Value stocks have had a good start to the year, with the Russell 3000 Value Index up over 5%. That nearly erases its 8% loss in 2022. What’s behind the recent strength? Simply put, investors started the year with a more optimistic outlook.

Investors remain hopeful that there will be a “soft landing” for the economy, with the worst-case scenario a slight recession in the economy. If this scenario plays out, earnings may not be robust this year, but they will not fall sharply either. After that, there would be a recovery in the economy and earnings in 2024, as the Federal Reserve’s tightening phase will finally be over. There’s even a possibility that the Fed could reduce rates as inflation comes down to their 2% target.

While this is a possibility, this scenario is hardly a sure bet.

The other potential scenario is that economic growth slows further, even with the Fed winding down its rate increases this year. Strong job growth, which has kept the economy rolling through the Fed tightening, will not last forever. Earnings estimates for 2023 may eventually be lowered, and in turn, some of the rally since October could be erased.

Having said that, now is not the time to run away from the market.

Stocks are not as dirt cheap as they were a few months back, but there are still reasonable values out there. Even if the Fed tightens a little more and keeps rates high for a while, longer-term interest rates remain low enough to support stocks at their current valuations. Furthermore, despite Fed Chair Jerome Powell’s hawkish posture, I do not think he will hesitate to cut rates should the economy appear to be heading into a recession. This is, in fact, the bet bond investors are making right now, as the inverted yield curve indicates cuts are expected within the next year.

Overall, we shouldn’t fight the market’s momentum right now. We are off to a strong start for the year, with our stocks gaining over 10% on average since the beginning of the year—and I believe our names have further upside. I will continue to be careful and disciplined in the stocks we buy and sell to ensure that we realize long-term gains even if the market and economic environment remains volatile.

Sysco: A Great Company at a Reasonable Price

On Monday, we added Sysco Corporation (SYY) to the Buy List. You may be familiar with the name, as Sysco is the leading global provider of food products. The company distributes a complete range of foods, including frozen and fresh meats, vegetables, canned foods, and beverages, as well as related disposable and paper products. Its primary customers prepare meals away from home, with 63% of its annual sales coming from restaurants. The majority of its remaining sales are roughly evenly divided between healthcare facilities, government and educational institutions, and the travel and leisure industry.

Sysco’s operations are run through 333 distribution centers, 190 of which are in the United States.  Revenues from outside the U.S. account for approximately 17% of the total. And the company derives 11% of its revenue from SYGMA, which specializes in distributing food to chain restaurants.

Sysco has a long history of profitable growth, which is reflected in the strong performance of the stock over a multi-year period. The company is planning for this growth to continue over the next few years, with SYY growing at 1.35X the industry in the current fiscal year and this ratio anticipated to improve to 1.5X two years from now. SYY calls this multi-faceted plan, “Our Recipe for Growth.”

To achieve its growth goals, Sysco plans to continue to make strategic acquisitions. As an example, the company acquired an Italian food importer Greco and Sons two years ago, and Sysco continues to roll out Greco’s offerings to its customers. Sysco should also have success through its customer loyalty program, Sysco Your Way and Perks. The program has a strong emphasis on product, protein and Italian offerings. Growth will also be driven by enhanced pricing and digital capabilities and an improvement in fulfillment capabilities, as the company establishes six-days-a-week deliveries and still keeps truckers on a preferred four-day-a-week schedule.

The company has come through the adverse impact of the pandemic well on the top line and will see improvement on the bottom line as volumes continue to grow and wage pressures decline.  In the June 2019 fiscal year, the last full one prior to the pandemic, Sysco had revenues of $60.1 billion and EPS of $3.55. Although results declined during the pandemic, SYY had revenues of $68.6 billion and EPS of $3.25 in the June 2022 fiscal year.

The first half of fiscal year 2023 has started well for SYY, with sales up 15.1% and EPS up 12.3%. However, the stock fell back after it reported second-quarter earnings last week, as EPS of $0.80 was $0.04 short of expectations. The company also lowered EPS guidance for the full year to a range between $4.00 and $4.15, down from previous guidance for $4.09 to $4.39. The company attributed the lower guidance to softer-than-expected industry volumes and expenses not coming down as fast as anticipated.

The stock fell on the news, falling from $82 to the current price of about $76. I think the recent decline represents a good buying opportunity for us. Volume growth improved in January, and a strike that hurt fiscal second-quarter volumes has been settled. Also, while expenses did not improve as much as the company expected, they are headed in the right direction, and wage pressure is declining. Employees staying on the job longer should also lead to lower training costs.

I believe EPS for the current year can come in at the high range of guidance at around $4.15 and improve to $4.50 in the June 2024 fiscal year. When you consider that this industry leader has a long history of growth, trades at 17X fiscal 2024 estimates, and has a 2.5% dividend yield, it’s easy to see why I think SYY is attractively valued. SYY is a buy below $80. My $92 target is where the stock traded in April 2022.

Position Review: More Earnings on Tap

Brady Corp. (BRC) will report fiscal second-quarter earnings within the next two weeks. Expectations are for EPS of $0.81, vs. $0.70 last year, on a slight decline in revenues. However, organic growth should be positive, with the company benefiting from continued growth in its identification solutions segment, and improvement in workplace safety following the simplification of product offerings.

The stock has performed well, aided by its good earnings momentum and recent strength in the industrial sector. While the recent rally could pause, the company is in a good long-term position for earnings growth and further gains from the current price. BRC is a buy below $50. My target is $67.

Fidelity National Information Services (FIS) will report fourth-quarter earnings on February 15 prior to the market opening. Expectations are for EPS of $1.70, vs. $1.92 last year, on flat revenues, as investments and increased competition will continue to pressure results.

The stock is very inexpensive at less than 12X forward EPS estimates, and the company will need to show some stability in results before the shares can rally. I believe FIS can right the ship, but I will be wary of the potential of market share loss in a changing payments industry.  For now, FIS is still a buy under $80. My target is $100.

First Busey (BUSE) has snapped back nicely from its disappointing fourth-quarter earnings, which we reviewed on January 27. Selling at less than 10X EPS estimates revised for a higher-than-expected tax rate, the stock remains cheap and will do well if the economy does not slip into a recession and credit losses remain limited. BUSE is a buy below $23. My target is $28.

Lowe’s Companies (LOW) will report fiscal fourth-quarter earnings on February 28, with expectations for EPS of $2.24, vs. $1.78 last year, on a 6.7% gain in revenues. EPS comparisons have benefited from the company’s aggressive share buyback. Difficult comparisons and a slowdown in the housing market will cause operating income to fall next fiscal year, but aggressive share buybacks should allow EPS to improve slightly from the $13.74 expected in the current fiscal year. If consumers spend to improve their current house rather than move, it could potentially offset lower new and existing home sales in the upcoming year. Whatever the new year brings, LOW is a strong company operationally and financially, and its earnings will rise in the long-term. LOW is a buy below $215. My target is $260.

Newell Brands (NWL) will report fourth-quarter earnings before the market opens on Friday. Expectations are for EPS of $0.11, vs. $0.42 last year, on a 20% decline in revenues. The decline in results is driven by major retail customers right-sizing their inventories.

If results start to improve in the second half of this year as inventories normalize and allow 2023 EPS to come in at $1.30 to $1.40 a share, the stock can continue its recent rally. NWL is not just relying on macro factors to improve, as it recently announced another restricting program, which will lower pretax operating costs by $220 million to $250 million a year, or $0.35 a share on an after-tax basis.

The company also recently declared its regular quarterly dividend of $0.23 a share, demonstrating it has confidence that earnings will rebound. I share this confidence and continue to recommend the stock. Buy NWL under $15. My target is $20.

Old Republic (ORI) shares have been stable since the company reported fourth-quarter results. Given the company’s strong earnings momentum, I expect the stock to eventually move closer to my $27 target, at which point I will decide on raising the target or recommending sale. Hold ORI for now and buy only if a market setback takes it below $24.

Patterson Companies (PDCO) will report fiscal second-quarter earnings in the first week of March. Expectations are for EPS of $0.60, vs. $0.55 last year, on a 1.7% increase in revenues, as the company should realize gains in both the dental and animal health segments and have lower COVID-related costs than a year ago.

The stock has done well since my January 6 recommendation, especially when you consider many health care stocks have struggled. This is in part due to the fact that there was not a surge of severe COVID cases this winter, and major disruptions to Patterson’s dental business from COVID seems unlikely.  With the shares selling at only 13X fiscal 2024 EPS estimates with a 3.5% dividend yield, I feel there is more upside in the stock. PDCO is a buy below $29.50. My target is $33.

Phibro Animal Health (PAHC) will report fiscal second-quarter earnings after the close tomorrow. The company is expected to report EPS of $0.30, vs. $0.37 last year, on a 3.7% gain in revenues, with higher commodity costs and investments in future growth hurting the bottom line. However, I look for these negative factors to moderate as the year goes on.

The stock became ridiculously cheap at the height of the market sell off, and it is still attractively valued at 13.5X depressed estimates for the July 2023 fiscal year. PAHC is a buy below $16. My target is $20.

Sonoco Products (SON) will report fourth-quarter earnings after the close tomorrow. Expectations are for EPS of $1.21, vs. $0.90 last year, on a 23.3% increase in revenues, as the company continues to benefit from price increases for packaging products. Investors will also be tuned into the company’s comments about its customers’ inventories, which management indicated were rising at the end of the third quarter, and whether supply chain problems cut into free cash flow. These issues have limited stock gains in recent months, but if the company believes it is through the worst of these problems, SON could do very well from its current price. SON is a buy below $65. My target is $75.