A lot has happened in the first two weeks of the New Year, and that has put stocks in a more defensive mode.
First, we must remember that the strong fourth-quarter rally produced overbought conditions at the end of 2023. So, most stocks are not cheap, and a further near-term decline is possible.
Second, bonds started the year on a weak note, as central bank officials have walked back the potential of near-term rate cuts. The Federal Reserve now sounds more data dependent than Fed Chair Jerome Powell did at the last Fed meeting. As a result, Treasury yields bounced off their lows, with the 10-year Treasury yield now trading back around 4.0%.
Now, even with this bounce, yields are still supportive of equity valuations, especially value-oriented stocks that underperformed last year. It’s also important to note that the economy remains steady, and that bodes well for earnings season, where we have already seen decent earnings reports from banks.
So, I think we are well positioned to navigate any rocky roads in January, before we start the seasonally strong February to April period. Our stocks remain inexpensive, valued very attractively in comparison to the near 20X this year’s earnings estimates that the S&P 500 is currently selling at. Most of our stocks also have solid dividend yields that will be made more attractive if the Fed does start cutting interest rates.
Overall, I will look to make adjustments where necessary, but for now, I am confident that 2024 will get off to a solid start for us.
Updates and Earning Reviews
Core Holdings
Brady Corp. (BRC) continues to trade very well, with shares close to my $62 price target. With valuation still attractive and the company’s operating momentum strong, there is a reasonable chance that this target and my $52 buy underprice will be raised. In the meantime, the company’s fiscal quarter ends at the end of this month, and I will have a review on it next month. For now, hold BRC.
Fidelity National Information Services (FIS) will report fourth-quarter earnings in February, with expectations calling for EPS of $0.97, vs. $0.98 last year. These results consider the company’s WorldPay Merchant solutions business as a discontinued operation, for which it maintains a minority interest for now. The stock has done a lot better recently, and while Worldpay proved to be a costly acquisition, the spinoff and cost cutting that the company has undertaken are proving to be the right steps. FIS is a buy below $62. I will reconsider my $65 price target after earnings.
Genuine Parts (GPC) will report earnings in late February, so I will wait until next month for an earnings preview. The stock is higher since my recommendation, but still somewhat hesitant as investors seem to want more insurance that the product availability issues that hurt third-quarter results are behind the company. With the stock cheap at 14X this year’s EPS estimates, and with cost cutting underway, the risk vs. rewards characteristics of the stock still look quite favorable. The shares remain a buy ahead of earnings. GPC is a buy below $136. My target is $160.
Honeywell (HON) will report fourth-quarter earnings on February 1, with expectations calling for EPS of $2.59, vs. $2.52 last year, on a 5.5% increase in revenues. Ongoing strength in the aerospace business will offset weakness in building automation. The stock has slumped with the industrial segment so far this year. However, EPS estimates for $9.80 to $10.00 a share this year, up from an expected $8.76 in 2023, are realistic. I believe the company will guide earnings for 2024 close to the current estimates, and the stock of this high-quality company will recover. HON is a buy below $200. My target is $220.
Kraft Heinz (KHC) will report fourth-quarter results in early February, with expectations for EPS of $0.77, vs. $0.85 last year, on a 5.3% decline in revenues. Volume declines and investments in new offerings are expected to offset price increases. The stock is not far from my $40 target, which is 13.3X forward EPS estimates. Depending on market conditions and the way the stock is acting, there is a chance that we could sell the stock before the earnings report. KHC is a buy below $35.
Levi Strauss (LEVI), our new pick last week, will report fourth-quarter earnings for the fiscal year that ended in November in late January. Expectations are for EPS of $0.43, vs. $0.34 last year, on a 4.5% increase in revenues. Comparisons will be relatively easy, as currency had a major negative impact on the previous year’s results. I look for continued progress on LEVI’s direct-to-consumer efforts to also help results. If guidance for the current fiscal year comes in close to current expectations of $1.30, the stock has a great chance to outperform this year. LEVI is a buy below $17. My target is $20.
Phibro Animal Health (PAHC) will report fiscal second-quarter results in early February. Expectations are for EPS of $0.28, vs. $0.34 last year, on a little more than a 1% decline in revenues, as customers reduce inventory for PAHC’s performance and mineral nutrition products. The stock has regained a lot of the ground that it lost following disappointing first-quarter results. I am optimistic that the improved cash flow in the quarter is a sign the company’s results are about to stabilize. PAHC is very cheap at 10.5X this year’s EPS estimates, with a dividend yield of 4.2%. PAHC is a now a buy under $14, and my new target is $17.
Sonoco Products (SON) will report first-quarter earnings in early February, with expectations for EPS of $1.04, vs. $1.27 last year, on a 4% decline in revenues. The industrial economy remains weak, with the ISM Manufacturing Survey showing declining activity every month for over a year now, and that will weigh on results. However, enhanced productivity will help support profitability, and I think the stock is still cheap even if the lackluster manufacturing economy limits EPS to $4.75 to $5.00 this year from the expected $5.30. SON is a buy below $60. My target is $70. The 3.6% dividend yield will help support the stock.
Sysco Corporation (SYY) will report fiscal second-quarter earnings on January 30, with expectations for EPS of $0.88, vs. $0.80 last year, on a 5.3% increase in revenue. Although the stock has struggled over the past two years, the company has continued its historical consistent growth, and this should continue provided consumer spending holds up well. The stock is not as cheap as it once was, but it remains attractively valued at 17X EPS estimates for the current fiscal year. SYY is a buy below $80. My $92 target is 19.5X EPS estimates of $4.70 for the June 2025 fiscal year.
WEC Energy Group (WEC) will report fourth-quarter earnings in early February, with expectations for EPS of $1.09, vs. $0.80 last year, on a 12% increase in revenues. The company continues to benefit from the rollout of renewable energy in its markets. I am disappointed the stock has not responded better to the recent decline in interest rates, but utilities as a segment are struggling with concerns that regulators may be less accommodating with rate increases. I look forward to the company addressing this issue on the earnings conference call, and I am confident that the push for clean energy will continue to enable WEC to realize favorable growth and return on investment. WEC is a buy below $88. My target is $96.
Value Trades
Exxon Mobil (XOM) will report fourth-quarter results on February 2, with EPS expected to decline to $1.97 from $3.40 last year, reflecting lower oil and natural gas prices. Although the stock has been a disappointment since my November 17 recommendation on a near-term trading prospective, the shares have held up well in light of low commodity prices. I believe oil prices will rise at some point this year, and if support holds at $95, we should stick with this trade for now. XOM is a buy below $104. My target is $112.