Recent Changes Bode Well for a Year-End Rally

This month is all about change. (Cue the David Bowie “ch-ch-ch-ch-changes.”)

We’ve made some adjustments to our Value Authority strategy recently to account for the new market landscape, adding in more short-term trades. We’ll review this recent change in a moment, along with another adjustment to our publishing strategy. But first, let’s discuss the changes we’ve seen happen in the stock and bond markets recently.

First, long-term interest rates stabilized this week, which ignited a two-day rally from oversold levels. You may recall that the 30-year U.S. Treasury bond yield was at 5.05% at one point last Friday. It is currently at 4.76%. The bond rally was triggered when traders took a second look at Friday’s employment report. While the headline number of 336,000 jobs was strong, these jobs were mostly government hires and part-time employees. Full-time private sector job growth has stagnated over the past couple of months, and this could be a sign that the economy is about to weaken, which would help bonds.

However, a weaker economy is not great for stocks, especially in a market that is still expecting the S&P 500’s earnings to grow 10% next year to $250. At 17.5X this estimate, the market is not cheap at the current level of interest rates. And, of course, this amount of growth for next year is not a sure thing given signs of a softening economy and the uncertainty coming from the tragedy in Israel last weekend.

Now, with that said, this market continues to be very short-term focused and tends to react rather than anticipate. So, with the economy sound for now and expectations reasonable, results should be strong in the upcoming earnings season—and that could eventually produce a year-end rally.

More importantly, our stocks’ valuation bears little resemblance to that of the S&P 500, where money flowing into mega-cap names routinely has produced aggressive price-to-earnings multiples. I continue to believe our Buy List currently consists of companies selling at bargain basement levels with solid dividend yields and good earnings prospects. So, I remain confident that we will be rewarded if we stick with this discipline over time. There is also a good chance that some of our names will come to life in the fourth-quarter rally I anticipate.

Changes to Value Authority

Back on September 19, I alerted you to an exciting new feature to the Value Authority service. We added the Value Trader Portfolio to the service as a way to lock in quick wins since the market has been dominated by short-term thinking—and that is often difficult to combat with traditional value investing. I remain confident that we will find good success in these shorter-term trades.

Also, given the more dynamic market environment, publishing has turned into a real-time industry, and we will follow this trend. So, with this in mind, we plan to provide updates on company news (i.e., earnings and other important events) and important market developments in a more timely manner.

To better direct resources to this effort, this will be our last monthly issue.

Rest assured, even without monthly issues, I will be in contact regularly to ensure that you receive our latest recommendations, trades and updates to navigate the ever-changing market landscape. If you have any questions about our new direction, I encourage you to contact our Customer Service Team.

Position Review: Positioned for a Strong Year End

Core Holdings

Brady Corp. (BRC) continues to trade steadily through the market turmoil. The company has good earnings visibility from new products in both its identification solutions and workplace safety segments. With its valuation still favorable at 14X earnings estimates for the July 2024 fiscal year, I believe the shares should continue to outperform. BRC is a buy below $52. Mt target is $62.

Fidelity National Information Services (FIS) will report third-quarter earnings in the first week in November, with expectations for EPS of $1.57, vs. $1.74 last year, on a 1.3% increase in revenues. There will be continued pricing pressure in the company’s business, but this should be offset by cost cuts that should allow the company to return to earnings growth next year. The stock has weakened with the market, but it has good support near $50. I think the chances are good that the stock will experience a strong yearend rally. FIS is a buy below $60. My target is $72.

First Busey (BUSE) will report third-quarter earnings in the last week of October, with expectations for EPS of $0.51, vs. $0.65 last year. Higher deposit costs and a tick up in credit costs from very low levels is expected to hurt the company’s profits. The stock has taken a hit as concerns over regional banks have returned, but I believe EPS on a quarterly basis should stabilize at $0.50. BUSE is very attractive at less than 10X forward EPS estimates. BUSE is a buy below $20. My target is $25. The 4.9% dividend yield will add to total returns.

The Kraft Heinz Company (KHC) was hit last week by ongoing concerns about food deflation, which could interrupt KHC’s and food producers’ strategy of sacrificing market share for price increases. However, what does not seem to be part of the conversation is that the company’s costs will be lower as well, which I think should help KHC manage any pricing difficulties.

The company will report third-quarter earnings on November 1, with expectations of $0.66, vs. $0.63 last year, on a 3.6% increase in revenues. Price hikes should partially offset higher costs and volume declines. While estimates have gone down for KHC, the stock remains attractive at 11.6X this year’s EPS estimates with a 5.0% dividend yield. If the economy starts to come under pressure, food stocks like KHC should perform very well. Buy KHC below $35. My target is $40.

Honeywell International (HON) will report third quarter earnings on October 26, with expectations for EPS of $2.23, vs. $2.25 last year, on a 2.8% increase in revenues. Aerospace results will remain strong for HON, but softness in the industrial economy will drive weakness in its Safety and Productivity Solutions. While HON is lower since my July 31 recommendation, the stock has hung in well relative to the market and the industrial sector. High-quality Honeywell is attractively valued at 18X forward EPS estimates, close to a market multiple.  I think the company and the stock should be able to navigate tough economic and market conditions. HON is a buy below $200. My target is $220.

Newell Brands (NWL) will report third-quarter earnings on October 27, with expectations for EPS of $0.23, vs. $0.50 last year, on a 5.9% decline in revenues. However, earnings comparisons will be much easier going forward. In fact, earnings comparisons will turn positive, as the company will anniversary the period where retailers started reducing inventories. The stock has been a victim over concerns surrounding consumer spending, as well as higher potential interest costs for Newell Brands as rates rise. However, these are priced into the stock, and I believe, at worst for 2024, EPS should be flat from $0.85 this year. The risk-versus-reward characteristics for Newell are very favorable. My new buy under price for the stock is $9.50, and my new target is $14.

Patterson Companies (PDCO) found support post-earnings near $28 a share, and the stock has traded steadily in recent weeks. At less than 12X May 2024 EPS estimates, the stock is cheap. While earnings could be somewhat uneven quarter to quarter, the company is on a growth path, and I believe my target can be achieved. PDCO is a buy below $30. My target is $35.75.

Phibro Animal Health (PAHC) appears to have good support near $12.25 a share, which reflects the company’s ability to realize much in a way of growth and its consistent earnings. The stock’s lack of economic sensitivity also makes it deserving of a higher multiple. I believe growth will come in time, and the stock will move higher. PAHC is a buy below $15. My target is $18.

Sonoco Products (SON) will report third-quarter earnings in late October. Expectations are for EPS of $1.24, vs. $1.60 last year, on a 7.8% decline in revenues, with demand weak as customers work off excess inventory. However, the company should continue to generate good free cash flows, and even with earnings under pressure, SON sells for under 10X forward EPS estimates. I believe further downside is limited. SON remains a buy below $60. My target is $70.

I find the recent decline in Sysco (SYY) shares a little bizarre, given the company’s historical earnings excellence and good current operational momentum. However, the concerns about food inflation are real and are controlling market momentum. Future earnings should show these concerns were overstated, and the stock is a great value at 14.7X EPS estimates for the June 2024 fiscal year, with a 3.1% dividend yield. Earnings will be released in early November, and if results are reasonably close to expectations of $1.04, vs. $0.97 last year, on 6% revenue growth, I expect the stock to do very well. SYY is a buy below $80. My target is $92.

WEC Energy Group (WEC) will report third-quarter earnings in late October. Expectations call for flat EPS of $0.96 on a 5.9% increase in revenues, as profitability will be held down by Information Technology investments. However, WEC’s strong long-term earnings growth should continue, as it’s driven by the company’s ongoing buildout of regulated renewable energy capacity. The stock has taken a hit on rising interest rates, but I believe the move is a big overreaction. The stock’s 3.8% dividend yield should grow 7% a year, and it makes WEC attractive in the current interest rate environment. WEC is now a buy below $88. My new target is $96.

Value Trades

American Electric Power (AEP) has moved higher with the decline in interest rates. I believe rates are at or close to their top, and with AEP yielding 4.6% and the dividend potentially growing 6% to 8% per year, I continue to believe the risk-versus-reward characteristics of the stock are compelling. AEP is a buy below $73. My target is $80.

HP Inc. (HPQ) will have an analyst meeting tonight to discuss the company’s future growth plans. There could be an update on fiscal fourth-quarter guidance, but I do not expect to see any meaningful changes. I will have more on HPQ tomorrow, but for now, let me say that I like the stock. It is currently trading under 9X forward earnings estimates, and the PC market will likely to show some recovery next year. Buy HPQ under $28. My target is $31.