The great reset in value stocks that got underway when COVID vaccines proved to be effective in clinical trials has probably run its course. After advancing nearly 40% from early November to early May, our side of the market has earned a break.

We cashed eight big winners over that period, with average annualized performance of about 50% and the latest — ORI — was the biggest in the history of Value Authority.

And we’re still sitting on a healthy paper profit on our live positions, with more money coming in quarterly as the dividend checks stack up. This is when we thrive.

In the absence of bad news about the economy, the Fed in a fully accommodative posture and the earnings outlook good, stocks continue to advance at a slow pace. Both the S&P 500 and Russell 3000 Value Index trade close to all-time highs.

The only question is whether the gains stack fast enough. In our world, stability and consistency trumps sizzle and hype every time. I have recommended taking profits in a few names in recent months, partly considering the shifting market dynamics.

While stocks are not expensive at the present time, they are not cheap either. Selection is very important here, and I want to position the Buy List to make sure we are well positioned to withstand a more difficult environment that may occur as the Fed inevitably cuts back on its accommodation.

An emphasis on solid dividend yields, strong free cash flows and solid balance sheets should help preserve and extend our gains. That’s what we do.

A Bank for Investors

Investors Bancorp (ISBC) is a commercial bank headquartered in Short Hills, NJ, an affluent New York City suburb. Despite the name “Investors,” the company has no trust or investment management operations and 88% of revenue is derived from net interest on its loan portfolio, which primarily consists of multi-family homes, residential mortgages, and commercial real estate.

The company has over 145 branches in New Jersey, New York City and suburban Philadelphia. These branches are usually close to high income neighborhoods and areas of robust economic activity. These factors, along with a strong consumer focus, helps the bank fund itself largely through no- or low-interest deposits, which have greater stability and lower costs than other sources of funding. At the end of the first quarter, deposits of $19 billion represented 93% of the company’s $20.5 billion loan portfolio.

ISBC has been a consistent performer in recent years, with earnings per share increasing from $0.64 in 2016 to $0.94 last year. Pretax income was flattish over this period as growth in the company’s loan portfolio was offset by narrower interest margins and higher operating expenses. However, lower taxes from the 2017 tax act and a nearly 20% decline in shares outstanding helped the EPS numbers.
Credit charges were minimal until last year, when they were $70 million, or roughly $0.21 a share after taxes, as the company set up reserves to cover losses from the pandemic. However, like many banks, ISBC has started reversing some of these losses as they will likely not be as bad as initially thought, In 1Q21 the bank has a negative provision for credit losses of $2.9 million. Results outside of credit were helped by both higher interest and non-interest income, and EPS in the quarter rose to $0.31 from $0.17 a share.

I believe the company is adequately reserved for future credit losses, with an allowance for bad loans of $283 million more than 3X greater than non-performing loans of $83 million. While the company has $693 million of COVID-19 related deferrals, this number is down from $756 from February. Furthermore, approximately 72% of these loans are still paying interest if not principal. The biggest chunk of these deferred loans is $196 million from Manhattan hotels, which are all paying interest and seeing improved trends. Keep in mind that because the company’s loans are backed by real estate, there is usually a significant recovery from any loans that go into foreclosure.

Perhaps due in part to the concern over the deferred loans, the stock is cheap compared to other banks, selling at 11X next year’s EPS estimates of $1.35 and 1.3X year-end tangible book value of $11.00 a share. Again, however, I believe the company is adequately reserved for losses, and credit expenses should remain low.

I believe the continued decline in deferred loans will be a catalyst for the stock. Buy ISBC under $15.75, my target is $18. The 3.76% dividend yield will add to total returns.

Position Review

3M (MMM) has performed closely in line with the market over the past month. Selling at around 20X next year’s EPS estimates, the stock remains at a discount to other mega-cap industrial companies like Illinois Tool Works (ITW), Danaher (DHR) and 3M (MMM). Although I am somewhat concerned about raw material costs and tough comparisons from last year in the healthcare segment, I believe these are reflected in estimates and I think the stock can move closer to my $210 target before next month’s earnings report. 3M is a buy below $185.

Cognizant Technology Services (CTSH) shares have started to stabilize after the company warned following first-quarter earnings that COVID in India and the rising costs of consultants were growing risks. However, the latest outbreak in India appears to be peaking, and the company has managed higher consultant costs well in the past. There is good value in the stock at 16X 2022 EPS estimates of $4.40. CTSH is a buy under $75 as I target $85.

Dollar Tree (DLTR) is starting to come back following a selloff after the company gave disappointing guidance following fiscal first-quarter earnings. I continue to urge subscribers to buy the shares, as the big increase in shipping costs will likely reverse next year. Meanwhile, the company is doing well with its growth initiatives, and the stock is inexpensive based on potential EPS of $7.00 a share next year. Buy DLTR under $110. My target is $125.

General Mills (GIS) will report fiscal fourth quarter earnings on June 30, with expectations for EPS of $0.84 vs, $1.10 in the prior year on a 13% decline in revenue as the company faces very difficult comparisons from the start of the COVID crisis. Management has expressed optimism about the year ahead despite the tough comparisons, and if guidance comes in above $3.55 in EPS in the May 2022 year versus and expected $3.73 from a year ago, the stock can go beyond my $65 target. GIS is a buy below $59.

Ingredion (INGR) continues to go higher and remains cheap at less than 14X 2022 earnings estimates of $7.00 a share. While rising corn prices are a risk, I feel this input can be passed through to consumers at some point. There is still plenty of room for multiple expansion at INGR. Despite some quarterly volatility in earnings, the company consistently produces good free cash flow. INGR is a buy below $90, my target is $105.

Juniper Networks (JNPR), last month’s pick, got off to a tough start as technology slumped but has been coming back recently. Selling at only 14.5X next year’s earnings, there is no reason to fear the potential for higher interest rates here . . . unlike other tech stocks. Furthermore, the company’s commitment to Artificial Intelligence in Networking should continue to help earnings and allow the turnaround to continue. Buy JNPR under $28, my target is $32.

Kronos (KRO) shares have stalled out recently. However, titanium dioxide prices continue to be firm and the company should be able to earn in excess of $1.00 a share next year. KRO remains a good play on higher raw material costs. KRO is a buy below $15. My target is $18.50. The 4.36% dividend yield should add to total returns.

Mueller Industries (MLI) has been consolidating its gains from when I first recommended the stock. However, the stock still looks good from a technical basis and remains attractively valued at 10X next year’s EPS estimates. Although the price of copper has slumped slightly, I expected commodities to remain relatively stable, which will help support the stock. MLI remains a stock that can benefit from continued global economic growth. Mueller is a buy below $48; my target is $52.

Safety Insurance (SAFT) seems directionless, as the stock may be feeling some pressure from the reopening of the economy and the inability of long-term interest rates to rise. However, the company should be able to sustain EPS of close to $7.00 even as the pandemic ends and rates will eventually rise as long as the economy can stay firm. The 4.6% yield remains very attractive and will support the stock. SAFT is a buy below $80, my target is $90.

P.S. Orlando MoneyShow, Championsgate Resort, June 10-12: The MoneyShow is back in person! Speakers not only include me but Larry Kudlow, Mark Skousen, Bob Carlson, Jon Najarian, Jeffrey Saut, Jeff Hirsch and Louis Navallier. Click here to register or call 1-800-970-4355 and mention priority code 052705 to attend free.