Are We Seeing Too Much of a Good Thing?

Until yesterday afternoon, there was seemingly a non-stop rush by investors to sell every tech stock and then reinvest the funds in a financial or industrial name.

This scenario was like a dream come true for value investors. For years, they have seen value-oriented companies, many of which were posting solid earnings reports, badly lag their growth stock counterparts, even if they were sometimes companies of dubious quality.

Despite the late-day selloff yesterday, value is still trouncing growth heading into today, with the Russell 3000 Value Index up 19.1% in 2021, compared to a gain of 4.3% for the Russell 3000 Growth Index.

While I believe that value stocks can continue to outperform growth stocks, I believe that a bit of a rest is overdue and healthy for the market.

The valuations in many stocks and segments are getting more and more challenging. Taking a quick look at some of investors’ favorite segments thus year, many industrial shares are selling for over 20X 2022 earnings, even while facing challenges from rising input prices as inflation is starting to pick up.

Many financial stocks are being sold at a historically high 14X next year’s earnings, with dividend yields for many names now below 3%, which are also historically low.

Perhaps investors will begin to take the possibility of a corporate tax hike seriously as President Biden gets closer to enacting his agenda. This will lead to lower earnings estimates and make stocks even more expensive.

I have already taken profits in Valvoline (VVV) and Keurig Dr. Pepper (KDP) since the publication of our April issue, and there could be more profit-taking to come. While the market environment may get more challenging for value stocks, I believe that we can preserve and add to our gains in 2022 with good stock selection and timely adjustments.

Turnarounds are stocks that can often do well in any market environment. I believe that I have a good one for our May selection.

JNPR: New Technology Driving Turnaround

Juniper Networks (JNPR) provides a variety of routers, switches and controllers to enable its customers to run high performance networks. The company has struggled against rivals like Cisco Systems (CSCO) but may now be in the early stages of a turnaround.

One key to the turnaround has been the acquisitions of companies that have improved JNPR’s capabilities in the critical technologies of the future. In 2019, Juniper acquired Mist Systems for $405 million. Mist Systems’ key technologies enable enterprises to manage their networks on an artificial intelligence (AI) approach which will self-correct errors for maximum downtime.

Juniper further enhanced its artificial intelligence capabilities through the 2020 acquisition of 128 Technology for $450 million. This built on the Mist Systems acquisition by extending the company’s AI capabilities to the cloud.

In November 2020, Juniper acquired Netrounds, a maker of programmable test and assurance services for fixed and mobile networks. The acquisition will help JNPR’s internet service provider customers offer better services to their customers through providing insights as to where problems originated on a network when it is not operating in a fully optimal matter.

The acquisitions are helping the company meet its objective of offering simplified operations and better end-user experience to its customers.

Juniper has had positive revenue growth for three consecutive quarters and got 2021 off to a strong start with solid results. Revenues were up 8%, driven by strength with service providers, and earnings per share (EPS) increased to $0.30 from $0.23 a share. Orders were strong, and the company grew its backlog. Most notably, the company indicated that software orders were up 70%, showing good market acceptance for Juniper’s AI offerings. On the earnings conference call, the company also indicated that it is taking market shares in the enterprise segment.

Juniper gave second-quarter guidance for revenue growth of 4.9% to $1.14 billion and EPS of $0.38 vs. $0.35 in the prior year. Given the company’s current momentum, I believe that current EPS estimates for $1.71 vs. $1.55 in 2020 are realistic and could prove to be conservative.

This is not to imply that Juniper is headed for rapid sales growth, as the networking market is already mature. However, these new products are making Juniper more competitive and able to compete with the industry giants. JNPR should be able to grow sales at least in the low single-digit-percentages, and, combining that with the likelihood of improving gross margins though adding more software in the revenue mix and well-controlled general and administrative expenses, we might see double-digit-percentage EPS growth over the next few years.

Also making JNPR attractive is its strong balance sheet with little net debt. The company also has a history of good free cash flow generation. These characteristics could potentially make the company a takeover target, especially if the company’s new solutions continue to take market shares.

JNPR is a buy under $28. My $32 target is a reasonable 17X 2022 EPS of $1.90. The 2.9% dividend yield will add to total returns.

Position Review

3M (MMM) made a new 52-week high yesterday, erasing all its post-earnings selling as investors poured money into cyclical stocks as technology continued to weaken. The company faces earnings uncertainty regarding input costs and how good the health care segment will do as the worst of the pandemic starts to wind down. However, the stock still sells at a meaningful discount compared to large-cap industrial peers like Honeywell (HON), Caterpillar Inc. (CAT) and General Electric (GE). I am therefore edging my price target up to $210. 3M is a buy under $185.

Cognizant Technology Solutions (CTSH) has inched higher since last week’s post-earnings selloff. While the COVID-19 tragedy in India does represent some risk to earnings this year, I believe that investors should focus on the bigger picture, including the company’s ability to return to consistent sales growth as digital sales continue to grow and become a larger part of the company’s revenue base. There is good value in the shares as they are selling for less than 19X this year’s EPS estimates. Buy CTSH under $75. My target is $85.

Dollar Tree (DLTR) will report fiscal first-quarter earnings sometime in the last week of May. Expectations are for EPS of $1.35 vs. $1.04 on a 3.9% increase in revenue, with profitability benefitting from the absence of initial COVID-19 expenses of $0.23 per share in the prior year. Sales face a difficult comparison as a surge of business due to COVID-19. Indeed, we saw that the company enjoyed an 8% increase in sales when compared to the first quarter of last year. However, continued good results from renovated Family Dollar stores will give sales a lift.

The stock cooled off in April after a very strong March. However, with top-line momentum strong and lowered COVID-19 expenses this year, I have a high degree of confidence that the company can earn $6.20 a share this year, up from $5.65 last year. My $125 target is a reasonable estimate. DLTR is a buy below $110.

General Mills (GIS) fiscal fourth-quarter ends on May 31. So, do not expect earnings from the company until late June. The stock, and the whole food group, was strong last week, aided by good results from Kellogg’s (K). In a market that is looking increasingly pricey, there is good value in the stock at 17X forward earnings with a 3.2% dividend yield. Buy GIS under $59. My target is $65.

Despite lowering 2021 earnings guidance on higher corn costs, Ingredion (INGR) continues to trade steadily. At less than 15X this year’s earnings estimates, the shares sell at a big discount to the market price-to-equity ratio (P/E) of 24.2X, and continued growth in specialty products will add a degree of earnings stability to the company over the long term. Buy INGR under $90. My target is $105.

Although currency losses led to disappointing first-quarter results, Kronos Worldwide (KRO) shares have stabilized. I still believe that commodity-based stocks should continue to do well, and I am confident that KRO can achieve my $18.50 target with the company likely to earn close to $1 a share this year. The stock is a buy below $15.

Mueller Industries (MLI), last month’s new pick, is off to a strong start for us. The company delivered good first-quarter earnings, with EPS of $1.11 vs. $0.57 on a 35.6% increase in revenue to $818.1 million as the company benefitted from improving end markets and strong copper prices. Management was also optimistic about the entire year as end markets will continue to improve as the economy reopens. The company could now earn as much as $4 a share this year, and the stock remains attractive despite its recent rally. Buy MLI under $48. My target is $52.

Old Republic (ORI) is trading close to my $26 target price. While I could raise the target again as the stock is not expensive, I think it needs to be pointed out that the company is more sensitive to market fluctuations than the average insurance stock as ORI keeps a somewhat higher percentage of its investment portfolio in stocks than is typical for an insurance company. Hold ORI for now and I will let you know what my next step is going to be.

Safety Insurance (SAFT) responded well to first-quarter earnings and can still go higher. While the shares are somewhat thinly traded and thus subject to some volatility, the 4.2% dividend yield will keep investors interested in the stock and provide support. My $90 target is realistic based on a year-end book value of $62.50 and sustainable earnings of $7 a share. SAFT is a buy below $80.

P.S. Orlando MoneyShow, Championsgate Resort, June 10-12: The MoneyShow is back in person! Speakers not only include me but Larry Kudlow, Mark Skousen, Bob Carlson, Jon Najarian, Jeffrey Saut, Jeff Hirsch and Louis Navallier. Click here to register or call 1-800-970-4355 and mention priority code 052705 to attend free.