $125. My target is $140.

General Mills (GIS) fiscal second quarter does not end until November, so they will not be reporting earnings to close to year end. The stock trades steadily, and with a favorable valuation of 16.3X EPS estimates for the May 2022 fiscal year with a 3.3% dividend yield, I believe the company can weather most market environments. GIS is managing through the supply chain crisis so far. Management has pricing power on their side to handle the potential impact of inflation on results.  GIS is a buy below $59. My target is $65

Ingredion (INGR) reported third-quarter EPS of $1.67 vs, $1.77, which was $0.22 better than expectations. However, a lower-than-expected tax rate accounted for more than half of this outperformance and operating income declined 10% as higher commodity costs remain an issue. The company raised its expected EPS range approximately $0.15 for the full year to $6.65 to $7.00. However, since this raise was less than the third quarter’s outperformance, operating results in the fourth quarter are expected to remain under pressure.

On the conference call, the company warned that it expects the recent inflation in corn prices to continue. While management has negotiated price increases with about 1/3 of its customers and is trying to negotiate with others, this temporarily set off panic selling in the shares.

Nonetheless, given strong business conditions, I believe management can raise prices . . . after all, they’re already producing all they can to meet demand. EPS should remain close to $7.00 a share next year, supporting my $105 price target. Buy INGR below $90.

Juniper Networks (JNPR) reported third-quarter EPS of $0.46 vs. $0.43 on a 4.4% increase in revenues. The company’s AI-driven enterprise networking solutions continue to lead the sales gains.

Although earnings were merely in line with expectations, the stock has soared since the earnings release. Results would have been better if not for the current semiconductor shortage. Orders increased 50% for the second consecutive quarter and the backlog is now up $1 billion from a year ago, reflecting not just strong customer acceptance of the company’s Mist and Astra platforms, but also investments the company has made to improve sales execution.

Momentum continues to build at JNPR, and I am raising my buy under and target prices by $1 each. JNPR is now a buy under $29. My target is $33.

Kronos Worldwide (KRO) had a strong third quarter. Revenues increased 20% as volumes improved 6% and pricing for titanium oxide jumped 11% over the past year. Unlike the previous two quarters, the company was able to make the most of its revenue gains . . . gross profit increased over 50% and EPS increased to $0.31 from a lowly $0.07. Since the company earned $0.39 in the first six months of the year, the quarter represented a significant improvement.

The market took note of the results, sending KRO shares to their highest prices since July. I believe the company has a chance to earn $1.20 a share next year, making my $16 target realistic. Buy KRO under $13.

Molson Coors (TAP) reported third-quarter EPS of $1.75 (14% above expectations) vs. $1.62 on a 2.5% increase in revenue. Price increases and a favorable revenue mix helped offset higher transportation costs . . . above-premium brands now account for over 25% of revenues for the first time since management started revamping the product line.

Guidance remains steady: mid-single digit revenue increases and flat EBITDA for the year, followed by rising EBITDA as inventory circulates through the company’s distributors.The company has already generated $900 million of free cash flow this year, which makes the stock very cheap considering its $10 billion market capitalization. The revitalization narrative will gain more credibility as time goes on and the stock should perform well. TAP is a buy below $50. My target is $57.

Newell Brands (NWL) reported third-quarter EPS of $0.54, $0.04 above expectations but still well below the $0.84 we saw a year ago. Year-over-year comparisons remain challenging. Revenues rose a reasonable 3.3% as seasonal demand shifted in the face of the pandemic. However, ambient inflation and rising promotional and advertising expenses impacted profitability.

The good news is that management insists that price increases in the quarter are only now starting to kick in, making cost comparisons much less difficult next year and taking pressure off the margins. As such, while consumer demand for the company’s products will moderate in 2022, we might see EPS will improve from $1.70 this year to at least $1.85 in 2022. Increased confidence in this estimate should drive shares to my $28.50 target. Newell is a buy below $24.

Safety Insurance (SAFT) reported third-quarter earnings that reflected the reopening of the Massachusetts economy and accidents returning to normal levels as commuters go back to the office. Excluding gains and losses from the company’s investment portfolio (always important in the insurance industry), earnings per share declined to $1.70 from $2.53.

Earned premiums were flat in the quarter but book value climbed to $61.94 per share, up from $59.40 at the start of the year. I believe book value can reach $65 by the end of next year and a 1.4X multiple of that can get the stock to my $90 target. SAFT is a buy below $80. The quarterly dividend of $0.90 is secure and the 4.5% yield will add to total returns.