While it has been a tough October so far for the S&P 500 and Nasdaq, the Russell 3000 Value Index opened today slightly higher for the month.

Rising interest rates have money managers selling off their high-flying equities in favor of value plays, which are not dependent on ultra-low rates to justify their current prices. Value stocks have been underperforming growth stocks all year, so value investors could finally be seeing the light at the end of the tunnel. I think there is a good chance we could see this trend continue for a while.

The key for continued improvement in the performance of value stocks will be earnings growth, and we will get a better feel for that issue in the next few weeks as earnings season is about to kick off once more. There are threats to the current positive environment for earnings, including rising raw material costs and the potential for slowing economic growth in 2019. However, while current estimates may need to come down a bit, I believe there is not enough evidence at this time to say there is a probability that earnings will be a major disappointment in 2019. So, value stocks should be good for a while. In any event, I think most of the stocks on our Recommended List will be minimally impacted by the potential issues and should do well, provided the economy remains relatively stable.

The bottom line that, while cautious, I remain positive on value stocks. Being a bit of a contrarian, recommending winners such as Henry Schein (HSIC), Walmart (WMT) and Kellogg (K) while they were out of favor enabled Value Authority subscribers to score some nice gains in a tricky value market earlier in 2018.

As we enter the final quarter of the year, I still believe this contrarian approach will work. Certainly, this week’s recommendation of Morgan Stanley (MS), which is down 20% since its March high, fits the contrarian mode. So, while the market will be more volatile over the next 12 months and more patience will be required, the winners should still keep coming to us.

Morgan Stanley — Strength Through Diversification

Speaking of Morgan Stanley (MS), one of the best-known names in the financial world, I want to look at this recent recommendation in more detail.

The company operates through three segments:

1. Institutional Securities. This is Morgan Stanley’s largest segment, and it provides traditional investment banking services such as equity and debt underwriting, mergers and acquisitions advice, and institutional brokerage activities. This segment had revenues of $18.8 billion and net income of $3.6 billion in 2017. Institutional Securities revenue and income has been somewhat flat in recent years, as there has been little growth in investment banking. Plus, the lack of market volatility has caused trading results to be dull.

2. Wealth Management. This segment is primarily a brokerage business serving individual investors. It generates revenues by charging clients brokerage and management fees, along with trading and market-making activities. This segment had net revenues of $16.8 billion and net income of $2.3 billion in 2017, with revenues up 11% and net income up 10% as fee-based client assets under management grew 19% to $1.045 trillion.

3. Investment Management. This division primarily earns money by charging fees for managing money for institutional investors and wealthy individuals. Private equity operations are also contained in this segment. Investment Management had revenues of $2.58 billion and net income of $246 million in 2017. Higher incentive compensation has limited earnings growth since 2015.

In a strong bull market environment, Morgan Stanley has been able to drive good earnings growth, with earnings per share (EPS) in recent years increasing from $1.78 in 2013 to $3.74 in 2017, driven primarily by growth in the Wealth Management segment and an 8.2% decline in the share count due to share buybacks. The strong results have continued throughout 2018, with EPS improving from $1.87 to $2.75 a share. This reflects continued growth in the Wealth Management segment and better results from Institutional Securities, as investment banking and trading results have both improved.

Morgan Stanley will report third-quarter earnings on Oct. 16 before the market openss. Expectations are for EPS of $1.04, as growth has slowed from the first half of the year with quieter markets limiting trading results. However, the company is well on track to earn $4.85 a share this year, and over $5.00 next year. At less than 10x forward EPS, 1.36x tangible book value and sporting a dividend yield of 2.55%, Morgan Stanley is attractively valued, and the shares should do well over the next 12 months if we stay out of an extended market decline, which I believe we will. This is a very strong company with a leading market position in investment banking and wealth management. Furthermore, the company’s balance sheet is solid, with common equity amounting to 15.1% of total capital. Buy Morgan Stanley under $49. My price target is $56.

Review of Recommended Positions

Most of our current recommendations will be reporting earnings in October, and I am optimistic about their prospects. I also believe the current list is strong enough to withstand a good bit of near-term market volatility and be poised to do well in any end-of-the-year rally.

Big Lots (BIG) seems to have some support around $40 a share in what has been a very weak environment for retail names. While the stock has struggled this year, the company is set up for a solid 2019 as more new model stores, which have been doing very well, come online. Slower growth in investment spending will also help results. The company does not report earnings until November, so I will have an earnings preview in next month’s issue. Buy BIG under $42. My target is $52.

Chubb (CB) will report third-quarter earnings on Wednesday, Oct. 23, after the market closes. Expectations are for EPS of $2.62 versus a loss of $0.13 last year, which reflected high claims from the very bad hurricane season in 2017. While losses for the quarter are hard to estimate, they will be much lower than last year, and premium growth should keep the stock trading firmly. The recent rise in rates will help raise interest income over the long-term. I believe investors should own solid companies like Chubb in the current uncertainty, Buy CB under $136. My target is $150.

Cognizant Technology Solutions (CTSH) will report third-quarter earnings sometime in the last week of October or the first week of November. Expectations are for EPS of $1.13 vs. $0.98 on an 8.5% gain in revenues to $4.08 billion. While I believe demand for the company’s services remains strong, the wildcard will be profit margins. With a declining employee retention rate at CTSH, there is speculation that the company will be forced to raise salaries. However, this is a manageable problem in my opinion, and at 15x next year’s EPS, any potential margin compression is well priced into the shares. Buy CTSH under $77.50. My target is $90.

DowDupont (DWDP) has been under some pressure recently, as there are concerns that rising feed stock costs for commodity chemicals will cut into profitability. Third-quarter earnings will be released on Nov. 1, and we should get some more insight from company management into the issue at that time. Expectations are for EPS of $0.72 vs. $0.55 on a 10.6% gain in revenues to $20.22 billion, with the top line aided by the DowDupont merger and strong results across most of the company’s business lines. For now, I continue to recommend DWDP under $68. My target remains $75. However, if the stock continues to decline due to the higher cost issues and  concerns that rising interest rates will slow the economy, I will look to lower my target.

Emcor Group (EME) will likely report earnings sometime in the last week of October, with expectations for EPS of $1.23 vs. $1.09 on a 3.6% increase in revenues to $1.95 billion. Good demand for the company’s electrical services and strong execution on the company’s current contracts will deliver the revenues and earnings gains. With EPS growing at a nice rate, there is good value in the company, which now is priced at less than 15x next year’s EPS. Buy EME under $75. My target is $85.

First Hawaiian, Inc. (FHB), a bank holding company, will report results in the last week of October. Expectations are for EPS of $0.52 vs. $0.42 on a 6.6% increase in revenues to $193.8 million. Continued good loan growth and the benefits of tax reform will be the main drivers of higher earnings here. FHB’s stock has been hit by a flattening yield curve, and there are concerns that this will only worsen in 2019. Long-term rate gains are unlikely to be able to compete with another three possible Fed rate hikes in 2019. I will be paying attention to management’s comments on how they plan to address the flattening yield curve. However, even assuming EPS for 2019 comes in at $2.15 as opposed to the current $2.20 consensus, this high-quality bank is attractively valued at 12.5x forward EPS and sports a 3.4% dividend yield. Another positive here is the fact that BNP Paribas is almost done selling its interest in the company,  so there won’t be any more disruptive secondary offerings soon. Buy FHB under $28.  My target is $31.50.

J.M. Smucker (SJM) ends its fiscal second quarter on Oct.31, so there will be no earnings report until the end of November. The entire food group ran into selling in September following weak earnings from General Mills (GIS), but I remain confident that SJM is stabilizing results as it sells off underperforming businesses and invests more in growing areas. At just over 12x this fiscal year’s EPS and sporting a dividend yield of 3.2%, the stock is very attractively valued. If the market environment starts to express fear that higher interest rates will lead to slower economic growth, SJM is poised to do very well relative to the market, as investors will be more favorably inclined to the food industry. Buy shares below $108. My target is $120.

Omicom (OMC) will likely report earnings sometime next week, with expectations for EPS of $1.21 vs. $1.13 on flat revenues of $3.71 billion. Tax reform was the main driver of the earnings gains here. Trading at 12x EPS and offering a 3.4% dividend yield, the market seems to be saying that growth at Omnicom is a thing of the past.

However, I do not feel this is the case. My belief is that the company will report revenue growth improvement once it has completed divesting any underperforming business. At some point, the company could also consider cost cuts to better align expenses with projected growth. Buy OMC under $71. My target is $80.

Universal Health Services (UHS) will likely report results in the last week of October. Investors are currently looking for EPS of $2.02 vs. $1.49 on a 3.9% gain in revenues to $10.8 billion. The top line will be bolstered by low-single-digit admissions growth in chronic care and behavioral facilities, along with acquisitions. Tax reform gains will account for a good deal of the bottom line improvement. The shares have been volatile within a tight range in recent weeks, but as long as the company can combine consistent results with modest top-line gains, the direction of the stock is likely higher. Also, UHS is currently cheap at 13.2x 2018 EPS estimates. Buy UHS under $115. My target is $130. Both of these numbers may be raised in the future should the company continue to deliver.

Valley National Bank (VLY) will report earnings in late October, with expectations for EPS of $0.23 vs. $0.14 on a 31.7% increase in revenues to $251,4 million. Top-line gains should reflect continued loan growth and the acquisition of USAmeriBancorp, while EPS growth will be aided by tax reform and an easy comparison off of a relatively weak quarter in 2017. Valley National, like most regional banks, has seen its share price pressured by concerns over narrowing interest margins as the yield curve has tightened. However, the sell-off has given investors the opportunity to buy this leading regional bank at just 11x 2019 EPS estimates. Investors can also pick up a dividend yield of 3.85% here. Buy VLY under $12.50. My target is $14.