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All Contents © 2019The Kiplinger Washington Editors
By Vince Martin
| June 12, 2017
It’s been a solid 2017 for the equity markets, which would seem to make it more difficult to find reasonably priced stocks to buy. The S&P 500 Index has risen 9% so far this year. The Dow Jones Industrial Average has gained 7.3%, even with poor performance from energy stocks Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX).
That performance has been dwarfed by the Nasdaq Composite, up 17%, and a 21% rise in the large-cap-heavy Nasdaq 100. The so-called “FANG stocks” — Facebook Inc. (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc. (GOOG, GOOGL) — have risen over 30% as a group. Particularly on the tech side of the market, stock prices seem potentially high.
But not everyone has joined the rally so far. Energy stocks beyond giants XOM and CVX largely have struggled. More broadly, and more surprisingly, a simple screen shows that more than 40% of U.S.-listed stocks actually have declined so far this year. In other words, there are stocks to buy that haven’t joined the rally — yet.
Here are 10 of those stocks that have had a quiet 2017, but are ready to finally join the broad market’s rally.
Prices and data are from the original InvestorPlace story published on June 5, 2017. Click on ticker-symbol links in each slide for current prices and more.
Courtesy American Axle & Manufacturing
Automotive stocks — with the notable exception of Tesla Inc. (TSLA) — are out of favor at the moment. Ford Motor Company (F) and General Motors Company (GM) trade at single-digit earnings multiples. F stock hit a four-year low, in fact, before the resignation of CEO Mark Fields last month.
But even by the standards of the sector, American Axle & Manufact. Holdings, Inc. (AXL) looks absurdly cheap. AXL stock trades at just 4.6x 2017 analyst estimates. And the benefits from the recently completed acquisition of Metaldyne won’t be fully realized until 2018 and beyond. Management’s guidance for $400 million in free cash flow once synergies are realized suggests a price-free-cash-flow multiple of under 4.
AXL stock does have its share of risks, though. The company has a large amount of exposure to GM, and is losing some of its business with that key customer. But the Metaldyne purchase diversified the overall business. Meanwhile, American Axle has said it has replaced a large chunk of lost sales. AXL’s debt load is concerning — particularly at what looks like the top of the cycle — but free cash flow over the next few years should clean up the balance sheet.
At this point, AXL stock seems just far too cheap, even accounting for those risks. And if macro sentiment continues to improve — particularly overseas — AXL could be a prime beneficiary and reverse a 20% YTD decline.
Web Summit Via Flickr
Twilio Inc. (TWLO) has declined 14% so far this year, with all of the decline, and then some, coming after an ugly Q1 earnings report. A full-year guidance cut sent TWLO stock down 26%, and TWLO now sits 65% below late-September highs.
With expectations reset, however, Twilio seems likely to join the tech sector rally going forward, should it continue. The full-year guidance cut was driven by Uber’s decision to spread out its business. That’s not necessarily a repeatable event. Meanwhile, a partnership with Amazon Web Services should help demand, and Twilio still has years of growth and impressive exposure to the growing app industry.
Like with AXL, there are risks here, and even after the declines TWLO stock is hardly cheap. I’ve been early to the story, even anticipating a better-than-expected first-quarter. But the growth story here is dented, not broken.
And with some of the growth pressure removed by the lower valuation, Twilio stock should have upside from here.
CBS Corporation (CBS) has seen broader media concerns weigh on its stock, as they have others. Walt Disney Co. (DIS) has declined sharply over the past month amid renewed concerns about its ESPN unit. AMC Networks Inc. (AMCX) and Discovery Communications Inc. (DISCA, DISCB) have weakened as well.
The declines elsewhere make some sense in an increasingly fragmented landscape. But CBS stock, which now has declined YTD, seems like the baby tossed with the media bathwater. Competition from Netflix, Hulu and other streaming services might be a concern. But CBS All Access continues to perform well, and unlike AMC and even ESPN, CBS is a central offering in all so-called “skinny bundles.”
Meanwhile, CBS stock now trades at less than 12x 2018 analyst estimates. Those analysts have an average target price of $74, suggesting 20%-plus upside from current levels. A media stalwart that generates profit both online and over-the-air should be participating in the broad market rally, not lagging it. It seems likely that will reverse at some point soon.
Sinchen.Lin Via Flickr
NetGear, Inc. (NTGR) stock hit an all-time high in October after reversing a multi-year trend. For years, NetGear had generated flat earnings and basically no movement in its share price. Growth in consumer wireless routers was offset by steadily eroding sales to major broadband providers.
But a restructuring in the service provider business significantly improved profitability last year, and NTGR stock soared as a result. But much of those gains have reversed, with NTGR declining almost 25% just since early February. A pair of strong earnings reports were offset by below-expected guidance, and both quarters sent NTGR stock tumbling.
But it looks like NetGear stock has bottomed — and with good reason. The new Nighthawk router, Orbi “mesh” products, and Arlo IP cameras all are posting huge growth. 2017 earnings may be impacted by investments in growing those products – but NTGR now trades at roughly 10x free cash flow. Meanwhile, the service provider business has stabilized, and 2018 should see an increase in revenue and profits overall.
The story that pushed NTGR to all-time highs still is intact, though it might be delayed. But that doesn’t justify a 25% decline in NTGR stock. With the company’s exposure to growing categories, a further market rally should bring NTGR stock along.
Courtesy HD Supply
One would think an industrial distributor like HD Supply Holdings Inc. (HDS) would be leading a rallying market, not trailing it. Yet the share price of the former Home Depot Inc. (HD) unit actually is down modestly so far this year, and basically hasn’t moved since a sharp post-election run.
Concerns about the distribution space as a whole have weighed on stocks like Fastenal Company (FAST), and in particular, W W Grainger Inc. (GWW). But those concerns — driven largely by competitive fears surrounding the entry of Amazon Business — shouldn’t really apply to HD Supply’s more equipment-heavy business. Optimism toward higher infrastructure spending should be a catalyst, and while that optimism no doubt drove some of the November gains, some investors appear to assume that benefit no longer is coming.
Even if it isn’t, HDS might be just too cheap. The stock trades at 11x 2018 analyst estimates, and at a 13% discount to analyst targets. Growth hasn’t been torrid so far, but the same economic improvement being priced in by equity markets should accelerate HDS revenue and boost margins. If the market is right that the U.S. economy will improve, HD Supply should benefit. But at the moment, HDS stock isn’t pricing in those benefits.
Philadelphia 76ers Via Flickr
Again, 2017 hasn’t been particularly kind to energy stocks. The Energy Select Sector SPDR (XLE) is down 14% YTD. Meanwhile, Chesapeake Energy Corporation (CHK) has doubled that decline after a torrid 2016
CHK stock, however, looks tempting back under $5. Oil prices have not cooperated this year, and natural gas prices fell sharply over the past week. But Chesapeake Energy still is on its way toward being cash flow-positive, and it has made tremendous progress in cleaning up its balance sheet.
Meanwhile, $5 has held as support multiple times of late, and the same projected economic improvement driving higher stock prices should move oil higher — assuming shale drillers like Chesapeake don’t create supply that outstrips demand.
There are plenty of energy stocks available at a seeming discount — but CHK looks like one of the most attractive at the moment.
Courtesy PacWest Bancorp
Financial stocks haven’t declined to the same extent as energy plays — but nor have they performed as one might expect in an improving economy and rising stock market. Bank of America Corp. (BAC) is one of the few mega-cap financials to rise YTD, through a 1.6% increase lags the S&P 500, and there still appears to be upside in that stock going forward.
It does look like there’s an opportunity in smaller community banks as well, with PacWest Bancorp (PACW) a particularly attractive candidate. PACW offers exposure to the still-solid Los Angeles and San Diego markets, and the recently announced acquisition of CU Bancorp (CUNB) will strengthen its franchise in L.A.
Yet PACW actually has declined 20% YTD. It now trades around 1.2x book value, offers a 4.3% dividend yield, and trades at under 14x forward earnings. There’s still benefits from interest rate hikes to come, and further growth assuming economic strength in California. A modestly disappointing Q1 casts a bit of a shadow, but doesn’t justify a 20% haircut.
A rising stock market generally signals expectations for a stronger economy. A stronger economy means more discretionary income — a clear positive for the boating industry. And that should benefit boat dealer MarineMax Inc. (HZO).
Despite being the case for the rest of the industry, it hasn’t been the case for HZO stock. Brunswick Corporation (BC), the world’s largest boat manufacturer, has gained 3.6%, but smaller firms MCBC Holdings Inc (MCFT) and Malibu Boats Inc. (MBUU) have risen 31% and 29%, respectively.
At the same time, both MarineMax and rival West Marine, Inc. (WMAR) have declined YTD. And HZO stock hasn’t really moved over the past two and a half years — while its suppliers have generally seen big moves.
With HZO stock trading at 12x next year’s EPS estimates, there’s a clear discrepancy between how the market views boat manufacturers and boat dealers. Should that discrepancy end, HZO stock will benefit.
Courtesy GGP Inc.
There are very few retailers who have taken part in the market rally over the past year, so the weakness at REIT GGP Inc. (GGP) isn’t a surprise. But at some point, the bearishness toward higher-end mall owners like GGP seems likely to abate.
In the public markets, even high-end mall REIT stocks are tumbling. Investors are projecting lower occupancy rates and lower profits – at best. But private market valuations are holding up just fine, as both GGP CEO Sandeep Mathrani and Macerich Co. (MAC) CEO Art Coppola have pointed out.
Mathrani took it a step further on his company’s Q1 conference call. He told listeners that “the sum of the parts is far greater than GGP’s current stock price” and that at some point, “the market will appreciate the value of the real estate — and it may be that we need to demonstrate how we show them that.”
Meanwhile, Lululemon Athletica Inc. (LULU), Best Buy Co Inc. (BBY) and even Victoria’s Secret owner L Brands Inc. (LB) have shown that there is some life in brick-and-mortar retail yet. And at some point, a stabilization in sentiment should strengthen GGP stock. Even if that stabilization doesn’t come, Mathrani could use the private markets to find shareholder value. Those efforts should allow GGP stock to join in the broad market fun.
The bull case for payroll processing firm Paychex, Inc. (PAYX) is pretty simple. More jobs and more workers equals more revenue for Paychex.
That case worked for PAYX stock for some time — until 2017. Paychex stock actually has declined almost 3% YTD, despite a pretty solid string of earnings reports.
Competition is a modest concern here, but Paychex has built an impressive moat through the years — and switching costs are high. A 3.1% dividend yield offers income, and a 25x forward multiple is dear, but not expensive relative to PAYX’s historical levels.
If the broad markets keep rallying, PAYX is going to join — at some point.
This article is from Vince Martin of InvestorPlace. At the time this article was published, he was long NTGR stock.
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