Coming into today, the S&P 500 was down 1.3% for October. While that seems like a lot over the course of a week, it could have been much worse.

We got a very bad Institute of Supply Management (ISM) manufacturing and service report last week that raised recession concerns. In addition, China diminished hopes for a trade agreement to be hammered out when negotiations resume tomorrow by indicating that it will not discuss changing its industrial policies and intellectual property theft issues at this week’s meeting.

Why has the market rallied since last Thursday’s lows? Perhaps it will be satisfied later this week if trade progress is made, even if no actual agreement is reached. In addition, with earnings season coming up, investors are more interested in how companies are doing and what they are saying about the future, rather than just relying on survey data or the ISM reports.

Like the market, I am not panicking either. On the other hand, I will also proceed with caution when necessary. I reduced our risk over the past week by taking profits in Packaging Corporation of America (PKG) and replacing it with the less volatile Genuine Parts (GPC). It is not that I am unwilling to take risks at this time, but stocks need to be priced adequately to reflect those risks before I will consider buying or holding them.

We have had some turnover in our recommended stocks recently, with profits taken on three of the past four selections.  I believe my current recommendations look very attractive, with some stocks already discounting a lot of potential bad news. However, I will not be shy about making further changes as warranted.

Given growing economic and political concerns, the upcoming earnings season will be a critical one, making the need for further adjustments necessary should some of the more bearish scenarios gain traction. However, keep in mind that great opportunities are also born in times of uncertainty, and I will be on the lookout for them as well. So be prepared to act. It should be an exciting last quarter of 2020, and I think we will come out of it just fine.

A Genuine Bargain

While it may seem odd to refer to an auto and industrial replacement parts distributor as an iconic company, Genuine Parts (GPC) has earned that title. The company was founded in Atlanta in 1928 when Carlyle Fraser purchased a motor parts store that had $78,000 in sales for $40,000. The company has since grown to a multinational giant that achieved $18.7 billion in sales in 2018. As the company is well regarded for its operational consistency, this fact has allowed Genuine Parts to raise its dividend for a remarkable 63 years in a row.

The company’s automotive parts distribution centers distribute replacement parts (other than body parts) for substantially all the motor vehicle makes and models that are in service in the United States including imported vehicles.  In addition, the company distributes replacement parts for small engines, farm equipment and heavy-duty equipment. Distribution in the United States is made primarily through 57 NAPA Auto Parts stores in 40 states and 1,100 NAPA Auto stores in 46 states. NAPA also operates in Mexico and Canada. This segment contributes approximately 60% of operating profit before corporate expenses.

The Industrial Parts Group, operating under the name Motion Industries, serves approximately 200,000 customers in all types of industries that are located throughout North America. Motion Industries services all manufacturing and processing industries and has access to a database of 7.6 million parts. This segment contributes approximately 34% of operating profit before corporate expenses.

The Business Products Group, operated through the S.P. Richards Company, distributes a broad line of office and other business-related products through a diverse customer base of resellers. S.P Richards sells over 98,000 items to 9,700 resellers and distributors. This segment contributes approximately 16% of operating profit before corporate expenses.

Financial Review

The company performed steadily from 2014 through 2017, with earnings per share (EPS) in a narrow range from $4.59 to $4.71 during that period. EPS improved to $5.68 last year due to the lower tax rate from the recent tax reform bill. Operating income remained flat though, as sales growth was offset by added expenses from strategic acquisitions and higher freight and personnel expenses.

Genuine Parts will report third-quarter earnings on Oct. 17, with expectations for EPS of $1.47 vs. $1.48 on a 6.7% increase in revenue. The quarter should also feature what has occurred so far in 2019: low single digit comparable sales growth that was boosted by acquisitions and negative offsets from currency issues. Rising freight and payroll expenses will continue to pressure profit margins. For the year, EPS should be change little from the $5.68 that the company earned last year.

The company’s flattish earnings over the past five years have taken a toll on the stock, which trades lower than it did when it first crossed $100 in November 2014. However, I am looking for the company to get earnings back on the growth track. The expense pressures should ease, and the company will be able to get more synergy out of the $2.6 billion in acquisitions it has made over the past four years. Genuine Parts will continue to make selective acquisitions and expand into adjacent and foreign markets. Sales outside of North America are currently only 15% of total sales.

Attractive features of the company include a strong free cash flow generation, with free cash flow being close to 100% of net income in recent years. In addition, GPC is a solid financial position, with interest expenses covered ten-fold by its operating income. These factors should allow the company to continue its expansion plans without straining its finances.

At 16.7X this year’s EPS, the stock is selling for less than many other “safe” plays. For example, many utilities trade over 20X this year’s earnings and do not have the same free cash flow generation capabilities that Genuine Parts has. GPC is also cheap compared to consumer product companies like Clorox and Proctor and Gamble, which trade well over 20X their respective forward EPS. Given the market’s willingness to pay up for stable companies in the current environment of very low interest rates and economic uncertainty, the stock could pass my $110 target if the company can earn $6.00 a share next year, which I believe it will. GPC is a buy under $100.

Position Review

Big Lots’s (BIG) share price weakened last week due to growing economic concerns. At its current price, the stock is discounting long-term earnings power of no more than $2.00 per share, even though the company has consistently earned more than that. The stock is also holding its own even though the company is being impacted by higher tariff and freight costs and continues to invest in its “stores of the future” concept. Since the stock is selling at less than 6X company guidance regarding its earnings per share (EPS) of $3.70 to $3.85 a share and since this stock has a dividend yield of over 5%, a lot of bad news is being discounted in the stock. If results this year come reasonably close to guidance and the company continues to show progress in its transformation, the stock should do very well from its current levels. With no signs of any operational deterioration which would warrant such a low stock price, continue to buy BIG under $26. My target is $38.

Cognizant Technology Solutions (CTSH) will report its third-quarter results on Oct. 30 after the markets close. Expectations are for EPS of $1.05 vs. $1.19 on a 3.4% increase in revenues to $4.21 billion, as profitability will be hurt by higher personnel costs along with the continued negative impact of renegotiated contracts with health care customers. Although the stock has struggled, expanding digital offerings will boost growth and the issues impacting health care profitability will soon weaken. CTSH is a quality company that is selling for just 15X this year’s EPS, and I believe the stock should be a much-improved performer through 2020. Buy CTSH under $65. My target is $79.

F5 Networks (FFIV) will report its fiscal fourth-quarter earnings in a little over two weeks’ time. Expectations are for EPS of $2.55 to $2.90 on a 3.5% increase in revenues. Profitability in the quarter will be hurt by expenses related to the NGINX acquisition and other investments that the company had made to increase its software offerings, especially the ones that allow enterprises to launch their applications in multi-cloud environments. The lower estimates are affected by the acquisitions as well as to concerns that slowing cloud infrastructure spending has hurt the stock this year. However, at only 13X EPS estimates for the September 2020 fiscal year, along with a high amount of recurring service revenue and a debt-free balance sheet that has $19 a share in cash, the shares are very attractive at the present time. FFIV is a buy under $145. My target is $165.

First Hawaiian Inc (FHB) will report third-quarter results on Oct. 24 after the markets close. Expectations are for EPS of $0.53 vs $0.50, with recent loan growth and tightly controlled costs driving results. The stock has drifted with the financial sector, but provided the economy stay sounds and credit costs remain low, I believe the stock can work towards my $30 target. The 4% dividend yield will add to our total returns. Buy FHB under $26. My target is $30.

Ingredion (INGR) will report third-quarter results sometime in the first week of November. Expectations are for a flat EPS of $1.70 on unchanged sales of $1.45 billion. The continued strength in the U.S. dollar during the third quarter will hurt results, although this will be offset by a sharp decline in corn prices. This could help the company’s top expectations. Trading at only 12X this year’s EPS expectations, INGR trades at discount to other food related stocks. Once investors gain confidence in an EPS improvement next year due to sharp decline in corn prices, the stock should do well. The 3.2% dividend yield adds to the attraction of the shares. Buy INGR under $90. My target is $105.

Morgan Stanley (MS) will report third-quarter earnings before the market opens. Expectations are for EPS of $1.15 versus $1.17 on a 1.5% decline in revenues as the company indicated that there has been a recent softness in equity trading and investment banking. Despite the near-term results being softer than what I would like, the stock trades at just approximately the 1.1X tangible book value of $38.44 per share. The tangible book value should grow at 6% to 8% per year, even as the company pays out $1.40 a share in dividends. This gives the stock a current yield of 3.4%. Provided we stay out of a recession, book value at the end of 2020 should approach $42.50. My $50 target is just 1.18X the forecasted tangible book value. MS remains a buy below $44. My target is $50.

The critical Halloween season is finally here for Party City (PRTY), and the company will announce October sales along with the third-quarter calendar results sometime during the first week of November.  Expectations for the third quarter are for EPS of $0.01 versus $0.07 on a 7% decline in revenue, with the top line impacted by the sale of the company’s Canadian stores, store closures and a continuing helium storage. Higher freight costs will hurt the bottom line. However, the quarter is not an important one for the company seasonally, and I expect that investors will be primarily concerned with Halloween sales. Provided that compatible store sales stay relatively flat and the company gives positive guidance regarding inventory and debt reductions, the stock will react favorably. While the results are being held back this year at PRTY by unusual issues beyond the company’s control, if the company can come out of the full year earning $1.20 a share with lower debt and inventory, the shares could bounce sharply higher. Buy PRTY under $5.50. My target is $9.

I am still waiting for Valley National Bank (VLY) to set a date to report its third-quarter earnings. It will most likely be in the last week of October. Expectations are for EPS of $0.23 vs. $0.21, with recent loan growth and the company’s successful program to increase VLY’s efficiency driving results. Credit costs should also remain low. While the stock has come under some pressure due to concerns that lower long-term interest rates will compress margins, with interest expense on the company’s short-term liabilities also declining and repricing faster than the company’s long-term assets, interest margins should stay stable for now. The stock remains a good value at 12X this year’s EPS, with a 4% dividend yield and a strong credit history. With a potential EPS of $1.00 in 2020, I am raising my buy under in VLY to $10.50 and my target to $12.50.

Valvoline (VVV) will report its fiscal 2019 fourth-quarter earnings in the first week of November and will likely give fiscal 2020 guidance at the same time. Expectations are for EPS of $0.33 vs. $0.34 on a 5.6% increase in revenues, with good growth from the Quik Lube segment offset by currency pressures and investments to improve the do-it-yourself business in the Lubricant segment. However, currency pressures should lessen next year, and with the growing Quik Lube segment accounting for a larger percentage of operating income, EPS should grow in fiscal 2020 to $1.46 from $1.33.  Even with the stock selling off recently due to currency concerns, I am still enthusiastic about VVV’s prospects. Buy Valvoline below $21.50. My target is $25.