Stocks have come under pressure to start September but are still trading a little above the prices they were at on Aug. 24, when Fed Chairman Jerome Powell gave a speech at Jackson Hole, Wyoming, with the market then drifting up slowly on end-of-summer light volume.

So, despite the concerns about trade, emerging market currencies and most recently a rise in 10-year Treasury yields to 2.95%, the market is still holding its own. I believe stocks may drift here a bit until the Fed announces its interest rate decision on Sept. 26 and Chairman Powell has his related press conference.

Some assurances from Chairman Powell that the Fed is not on autopilot for rate hikes to continue into 2019 will help this market. However, I am not sure this will be Mr. Powell’s thinking, especially given his Jackson Hole speech in which he spoke about avoiding the asset bubbles that led to the last two recessions.

The good news is that despite the uncertainty, our stocks look to be in excellent shape. Their valuations are reasonable enough to withstand any moderate rise in rates. Indeed, some stocks offer excellent dividend yields and the economy should be strong enough for the companies to achieve their earnings estimates.

We have booked 12 solid winners this year in Value Authority. By doing so, we freed the list from stocks that were getting extended. I feel confident that no matter what market conditions persist, we will finish 2018 strongly.

If you listened to my surprise prediction for the fourth-quarter conference call last Thursday, you heard me say that Industrials were my favorite sector for that quarter. After underperforming for most of the year, I feel that visibility into continued economic strength in 2019 will give the shares a lift. Today, I am recommending an industrial company with excellent financial metrics, including a strong balance sheet.

EMCOR Group (EME) (not to be confused with Emcore Corporation, whose ticker symbol is EMKR) is a leader in construction and services for commercial and industrial buildings. The company’s construction and facility services business produced 63% of its 2017 revenues and provides critical infrastructure for electrical, mechanical, heating and air conditioning, security and fire protection for both new and existing buildings in a wide range of industries.

The company also provides commercial building service operations that provided 27% of its 2017 revenues, including facility maintenance such as reception and security, vendor management and technical consulting. EMCOR Group’s industrial services unit delivered 10% of its 2017 revenues by providing onsite repairs and maintenance to refineries and petrochemical plants.

The company is currently benefiting from secular factors, as well as cyclical factors, with the economy strong. The electrical and mechanical construction services industry has grown over the years, due principally to the increased content, complexity and sophistication of electrical and mechanical systems. 

In addition, advanced voice and data communication systems require sophisticated power supplies and extensive low-voltage and fiber-optic communications cabling. Moreover, the need for substantial environmental controls within a building, due to the heightened need for climate control to maintain extensive computer systems at optimal temperatures and the demand for energy savings and environmental controls in individual spaces, have expanded opportunities for EME’s electrical and mechanical services businesses over the years.

EMCOR’s revenues come primarily from the United States — 96%, with operations in the United Kingdom accounting for the remaining 4%. A source of stability for the company is a diverse customer base with which it has longstanding relationships. The company has a customer service center that operates 24 hours a day, 7 days a week to help maintain those solid relationships. Services are provided through over 33,000 employees in 170 locations, a wide enough net for EME to be local to its customers.

Although the company has not had much in the way of organic top-line growth in recent years, strong contract execution combined with share buybacks has led to consistent earnings per share (EPS) growth in recent years, as it climbed from $2.22 in 2014 to $3.05 in 2017. EMCOR is also coming off a strong second quarter, with revenues up 3.1% and top-line growth up 2.2%, excluding acquisitions.

The company’s operating income continued to benefit from strong contract execution and rose 7.8% in the quarter. A lower tax rate from the tax reform act and a 1.6% decline in outstanding shares drove EPS 29% higher from $0.95 to $1.23 a share. Due to the strong results and favorable operating mix in the quarter, management raised its EPS guidance for the year to $4.40 to $4.80 a share from $4.10 to $4.70 a share, versus the $3.05 the company earned last year.

EME is in a solid financial position, with current assets greater than all liabilities and interest charges earned nearly 30 times. Given the solid finances, the share buybacks and acquisitions to augment growth should continue.

Assuming the company earns $4.60, the midpoint of guidance this year, $5.00 is very doable next year if the economy stays firm. At just over 15 times EPS, I believe there is room for EMCOR to climb. Buy the stock under $75 as I target $85.

Earnings for Big Lots and J.M. Smucker Company

Big Lots stock has stabilized nicely after slightly disappointing second-quarter results, which we covered in our recent special alert.

While higher freight costs hurt results, I think several items boost the intermediate-term outlook. Gross margins were stable despite the higher freight costs, as product mix improved. The company added 500,000 new loyalty customers in the quarter. Top-line trends are looking good, and expense growth should slow dramatically next year following big investments for the stores of the future and higher wages this year. The better sales should flow to the bottom line, and EPS should improve from $4.50 this year to $4.80 next year. Finally, while new CEO Bruce Thorn was not on the conference call, management that participated said he was confident in the company’s current strategy, so we should not look for any changes in thinking that could involve more investment and hurt the stock.

As the market gains confidence in that $4.80 estimate, the stock should do very well from the current depressed levels. Buy BIG under $42. My price target is $52.

J.M. Smucker (SJM) fell sharply after the company reported fiscal first-quarter results and, in essence, lowered operating guidance for the year when it said that it is affirming guidance of $8.40 to $8.65, but this now includes an extraordinary $0.15 gain on the sale of the bakery business.

I think the selling in SJM was very excessive considering operating guidance for the year was lowered by 2%, and the stock did bounce back nicely last week as the market weakened. While results currently are being hindered as the company invests in new brands and sells less productive ones, early results from the new brands, such as 1850 Coffee, are encouraging. We should see modest EPS growth in the April 2020 fiscal year after the company earns $8.40, excluding the extraordinary gain this year. At 13 times EPS, the stock is very attractively valued, and the secure 3.1% yield should add to total returns. Buy SJM under $108; I continue to target $120.

Review of Remaining Positions

Chubb Limited (CB) has been recovering ground it lost following the Redding, California, wildfires, which raised the potential for another quarter of catastrophic losses. However, the good news is that we are well into hurricane season with no significant damage so far. Should this continue, the stock will keep its firm tone. CB is a good place to be in a good economy and higher rate market, as the higher rates will, in time, add to the company’s interest income. Buy CB under $136; I target $150.

Cognizant Technology Solutions (CTSH) had a bit of a rally going before being set back by an analyst downgrade. While I understand the Street’s fears surrounding the company’s declining retention rate and the need to raise compensation, which could cut margins, I believe these concerns are largely priced into the stock. CTSH offers very good value at 16.7 times this year’s EPS, with earnings likely to grow in the high-single-digit percentages in the future. The stock is a buy below $77.50 as I target $90.

Dow Dupont (DWDP) came under pressure with the overall market last week but held its own to reflect the generally positive overall economic data. While I will more than likely recommend sale of the stock before next year’s breakup of the company, I believe the good global economy along with the improved results from the company’s agricultural division should allow the shares to outperform through the year’s end. Hold DWDP to my $75 target.

First Hawaiian Inc. (FHB) shares were slightly pressured by another sale of stock from BNP Paribas. BNP has been aggressively selling its shares all year, which has kept a lid on FHB’s performance. The good news is that BNP’s interest in FHB could be as low as 16% if the underwriters pick up their option to buy shares. Just one more offering of the size of the current one for 20 million shares will liquidate all of BNP’s holdings in FHB. Meanwhile, FHB’s results are getting a nice lift from the strong Hawaiian economy, and the $2.05 EPS I think the company will earn this year (up from $1.66 last year helped by tax cuts) should increase to $2.20 next year. Once the market gains confidence in this $2.20 estimate, my $31.50 target should be within reach. The 3.3% yield will add to total returns. Buy FHB under $28.

Omnicom (OMC) caught a bid while most of the market struggled last week, and I think money managers are perhaps seeking new ideas as some momentum names fade. Trading at 12 times this year’s EPS and a 3.5% divided yield, OMC will catch the eye of value-minded money managers. While the advertising agency industry is not growing as fast as it once did, I do not believe the industry is in decline, and I look for OMC’s steep discount to the market to close. Buy the stock under $71. My target is $80.

Universal Health Services (UHS) rose sharply after reporting earnings, before the stock pulled back with the market after briefly trading over my $130 target last week. With the stock still inexpensive at 13.3 times this year’s EPS estimates and the company enjoying a decent second quarter, my inclination is to hold the stock through its earnings report next month, then evaluate the results to see if I want to raise my target. Hold UHS for now.

Valley National Bancorp (VLY) has seen limited movement in its stock price in the past few weeks. I feel that while concerns over interest margins with the yield curve flattening are temporarily putting a lid on the shares, the 3.6% dividend yield is providing support. Merger synergies should compensate for tighter margins, and continued loan growth also will help lift EPS from $0.87 this year to close to $1.00 next year. VLY is a solid operation, and I recommend buying the stock under $12.50 as I target $14.