Commodity prices continued their exponential rise this week, as the conflict in the Ukraine has escalated. The latest example of truly outrageous prices was the 250% surge in nickel prices over the past two days. The London Metal Exchange even halted trading in the nickel market this morning, as prices broke above $100,000 per ton.

Sharply higher commodity prices, not just for nickel, but also for oil and important food staples like wheat, will likely dampen consumer spending globally. So, the repercussions of the Russia-Ukraine war will not be limited to Main Street. This is a time where Wall Street is also feeling Main Street’s pain.

Unless the conflict between Russia and Ukraine is resolved soon, earnings estimates for 2022 will likely come down significantly for most companies, as rising costs and muted consumer spending pinch profits. Not helping matters is a Federal Reserve that is determined to tighten monetary policy in an effort to curb inflationary pressures. So, there is no longer a protective “Fed put” to limit the decline.

While the clouds hovering over Wall Street and Main Street are pretty dark and ominous right now, I have uncovered a few bright spots among the clouds.

First, value stocks have held up much better this year than their growth counterparts. Their valuations simply did not reach the same extended levels that left growth stocks vulnerable and more susceptible to market’s recent bout of volatility.

Second, some of the bad news from rising commodities prices is now discounted in a lot of names. Our Newell Brands (NWL) is good example of this. The leading consumer goods company dipped as commodity prices soared in recent weeks, but the stock is now holding up relatively better than some of its peers, which tells me the worst may already be priced in.

And finally, I am still hopeful there is a chance that all of the sanctions being placed on Vladimir Putin will force him to negotiate with more sincerity than he currently is now.

Overall, there’s still a lot of uncertainty on Wall Street and Main Street. The market could move a little more to the downside, with our stocks potentially following suit. However, the valuations on our names are reasonable, and I believe our stocks can handle the likely earnings shock from higher commodity prices better than most companies. Our stocks will either not be impacted or will have largely discounted the impact that the war could bring. As a group, they should still perform well through year end.

So, hang in there, now is not the time to panic.

GPS: Filling the Gaps to Build a Better Company

The Gap, Inc. (GPS) operates well-known “lifestyle” clothing and accessory retailers under the Gap, Banana Republic and Old Navy nameplates. These brands are best differentiated by price points: Gap is focused on current essential fashions at midpoint prices, while Old Navy is discount current fashion. Banana Republic is more of a luxury brand that is focused more on classic and timeless clothing as opposed to fashion.

The Gap also operates Athleta, a rapidly growing premium fitness apparel store for women that the company acquired in 2008. Sales at Athleta are up 48% since the start of the pandemic and up 18% in the most recent quarter. Athleta opened Athleta Girl in 2016 and began selling sleepwear on 2020.

Old Navy is the largest of the company’s brands, accounting for 54% of sales in the January 2022 fiscal year. Gap Stores accounted for 24%, Banana Republic for 12%, and Athleta for the remaining 10%.

The past decade has been a very frustrating one for Gap shareholders. Revenues did not grow between the January 2014 and the January 2020 fiscal years, barely advancing from $16.1 billion to $16.4 billion. Margins came under pressure from a competitive retail environment and spending on new store concepts. Also, despite share buybacks that retired 22% of outstanding shares, EPS fell from $2.74 to $1.97 over the same period. During this period, the price of GPS stock fell from over $40 a share in 2014 to under $20 a share by the end of 2019.

When the pandemic led to operating losses, Gap management took action, initiating Power Plan 2023 to improve results. Under this plan, the company sought to grow the profitable Old Navy and Athleta brands, close underperforming stores and increase online sales. Non-core businesses, including baby store Janie and Jack and men’s fitness store Intermix, were divested.

The plan seemed to have some success initially. The first half of the January 2022 fiscal year was a strong one, with revenues up 6.3% and operating income 8.5% higher from the same period in pre-pandemic 2019. Investors were very encouraged and bid the stock up to over $36 a share. However, higher freight costs and supply chain shortages dampened the second half of the year, especially for the key Old Navy brand, and the stock fell back to below $20 again.

Still, I do not think the January 2022 fiscal year was a bad one for GPS, with diluted EPS of $1.44 a share and sales up 2% from 2019 levels despite the extraordinary expenses and sales shortages related to the supply chain. Extra air freight alone cost the company $0.80 a share in earnings. So, all things considered, fiscal 2022 was a decent year for the company.

Now, GPS has become a “show me” story for fiscal 2023. There is some market skepticism surrounding the company’s guidance for EPS of $1.85 to $2.05 in the current fiscal year. However. I believe this guidance is actually reasonable.  A bigger contribution from online sales and the more profitable Old Navy and Athleta names should drive a continued expansion in merchandise margins. While the number of Gap stores is shrinking, the remaining ones have been doing well. Sales comparisons are very easy in the second half of the year, and the cost pressures should ease at that time as well.

I am confident GPS will earn at least the low-end of their guidance in the current year. At just 8X EPS of $1.85 in the current year, there is too much negativity priced into the stock, as there are several good things going on at GPS. I expect the negativity to lift sometime this year, and then the stock should do very well. Buy GPS under $17. My target is $21.

Position Review

Cognizant Technology Solutions (CTSH) continues to trade firmly post earnings, as growth at the company appears to be fully back on track. Still trading at a discount to the market at just over 19X this year’s EPS estimate, I continue to expect the stock to outperform. Buy CTSH under $80. My target is $95.

I believe the selling in Fidelity National Information Services (FIS) has gotten very overdone. The stock sells for only 13X revised 2022 EPS estimates of $7.30, which is down just a little more than the $7.40 estimate to start the year. Meanwhile, the company continues to grow both the top and bottom lines, and the competitive threat from new credit processing products such as “buy now pay later” is not as great as the market fears. My new buy under for FIS is $110. My target is $130.

First Busey (BUSE) has come under some pressure with all bank stocks. This primarily reflects a flattening yield curve, as there are concerns that rate hikes along with the fallout of the Ukraine war will slow the economy and perhaps even lead to a recession. However, even in a worst-case scenario for the economy, I believe BUSE can remain highly profitable, and any increase in credit losses will be manageable. Buy BUSE under $29. My target is $32. The 3.4% dividend yield will add to total returns.

Johnson & Johnson (JNJ) won an important court case, as a federal bankruptcy judge approved JNJ’s plan to place its liabilities related to talcum powder litigation into a subsidiary, LTL Management, which filed for bankruptcy last October. The move should make further claims manageable and likely force litigants to reach a class action settlement that will not have a significant financial impact on Johnson & Johnson.

More good news came from the company as JNJ and its partner, Legend Pharmaceutical, won FDA approval for Carvykti, a treatment for multiple myeloma. The drug has sales potential of $1.5 billion, and if it is approved for other indications, it could reach $5 billion.

With its consistent cash flows and diversified product line, Johnson & Johnson remains a perfect stock for the current uncertain environment.  JNJ is a buy under $162. My target is $180.

Molson Coors Beverage (TAP) reported fourth-quarter EPS of $0.81 vs. $0.40 on a 14.2% gain in revenues. Comparisons were easy versus COVID-impacted results of the prior year. While results were $0.05 below expectations, the stock has done well since the release. I believe this reflects continued strong performance of the company’s key Coors Lite and Miller Lite brands, greater confidence in the company’s ability to manage costs and earn close to $4.00 a share this year, and the market favoring stocks of companies that are less cyclical in nature.

TAP still sells for only 12.5X this year’s EPS estimates, and if it can continue its progress on costs, maintain market share of established brands, and grow emerging products, my $57 target could prove conservative. TAP is a buy below $50. My target is $57.

Newell Brands Inc. (NWL) experienced a nice rally following strong fourth-quarter earnings and favorable guidance for 2022. But recently, it’s given back these gains as rising commodity prices remain a concern. The company is doing everything it can control well though, and the company’s lower debt and cost structure will continue to help results. Even if higher costs push earnings estimates down a little bit, there is a big margin of safety for the shares, which trade at only 12x this year’s EPS estimate of $1.90. NWL is a buy below $24. My target is $30.

Phibro Animal Health (PAHC) has been trading steadily, as higher commodity prices should benefit livestock producers, which are the company’s primary customers. While higher commodity prices also raise the company’s costs and the higher dollar could also be a drag on results, I believe the company will continue to produce solid earnings results, and the non-cyclical nature of the company’s operations should continue to draw investor interest. PAHC is a buy below $20.50. My target is $25

Sonoco Products (SON) has been trading in a tight range between $55 and $59 a share for three months now. While not inspiring, this is still a better performance than most of Sonoco’s industrial peers, and I believe it reflects the market’s respect for SON’s ability to realize good earnings results even if the economy softens. Once we regain confidence about the economic outlook for 2022, I believe SON will do very well. The stock is cheap at 12.3X 2022 EPS estimates of $4.60 a share, and SON offers an attractive 3.2% dividend yield as well. SON is a buy below $63. My target is $70.