Focus. It’s an attribute the stock market has lacked recently.

Take a look at a chart of the S&P 500 in June, and you’ll see every down day is followed by an up day, and every up day is followed by a down day. Stocks had appeared to be on the verge of a breakout to the upside after a sharp gain heading into Memorial Day weekend. But as we all know, the market fell back last week when interest rates resumed their rally.

The one positive amidst all this volatility is that the market seems to be holding its ground better than it did in April and the first half of May. In fact, the S&P 500 remains 7.6% above its low of May 20.

The lack of focus this week—as evidenced by today’s up-down action—is primarily due to investors anxiously awaiting the release of the Consumer Price Index (CPI) report on Friday. There is a hope among the bulls that if there are signs that inflation is stabilizing, then the Federal Reserve might consider a pause in tightening after the 50-basis-point increases expected at next week’s meeting and at the July meeting.

What’s interesting is that Treasury Secretary Janet Yellen stated today that inflation will likely average 4.7% this year. But she followed that statement up by saying that inflation will likely be even higher. So, what the Fed will ultimately do after July is uncertain.

While an easier Fed would be helpful, it should not be our focus as value investors. Value stocks never did fully discount the abnormally low rates that we saw through much of the past decade. Plus, I personally think there are still great values out there, even if the yield on the 10-year Treasury climbs as high as 4.0%.

So, while we need to keep an eye on the Fed and interest rates, a more critical focus for value investors is the state of the economy. For now, the U.S. still seems to have a firm economic footing, given the strong manufacturing and employment data released last week. The one concern is that high energy prices and the rise in rates will take a toll on the economy going forward. I believe economic growth will slow, but I still think it is too early to assume there will be a recession.

With the U.S. not at risk of falling into a recession in the near-term, I think the earnings for most of our companies will be fine through 2023. So, overall, I like the present composition of our Buy List for the current environment, and I believe it will outperform over the remainder of the year. We’ll make adjustments as necessary, but for now, each of our Buy List positions are solid bets.

UHS: A Solid Healthcare Pick

Our newest addition to the Buy List was Universal Health Services (UHS), which is not to be confused with managed healthcare company, United Health Group (UNH). Universal Health Services operates more than 400 acute care hospitals, behavioral health facilities, outpatient facilities and ambulatory care centers in 38 states, as well as Washington D.C., Puerto Rico and the U.K. The company is also a commercial health insurer and has a vast network of physicians.

After it was founded back in 1979, Universal Health Services has made many strategic acquisitions that have played an important role in the company’s growth strategy. As an example, UHS spent $105 million and $52 million on acquisitions in 2021 and 2020, respectively. UHS concentrates on rapidly growing markets, such as Las Vegas, in its strategy, as well as invests heavily in its acquired hospitals in order to provide the same high care standards that it has in its existing operations.

In 2021, acute care, outpatient facilities and insurance accounted for 56% of revenues, and the behavioral health facilities accounted for 44% of revenues. Interestingly, behavioral health is more profitable for the company, as it contributed 58% of total segment operating income in 2021.

United Health Services’ financial results have historically demonstrated great stability with modest growth. Revenues increased from $10.4 billion in 2017 to $12.6 billion in 2021, while operating income rose from $1.28 billion to $1.36 billion over the same time period. On the other hand, EPS growth was enhanced by aggressive share buybacks, which lowered the share count from 94.2 million to 77 million. Lower interest expense and the positive impact of the corporate tax rate cut in 2018 also helped boost UHS’s EPS from $7.67 in 2017 to $11.82 in 2021.

The company’s operations have hit a few bumps in the road in recent years due to COVID. Margins have been compressed as the need to take care of COVID patients in acute-care hospitals have taken away the capacity to do more profitable procedures. UHS did receive over $400 million from the U.S. government in 2020 from the CARES stimulus act, although the company would have been solidly profitable in 2020 without the aid.

However, the traditional stability of results was interrupted in the first quarter of this year, when EPS declined to $2.15 from $2.44. That was $0.31 less than expectations, even as revenues increased 9.3% and revenue at acute care hospitals rose 9.7% on easy comparisons from the COVID-impacted first quarter of 2021. The company was hurt in the quarter by a shortage of nurses and other employees, which led to higher wages, the need to use higher-cost temporary workers and capacity shortages—all of which led to a 1.9% decline in admissions in Behavioral Health.

The company believes the employee shortage will ease, and operating income will improve in the remainder of the year. I believe that current consensus estimates for EPS of $11.80 this year are too high. However, EPS of $11, or roughly 7% less than what the company earned last year, is achievable. At 11X this estimate, and with the stock trading 25% off its highs of the year, UHS is attractively valued considering its solid historical results.

The company’s low PE is a positive in a time of rising interest rates, and the fact that operations are less sensitive to the economy is also a positive in a time of increasing recession concerns. So, I believe the stock will be bid higher on any sign that operations are stabilizing, which I believe will happen before yearend.  Buy UHS under $125. My target is $140.

Position Review: Stocks Rally, But Remain Range-Bound

Cognizant Technology Solutions (CTSH) has been locked in a trading range between $70 and $75 a share, with no new news to move the shares. I do believe the stock’s poor reaction to first-quarter earnings reflected slightly disappointing orders and currency factors. However, I continue to believe the company will earn $4.50 a share this year and close to $5.00 a share next year. At less than 15X next year’s earnings, the stock is very cheap considering its growth prospects. CTSH is a buy below $80. My target is $95.

Fidelity National Information Services (FIS) has rallied with the market recently, and the stock is now higher than where it was prior to the release of first-quarter earnings. The stock remains cheap at 14.5X this year’s EPS estimates, and if the company can continue to meet earnings estimates and competition concerns fade, my $130 target is achievable. Remember, the stock traded over $150 last year. FIS is a buy under $110. My target is $130.

First Busey (BUSE) has rallied steadily off its recent lows. I believe the recent rate hikes by the Fed will start helping with earnings in the second half of the year. If the economy can avoid recession and credit costs stay low, the company should have EPS of $2.15 this year and $2.35 next year. At 10X next year’s estimates and with a dividend yield of 3.9%, BUSE’s valuation remains attractive. BUSE is a buy below $24. My target is $29.

Newell Brands (NWL) shares have been pressured by the current difficulties facing big box retailers, most notably Walmart (WMT), which accounts for 15% of NWL’s sales. However, even if inventory reductions at big customers hit NWL’s results over the next few quarters, there is plenty of room for error in NWL’s stock price, which is only selling for 11.1X current EPS estimates of $1.90 for this year. Meanwhile, NWL continues to do very well in things that it can control, including lowering costs and reducing debt. I remain confident the stock will recover over time. Buy NWL under $24. My target is $30. The 4.3% dividend yield will add to total returns.

Old Republic International (ORI) has done well for us since last month’s recommendation. ORI is an insurer that has produced consistent financial results by its long-term thinking, and the stock is a bargain at less than 10X this year’s EPS estimates. The 3.9% dividend yield will also add to our total returns. ORI is a buy below $24. My target is $27.

Phibro Animal Health (PAHC) shares are currently close to the middle of the $18 to $20 range the stock has been trading in since releasing fiscal third-quarter earnings. While the stock has not done much, I am willing to be patient. I continue to be encouraged by the strong demand for the company’s products, and once we see some moderation in the inflation that is raising the company’s costs, the stock will do well. PAHC remains a buy below $20.50. My target is $25.

Sonoco Products (SON) has rallied over the past few weeks and, provided the U.S. can stay out of a recession, the stock should do very well. Inflation is benefiting the company, and strong manufacturing should continue to boost sales of packaging equipment. SON is a buy below $65. My $75 target is just over 14X this year’s EPS estimate of $5.30.

Target (TGT) is lower today but well off its worse levels of the day. The pullback happened after Target lowered fiscal second-quarter earnings guidance for the second time in three weeks. The company lowered its expected operating margin in the second quarter to 2% from an amount close to the first-quarter margin of 5.3%.  The lower expected margin is the result of the company taking aggressive action to reduce inventories in big ticket items that are not selling due to shifting consumer demand.

While Target’ s management has done an exceptional job in growing the company this year, they have slipped in not seeing the higher costs and the potential for consumer demand to wane. Once the inventory is cleared, I think the company will be back on the right track. The markets seem to agree, with the shares bouncing off their lows today.

The company also believes margins will improve to a typical pre-pandemic 6% in the second half of the year. With traffic and overall top-line growth still strong, I believe the company can earn $12 a share next year. Buy TGT below $163. My $187. 50 target price remains realistic.