Despite a very strong earnings season, the Russell 3000 Value Index remains slightly below its May peak as the market struggles with concerns over how well corporate sales growth will compensate for rising input costs.
As we weigh these concerns, keep in mind that our stocks in particular made a significant move between November and May and effectively got ahead of themselves in terms of both the technical situation and their internal valuations.
Even value stocks sometimes need time to rest. That’s where we seem to be now . . . and what’s nice about our position is that dividends keep coming in to keep cash flowing while we wait.
We could even argue that this start-stop-wait pattern is typical of value investing. More recently, Friday’s strong employment report was constructive but the market seemed confused by yesterday’s weaker commodity prices, which would ordinarily signal a less expansive economic environment ahead.
In my view, decelerating commodity inflation can only help preserve profit margins while the cause can be more easily attributed to a more aggressive Federal Reserve in a strong economic recovery. But we’ll just have to see.
Meanwhile, this is a seasonally weak period for the market, so it could be another 3-4 months before stocks find a clear direction and a little more visibility into 2022 earnings. For now, the Fed is unlikely to to start the process of reducing its purchase of securities before next year.
While our stocks may move sideways for a while longer, I remain comfortable with the names on the buy list: cheap enough to withstand a rise in interest rates and slightly overweight banks that would relish the chance to charge borrowers a little more. These are not the kinds of stocks that require a booming economy to expand, either.
In my view, simply avoiding an immediate recession should be good enough to keep dividends flowing. That’s all it takes to reward our patience.
NWL: Lean And Ready For Growth
Newell Brands is a leading global consumer goods company with a strong portfolio of well-known brands including kitchen products RubberMaid, Oster and FoodSaver, home products Yankee Candle and First Alert, school and office products from Sharpie and PaperMate, baby products from Graco and outdoor equipment from Coleman.
The company “seeks to create moments of joy and peace of mind” to consumers through products that are innovative, eco-friendly and available in nearly 200 countries around the world.
Growth has been aggressive in recent years, highlighted by a 2016 acquisition of the manufacturer of Mr. Coffee and Rawlings sporting equipment. However, NWL lurched down after earnings in the third quarter of 2017 disappointed, leading some analysts to wonder whether management had taken on too much debt to fuel acquisitions.
For others, it was an opportunity. Management took quick action and began selling brands, raising $6 billion in the process while hiring a new CEO in 2019. New management has brought in outside executives to run most business units and is now avidly pivoting into emerging consumer trends like home food preparation, outdoor activities and do-it-yourself projects.
So far, so good. Despite headwinds from COVID, pretax operating income increased 19% last year to $643 million thanks to lower operating expenses as well as low interest and depreciation charges. And the improvement continues. Revenue is up 25% YTD and EPS increased to $0.86 from $0.39 a share for the last two quarters.
The company is guiding for full 2021 EPS of $1.63 to $1.73 compared to an adjusted $1.79 last year, with the decline in EPS due strictly to a more normal tax rate this year.
NWL shares have declined from over $30 in early May on commodity cost concerns. However, the stock is now selling for just 13X next year’s EPS estimates of $1.90, which assumes sales growth of just 1%. This seems cheap for a company that owns many recognizable brands and appears to be well on its way to more vibrant operations. Buy NWL under $26.50. My target is $31.
3M (MMM) has been stuck in a narrow trading range since early July, a pattern followed by most industrial stocks. However, second-quarter earnings showed the company is still growing nicely, with good results across all business segments . . . even healthcare, which was facing difficult comparisons due to COVID. MMM remains a high-quality cash machine that sells at a discount to its mega-cap industrial peers, and I think the stock will begin to outperform again. MMM is a buy below $190. My target is $210.
Cognizant Technology Solutions (CTSH) has given up some of its post-earnings rally, but I believe the stock will move higher. Second-quarter earnings showed that growth initiatives taken in recent years continue to pay off and the company can successfully navigate challenges like higher costs and employee retention. The stock trades at 16X 2022 EPS estimates, a significant discount to the market multiple of 21X, and I believe this gap should close. Buy CTSH under $75. My target is $85.
Dollar Tree (DLTR) will likely report second-quarter earnings sometime in the last week of August. Expectations are for EPS of $1.02 vs. $1.10 on a 1% increase in revenue amid difficult y-o-y comparisons from COVID-aided business. The stock has traded in a very tight range since early June, but investors want to see more signs of an earnings recovery next years as freight costs moderate. Selling at just over 14X potential EPS of $7.00 next fiscal year, I believe upside is significant.
Fulton Financial (FULT) reacted well to Friday’s strong employment report and I think the stock has can still work its way higher. The company should continue to see solid loan growth and good credit quality, while any increase in long-term interest rates can only help interest margins over the long term. The stock is still reasonably valued at just over 12X a reasonable EPS estimate of $1.30. Buy FULT under $16. My target is $18.50.
Like all food stocks, General Mills (GIS) struggled last week on concerns over rising commodity costs. I believe these concerns are overdone and at 15.5X EPS estimates for the May 2022 fiscal year the stock can fall a little short of estimates and still be cheap. Earnings for the first fiscal quarter will not be released until late September, but I think they will show GIS can navigate the current tough environment. GIS is a buy below $59. My target is $65.
Despite posting better than expected results and raising EPS guidance for the year, Ingredion (INGR) has declined after earnings as traders indulge concerns about operating margin guidance the second half of the year. However, the lower margin guidance reflects higher corn prices early in the year. With corn retreating now, margins should recover nicely in 2022 when EPS should approach $7.00, up from $6.50 this year. While this has been a frustrating stock for us, it remains very cheap at 12X EPS estimates and if anything deserves a higher multiple given its steady results. Buy INGR under $90. My target is $105.
While I remain disappointed in Investors Bancorp (ISBC) agreeing to be purchased by Citizens Financial Group (CFG) for a low premium, the stock remains a worthwhile holding. ISBC sells at around a 2% discount to implied deal value and CFG is cheap at 10X next year’s earnings estimates. I believe all regional banks should rally as COVID and economic concerns fade, which should take both the stocks higher. My new price target for ISBC is $16.25, which assumes CFG can get back to its recent high of $50. ISBC is now a buy below $14.
Juniper Networks (JNPR) has bounced back nicely from post-earnings concerns over component shortages. I believe any problems with components will be short-term in nature while the recent quarter showed JNPR remains in a good growth phase and can outperform the networking industry. Buy JNPR under $28. My $32 target is 16.8X next year’s EPS estimate, easily a 20% discount to the broad market’s valuation, and the 2.8% dividend yield should add to total returns.
Kronos Worldwide (KRO) may lag for a while following disappointing second-quarter earnings results. However, supplies of titanium dioxide remain tight and the stock is cheap with the company likely to earn over $1.00 a share next year. The 5.5% dividend yield will provide support while we wait for the mood to improve. KRO is a buy under $13. My target is $16.
Mueller Industries (MLI) has continued to trade firmly following its very strong second-quarter earnings release. While copper prices are down since May, they are still 20% above where they started the year, which should also help the company in coming quarters. Once the current COVID fears subside and the economic outlook for 2022 becomes more visible, MLI can return to its highs of the year. Mueller is now a buy below $44 and my target is $50.
I remain very encouraged by the strong earnings reported last week by Safety Insurance (SAFT) and I think the stock can rally from its current depressed price. The second quarter featured good premium growth and underwriting results. I believe SAFT is demonstrating it can still earn close to $7 a share this year even when losses normalize as more drivers return to work. Buy SAFT under $80. My $90 target is roughly 1.4X year-end book value of $65 a share.