The month of May has had a bit of a bumpy start, with early market rallies giving way to three-straight days of big declines. As a result, the Russell 3000 Value Index was down 8.6% for the year going into today. While not pleasant, this is still a lot better than the 25% declines in both the Russell 3000 Growth Index and NASDAQ.

As I wrote about extensively in recent years, value stocks did not discount the abnormally low interest rates we have had since the Federal Reserve began its easing cycle. With the era of low rates now unraveling quickly, value stocks had at least some measure of what the founder of value investing, Benjamin Graham, called a “margin of safety” to help protect against unfavorable developments.

Still, with the broader market weakness, we have also taken some lumps over the past six weeks. But, overall, I am very enthused about our Buy List positions now that earnings season is drawing to a close. Earnings prospects are good, and valuations are favorable, with many of our names offering dividend yields above 3.0%. So, while there may be more downside to stocks in the near-term, I do not think value stocks have too much farther to fall. And I believe our companies will do very well in any subsequent rally.

The key for value stocks for the remainder of the year will be the economy. If the U.S. would slip into a recession, then earnings estimates would begin to decline. Right now, I think the economy will likely slow, but I do not think we will see a prolonged contraction. Rest assured, I continue to carefully monitor the economic data, and we will make adjustments to the buy list as needed.

I’m also watching the rise in Treasury yields, as the yield on the 10-Year Treasury is currently at 2.97% after rising to 3.2% on Monday morning. It could retrace it steps back above 3.0% and rise to 3.5% as the Fed starts selling off its bond portfolio. But even if this happens, I believe there will still be attractive opportunities for us.

ORI: Good Insurance Company Is Now Inexpensive

Founded back in 1923, Old Republic International Corporation (ORI) has nearly a 100-year-old track record as a conservatively managed insurance company. The Chicago-based company seeks to realize good long-term results through the proper pricing of its products relative to the risks assumed.

ORI has two main operating segments:

First, its General Insurance business primarily underwrites commercial trucking (37.3% of segment premiums) and workers compensation insurance (22.8%). The company also underwrites a wide variety of other insurance, including aviation, home and auto warranty and inland marine. Underwriting results have been excellent in recent years, with claims averaging 70.8% of total premiums. Insurance is primarily placed through brokers and independent agents.

Second, its Title Insurance business issues policies to real estate purchasers and investors to insure against losses arising out of defects, liens and encumbrances affecting the insured title. This business has been very strong in recent years, with low interest rates driving home refinancing and a generally strong real estate market. Losses from this business are usually very low, averaging less than 4% of premiums from 2017 through 2021. Approximately 22% of the policies are placed directly by the company, with 78% coming from independent title agents.

In 2021, General Insurance contributed 52% of pretax income and Title Insurance contributed 45%. The remaining 3% is from a mortgage insurance business that the company exited following the financial crisis. This business should have limited impact on the financial statements of the company going forward.

ORI has enjoyed solid operating results in recent years, with EPS increasing from $1.86 in 2018 to $3.08 last year. Premium growth in general insurance, very strong results in Title Insurance due to the strength in the housing market, and the good underwriting results mentioned above all contributed to the company’s growth over the years.

Now, it’s important to note that the results from last year are not sustainable. Lower home sales and fewer refinancing requests will hurt its title insurance businesses. This was evident in ORI’s first-quarter results, when operating EPS declined to $0.63 from $0.69, driven primarily by a 25% decline in pretax income for title insurance. EPS for all of 2022 will likely fall to $2.45 even as the general insurance business remains strong.

However, I believe this year’s earnings will be a base from which earnings can start to grow again. Inflation will be a net positive for the general insurance business, with premiums rising faster than the cost of claims. Higher interest rates will also eventually lead to higher investment income. After the stock declined from this year’s high of $27.19, the stock is cheap at less than 10X this year’s EPS estimates, and just over 1.0X book value of $22.23. The 3.93% dividend yield should also support the stock should market conditions remain difficult.

In short, Old Republic is a quality insurer that is conservatively managed with a dividend payment history going back to 1942. While not recession proof, this is a company built to last during difficult economic periods. After a recent correction, the shares are attractive for purchase, and they should outperform for the remainder of the year. Buy ORI under $24. My target is $27.

Position Review: Positive Earnings Results & Outlook

Cognizant Technology Services (CTSH) reported first-quarter EPS of $1.08, vs $0.97 last year, on a 9.7% increase in revenues. Revenues advanced across all industries served. Digital Revenues increased 20% and now account for 50% of the company’s total.

Earnings and revenues were slightly better-than-expectations, but the stock fell sharply after the earnings report as the company revised EPS guidance for the year to $4.45 to $4.55, down from previous estimates for $4.46 to $4.60. The company cited currency impact and a less favorable impact of acquisitions for the revised guidance.

The stock overreacted to the news, in my opinion. The company is still looking for 10% to 11% revenue growth in constant currency this year. Bookings also remain strong, and the company’s book-to-bill ratio over the past 12 months is 1.2, which is a good sign that revenue growth will continue. I still think CTSH can earn $5.00 a share next year, and the stock is a bargain at 15.6X this estimate. Continue to buy CTSH under $80. My target is $95.

Fidelity National Information Services (FIS) has been in a volatile range between $95 and $105 following its earnings report last week. While the stock remains somewhat controversial due to concerns that increasing competition in the payments industry may pressure profit margins, I believe the company is firmly entrenched with its customers. The stock is also very attractively valued at just 14X this year’s EPS estimates. Buy FIS under $110. My target is $130.

First Busey (BUSE) continues to be pressured by bad sentiment facing bank stocks, as there are concerns that the U.S. could enter a recession and that loan losses would rise sharply. However, the stock seems to be getting some support at $22 a share, and barring any additional indications that we may be near a recession, I think we are close to a bottom in the stock. I believe the company’s $0.23 quarterly dividend is secure under most economic scenarios, and BUSE’s 4% yield will support the shares. My new buy under price for BUSE is $24. My new target is $29.

Newell Brands (NWL) had a solid first quarter, with EPS of $0.36 vs. $0.30 last year. That was also $0.09 above expectations. Sales were up 4.4%, or 6.9% on an organic basis. The gains were consistent throughout the company, with five of the company’s seven operating segments reporting sales gains. Higher material and shipping costs continue to be an issue, with gross profit (sales less cost of sales) gaining just 1.2%. But the continued reduction in operating expenses led to higher overall profit margins.

The company maintained its EPS guidance for the year of $1.85 to $1.93, with continued cost pressures and supply chain issues offset by price increases. I believe this guidance is realistic if the economy remains healthy, and the stock is very cheap trading at just over 12X the midpoint of this guidance

Despite the terrible market yesterday, the stock rose sharply on heavy volume before pulling back today. Yesterday’s move was very encouraging, and I will try to see if there was a reason behind the move. Buy NWL under $24. My target is $30. The 4.0% dividend yield adds to the attraction of the shares.

Inflation took a toll on the results of Phibro Animal Health (PAHC), with its fiscal third-quarter EPS declining to $0.33, down from $0.34, despite a 13% increase in revenues. Results were in line with expectations. Demand remains strong for the company’s vaccine and nutrition products for livestock, and the company’s small pet division is realizing good growth. However, inflation, exasperated by the war in Ukraine and COVID lockdowns in China, is hitting profitability.

PAHC maintained its earnings guidance for the year, although this does not tell us a lot with just one quarter left in the fiscal year. Unless we see a break inflation, I do expect flat EPS of $1.35 on the June 2022 fiscal year. However, with the stock selling for less than 14X this estimates, and with a lift in earnings likely once inflation eases, PAHC looks attractive here. Buy PAHC under $20.50. My target is $25.

Sonoco Products (SON) reported strong first-quarter results that were no match for the concerns about the future direction of the company, and the stock is down over 10% from its post-earnings high. However, I remain confident about the prospects of the stock for the remainder of the year, as the recent earnings strength is just as structural as cyclical in nature. The stock also remains cheap even if current EPS estimates of $5.25 for 2022 prove to be too optimistic. Buy SON below $65. My target is $75.

Target (TGT) will report earnings on May 18, with expectations for EPS of $3.04 versus a very strong $3.69 per share in the prior year. Revenues are forecast to be flat. While I think there is very good chance the company tops estimates for the quarter, the real key will be guidance. While the stock is still higher since our recommendation in the last issue, there are concerns that inflation will eat away at the purchasing power of Target’s core customers. With so many things going well at TGT now, I remain confident of the company’s ability to earn $14.00 a share in the current fiscal year, with the company hopefully facing less inflation headwinds next year, which will allow the company to earn at least $15.50 a share. Buy TGT under $225. My target is $260. I will be back with an update after earnings are released.

The Gap, Inc. (GPS) will report earnings on May 25, with expectations for a loss of $0.11 versus income of $0.48 las year. The company has already pre-released disappointing revenue guidance for a low- to mid-teens decline in sales, as Old Navy is suffering from supply chain issues, which led to the dismissal of the President of the division.

The stock is well off of its worse prices since the pre-announcement, and GPS is still a very cheap stock now. However, the company will have to execute better, and I am very interested to see what the company plans to do differently when earnings are announced. Hold GPS in front of earnings. I will update you on what to do next post-earnings.