The month of June is off to a strong start so far, with the S&P 500 breaking through its resistance level at 4,200 and remaining above this level. The question is if ongoing fears of a recession will cause the index to retreat back below this level.

Financial media pundits have certainly been vocal about their thoughts on a recession, suggesting that it would be better for the stock market if a recession came now. This would end all speculation about whether a recession is coming and how bad it would be. A recession could also provide more clarity on when the Federal Reserve will start to lower interest rates, as a recession would pressure the Fed to cut sooner rather than later. Lower rates would also eventually lead to higher multiples being applied to 2025 earnings, at which point the economy could be on its way to recovery.

There is some merit in this argument, especially since many value stocks are already discounting a mild to moderate recession. Unfortunately, though, investing does not come with pre-arranged scripts, and we must try to our best to manage risk in each environment.

The good news continues to be that our Value Authority stocks are very cheap and have discounted a lot of bad news, most of which is unlikely to happen. The risk-versus-reward characteristics of our stocks are also compelling. So, once the current tech mania ends and we get more clarity on the economy in one direction or another, our stocks are likely to do very well. While I cannot exactly pinpoint the timing, this should occur sometime between now and year-end.

So, please be patient. I have a high degree of confidence that better days are ahead for value stocks.

DG: America’s General Store Offers Great Value

The old-fashioned general store invokes a bit of nostalgia for simpler times in the U.S. when people would gather for the latest town gossip and shop for necessities. There are still general stores littered across the U.S. (complete with penny candy and groceries), but most doors have shuttered with big box stores like Wal-Mart and Target.

Still, there is one retail chain that thrives in rural America and lives by the old general store tagline: “If we ain’t got it, you don’t need it!” Dollar General (DG) proudly refers to itself as America’s General Store.

Founded in 1939, Dollar General now operates 19,294 stores in the U.S., and it recently opened its first store in Mexico. The company is a customer-focused retailer, offering large discounts compared to its retail competitors on well-known brand names. Dollar General’s aggressive pricing is enabled by operating no-thrill stores with an average size of 8,500 square feet in lower-cost small towns with populations under 20,000. The company also sells its own private-label brands that offer consumers an even greater value.

Dollar General primarily sells everyday necessities, which helps drive customer traffic. Its largest category is consumables (accounting for 80% of sales in the fiscal year ending on January 21, 2023), which includes paper and cleaning products, food and snacks, health and beauty products, and pet supplies. Seasonal products (11% of sales) include toys and small electronic products, batteries, greeting cards and gardening supplies. Home products (6% of sales) include kitchen supplies, cookware and appliances. Apparel accounts for the remaining 3% of sales.

The company’s strategy of offering good value along with an easy shopping experience has proved to be a successful one: the company has realized 31-consecutive years of same store growth up to the January 31, 2021, fiscal year. The streak was broken the following year as the company faced difficult year-over-year comparisons after their stores benefitted from remaining open at the height of the COVID pandemic, while many competing stores were closed.

However, DG has held onto much of the market share gained during the pandemic. After earning $6.64 a share in 2019 (January 31, 2020, fiscal year), EPS soared to $10.62 in 2020 and retreated just slightly to $10.17 in 2021 despite the difficult comparisons.

Last year, aided by an extra week in the fiscal year, growth resumed. Sales were up 10,6%, with comparable store sales up 4.3%. DG also added 1,039 new stores in the fiscal year. Margins narrowed on higher product costs due to supply chain issues, and higher labor costs, but EPS still increased 4% to $10.68 a share.

Despite the generally solid results, the stock had been under pressure since November, as sales were somewhat below expectations. We then saw investor capitulation last Thursday when the company announced first-quarter 2023 results. First-quarter EPS were $2.34, vs. $2.41 last year, which was $0.04 below expectations. Sales increased 6.8% and same store sales rose 1.6%, as labor, depreciation, and interest costs all rose at a greater rate than sales.

In addition, guidance for the current fiscal year was lowered. Full-year sales growth is now expected to be 3.5% to 5.0%, down from 5.5% to 6%, which reflects the tough environment for many of the company’s lower-income customers. EPS guidance for the year was cut from growth of 4% to 6% to flat to down 8% on the lower sales. On the earnings conference call, CEO Jeffrey Owen said he is hearing from customers that they are becoming increasingly reliant on food banks for their needs.

However, I do believe the over 20% decline in the stock we saw in the shares following the earnings report is an overreaction. The stock is now selling for the same price it was prior to the pandemic, with the company getting no credit for the increase in earnings power post pandemic. Management is reducing the rate of store expansion, which will help ease the margins pressure near-term. In my opinion, nothing has happened that challenges the long-term success of the company’s business model.

Despite the lowered guidance, DG should still earn $10.00 a share this year, and at 16.5X this estimate, the shares are a bargain considering the company’s long-term record and the value they bring to consumers. DG’s balance sheet is also solid, and the company has over $1.0 billion available for purchases in its stock buyback program. DG is a buy below $170. My target is $200.

Position Review: Clarity on Fed and Economy Should Lift Stocks

Brady Corp. (BRC) reported fiscal third-quarter EPS of $0.95, vs. $0.86 last year, which was a record for the quarter. The company also noted a 0.4% decline in sales, although sales were up 1.9% excluding the impact of currency and a divestiture. Lower selling and administrative expenses from elevated levels last year drove the rise in earnings despite the tepid sales.

EPS were slightly higher than expectations, and the company raised the lower end of its EPS guidance with one quarter left in the fiscal year. The company expects EPS of $3.45 to $3.60 versus previous guidance for EPS of $3.40 to $3.60. The introduction of new products in its identification segment is expected to aid in earnings growth in the quarter.

The real question will be fiscal 2024 EPS. While estimates for $3.85 may be a little too high, this is priced into the stock. Brady is a high-quality manufacturer with high returns on investments and is poised to move meaningfully higher once we have better clarity on the economy or the Fed starts easing. BRC is a buy below $50. My target is $62.

Fidelity National Information Services (FIS) appears to have pretty solid technical support in the low $50s, and I think the fundamental picture will improve as well. Cost cuts and the eventual spin off of the merchant business will lead to a stronger company, and EPS will rise well above $6 a share next year. The banking crisis will have virtually no impact on earnings as we are not going to see a wide scale closing of banks that would reduce FIS’s customer base. If the company shows progress in improving their cost structure when the company reports earnings next month, look for the stock to soar. Buy FIS below $60. My target is $72.

First Busey (BUSE) is well off its recent lows amidst signs that the panic that hit regional banks in March is winding down. There has not been a bank failure related to the crisis for a few weeks, and borrowing from the Federal Reserve’s discount window is coming down, with regional banks gaining confidence that their funding is sufficient.

The question for BUSE and other banks now is how much will lower interest margins, as they are forced to pay deposit more and potentially experience higher loan losses, will cut into earnings.  Earnings estimates for this year have already dropped from $2.60 to $2.28 a share. But at less than 9X this depressed estimate, I think a lot of bad news is in the stock already. BUSE is well-capitalized, and I believe the bank’s approach to credit is conservative, which should help it get past any tough economic times.  BSUE is a buy below $19. My target is $24.

Lowe’s (LOW) stock has been volatile, but it is little changed since the company reported fiscal first-quarter earnings. EPS of $3.67, vs. $3.51 last year, was $0.23 above expectations. Revenues declined 5.9%, which was much better than the expected decline of 8.7%. Continued strong performance of Lowe’s Pro business, which had a sales gain in the quarter, helped drive the better-than-expected performance. EPS gained as a result of a nearly 10% decline in outstanding shares as the company continued to buy back its stock aggressively.

Still, due to the weakening consumer and lumber deflation, LOW reduced its EPS guidance for the year by $0.40. It now expects full-year EPS of $13.20 to $13.60, and comparable sales are forecast to decline 2% to 4% from previous expectations for flat to down 2%. Despite this, the stock is moving higher today, as it remains reasonably valued at 17X EPS estimates in a bad year, and investors are encouraged by the progress the Pro business is making.

LOW is a great franchise selling for only 16X this year’s depressed earnings. LOW is a buy below $215. My target is $260.

Concerns about consumer spending continue to weigh on Newell Brands (NWL) shares, although the stock appears to have strong support at $8 a share. The market obviously feels management’s guidance for EPS this year of $0.95 to $1.08 is too high. But with inventories now normalizing at major retailers, I do not think earnings will come in too far beyond the low-end of the range. The company cut its quarterly dividend to $0.08 a share last month, and I believe this level of payout is sustainable and will hopefully rise over time. The current yield of 3.4% remains attractive.

The company is expected to return to profitability next quarter, and if they can achieve this, I believe it will go a long way in restoring investor confidence. NWL is now a buy below $10. My new target is $16.

Occidental Petroleum (OXY) has moved lower with energy stocks and the price of oil since my May 1 recommendation. However, the stock and the sector are showing some resilience, and I think the shares will go much higher once oil prices stabilize.

First-quarter EPS were $1.09, vs. $2.12 last year, was $0.15 below expectations, with the decline reflecting a sharp drop in oil prices. Still, I do not think the report changes the investment thesis of the company, as the company will still realize strong low-cost production growth in the Permian Basin. Production volumes were up 22.6% from the first quarter of last year.

Berkshire Hathaway bought another $200 million worth of shares following the earnings report, and it now has a 24.4% stake in the company. While Berkshire Chairman Warren Buffett indicated he did not want to gain control of OXY, I think Berkshire will support the stock on any weakness.

Occidental will do well if we avoid a recession this year and next, or if the Fed quickly reverses direction on interest rates should the economy slump. The stock is a good value at 12X this year’s EPS, which the company is achieving with oil prices that are not elevated. OXY is a buy below $65. My target is $75.

Old Republic (ORI) has been trading in a narrow range. While the company does not face the same issues that jolted bank stocks, shares have felt some of the fallout with investors wary of all financial stocks since March. However, trends in general insurance at the company remain stable, and there will be an improvement in title insurance at some point. As investors become more confident the company will earn $2.40 a share this year, the stock will move closer to my $27 target. ORI is a buy under $24. The 4% dividend yield will support the shares. There is also a possibility for a special dividend to be announced over the summer, given ORI’s strong financial position.

Patterson Companies (PDCO) will report fiscal fourth-quarter earnings in late June, with expectations for EPS of $0.70, vs. $0.71 last year, on a 1.2% rise in revenues. Currency will have a negative impact on revenues, and higher interest rates will take away $0.03 a share from earnings. While the economy remains an unknown factor, dental comparisons will be much easier the next fiscal year. So, after flat EPS of $2.27 this fiscal year, an improvement to $2.40 a share next year is possible. PDCO is a buy below $29.50. My target is $33. The 4% dividend yield will add to total returns.

Phibro Animal Health (PAHC) shares have been under pressure since management gave cautious guidance following the release of fiscal third-quarter earnings, which I talked about in our last issue. The selling is very overdone, as I think the market is overestimating the degree of economic sensitivity in the company’s operations. Phibro’s products are largely non-discretionary, as livestock must be cared for and individuals will spend on medication for pets. The economy may limit results as management warned, but with the stock selling just above 10X this fiscal year’s earnings estimate, way too much bad news is priced in the stock. The funk small-cap value stocks are in may need to end before PAHC gets going, but the potential upside is significant. Buy PAHC under $16. My target is $20.

Sonoco Products (SON) has been rangebound for an extended period. The stock is simply too cheap to sell off significantly, with the company continuing to earn close to $6.00 a share despite a softening economy. Fear of a recession is keeping a lid on the price of the stock, but I am convinced that higher share prices are ahead of SON over the long-term. High returns on capital, strong free cash flow generation and the 3.3% dividend yield will help send the stock higher once the market is able to look past a potential recession. SON is a buy below $65. My target is $75.

Sysco Corporation (SYY) shares have started to bounce back after weakness related to the belief that a recession would hurt the company’s sales to restaurants. While management has acknowledged the economy will play a role in future results, it also believes Sysco is well positioned and will easily outperform its competitors in the food distribution industry this year. Sysco is a strong company with a solid long-term growth record and sells 20% below its all-time highs. SYY is a buy below $80. My target is $92.

U.S. Bancorp (USB) has done better lately, and I think there is room for more upside. The company needs to improve its capital positions in order for the stock to rise from its depressed levels. You may recall that an ill-timed acquisition of Mitsubishi’s U.S. banking operations weighed on shares. However, there should be an improvement in capital levels each quarter, and USB should be strongly capitalized again a year from now, which should allow for multiple expansion. With the stock just trading at 7X this year’s EPS estimate and a dividend yield of over 6%, there is significant upside potential in the stock. Buy USB under $37. My target is $42.