It’s almost time for stock buyers to feast on distressed names whose earnings are somewhat sensitive to changes in economic demand.
Equal weight
Standard & Poor’s 500 Index,
Which shows a more accurate performance of the stock’s average, down 3% from its most recent high in late December.
Inflation is still above the Fed’s 2% target, so the Fed may not be able to cut interest rates as soon or as often as investors expect. Some believe the economic damage from prolonged high interest rates is beginning to show, prompting companies like Wells Fargo to offer conservative revenue forecasts.
Also, Q4 earnings reports are still ongoing, and investors will be looking for numbers and guidance. If they don’t like what they see, they may start another bout of selling – and beaten-down stocks will look more attractive.
Where are the cheap and economically sensitive stocks now? The idea is to identify names that already reflect low earnings expectations, which could rebound once the market becomes more confident in economic growth.
Advertisement – Scroll to continue
One is FedEx
,
Which is what we discussed in last week’s Trader’s Column. Shares are trading at 12 times analyst estimates for earnings per share for next year. That’s a historically significant discount to the S&P 500 — as much as 19 times — according to FactSet. FedEx shares have fallen sharply from their multi-year peak in late December, after the logistics company faced a decline in sales.
Now, some positive factors may lead to higher earnings and shares. The company is limiting increases in payroll and related expenses to the low single digits, with analysts expecting $31.6 billion in those costs this year, according to FactSet. Once volumes recover — analysts expect sales of $94.5 billion by 2025, up from $90.6 billion this year — earnings per share could reach $23.33, up from $20.04 this year.
Another choice is Hillenbrand
,
An industrial company with a market capitalization of $3.2 billion, it recently sold its flagging casket-making business for $761 million. Small-cap stocks still trade at a particularly cheap price versus large-cap stocks. Hillenbrand shares now trade at just over 11 times earnings for a 43% discount to the S&P 500, near the lowest historical discount.
Advertisement – Scroll to continue
That’s why the stock could boom if Hillenbrand implements its renewed focus, selling aftermarket manufacturing parts to food, plastics and pharmaceutical companies. Since many Hillenbrand customers have not yet purchased additional parts, the company aims to increase sales – which are expected to reach $3.4 billion this year – above the global economic growth rate. If cost inflation remains under control, profits can grow at a similar or higher rate.
Another idea is Bloomin’ Brands
,
Parent company of the Outback Steakhouse chain. With a market capitalization of $2.1 billion, shares trade at just under 10 times earnings, when they can trade roughly in line with the S&P 500 when investors are confident about consumer spending.
The company may not shine this year, but it can grow in the long term. Sales grew nearly 6% to $4.7 billion last year. Since the rate of price increases may slow this year, sales may remain flat into 2023. But the company is still growing its presence and sales in Brazil faster than in the United States, and has increased its use of digital sales over the past. Several years, it can help Bloomin gain market share. Analysts expect sales to grow by 4% in 2025.
Since the company generates more than $500 million in annual earnings before interest, taxes, and non-cash expenses, which easily covers a significant portion of its total debt of less than $800 million, Bloomin can continue to buy back stock, which helps earnings per share grow faster. Of revenues.
There is, too
SPDR S&P Regional Banking
The exchange-traded fund, which owns regional banks such as Citizens Financial Group
,
Trust Financial
,
And
Advertisement – Scroll to continue
New York Community Bancorp
.
The fund trades at 9.5 times earnings, less than half the S&P 500 multiple.
A key factor in these pure lending operations, which analysts expect to produce just 1% sales growth this year, is that stable or lower interest rates can boost loan volume. Banks can leverage this to achieve faster earnings per share growth while weathering recent increases in financing and operating costs.
Watch if these stocks slide further.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com