One upside from the recent stock market selloff is that it may have created some opportunities for bargain hunting investors. However, an apparently cheap valuation is no guarantee that a stock is bound to rise, absent other positive forces that might propel its price upward. Analysts at Jefferies Financial Group have identified 12 stocks that are inexpensive "relative to their respective sectors," while also being possible beneficiaries of "identifiable catalysts between now and year-end," per Barron's.
These stocks come from a broad range of industries, such as retail, biotech, banking, investment management, travel services, semiconductors and manufacturing. They are Gap Inc. (GPS), Foot Locker Inc. (FL), Michael Kors Holdings Ltd. (KORS), Kennametal Inc. (KMT), Timken Co. (TKR), Broadcom Inc. (AVGO), Casey’s General Stores Inc. (CASY), HCA Healthcare Inc. (HCA), Amgen Inc. (AMGN), Marriott Vacations Worldwide Corp. (VAC), Santander Consumer USA Holdings Inc. (SC), and Invesco Ltd. (IVZ).
12 Stocks That Look Cheap: Jefferies
|Casey's General Stores||13.0%|
Source: Barron's; through the close on Oct. 30.
Significance for Investors
Despite the fact that traditional retail has been taking a beating from online competitors, leading some observers to conclude that this is an industry in perhaps terminal decline, it is interesting that four retailers are among Jefferies' picks: Casey's General Stores, Foot Locker, Gap and Michael Kors. Foot Locker and Kors are also among nine stocks that analysts at Wells Fargo recently identified as looking attractive based on seven criteria that Warren Buffett reportedly uses to screen investments for Berkshire Hathaway, covering valuation, profitability and risk. Gap, Kors and Foot Locker are representative cases, with key data summarized in the table below.
Big Potential Upside in Retail
|Jefferies' Targets||Gap||Kors||Foot Locker|
Source: Barron's for target prices from Jefferies and current prices as of the Oct. 30 close.
Gap is scheduled to report 3Q 2018 earnings on Nov. 15, and Jefferies analyst Randy Konik believes that it is likely to beat the consensus estimate. Konik is bullish on the Gap brand, believes that "the worst is behind them" and improved merchandising is likely to boost store traffic and sales.
According to Wells Fargo's analysis, Foot Locker has 5-year average ROE and ROIC figures of 19% and 18%, respectively, better than the Buffett-inspired benchmark of 15%, and a 5-year average pretax margin that is more than 70% better than the industry average. Its debt/equity ratio is a mere 5%, versus 19% for the industry, and its valuation is also significantly lower, whether measured by forward P/E ratio, price to book or price to cash flow.
Janine Stichter is the Jefferies analyst covering Foot Locker, and she discounts worries that recent moves by key supplier Nike Inc. (NKE) to increase its direct sales will hurt Foot Locker materially. While noting that about 70% of Foot Locker's sales are contributed by Nike products, she says "Nike's push to curtail its wholesale distribution should [be] a tailwind for Foot Locker, given its positioning as a key wholesale partner."
The Wells Fargo analysis also shows Kors scoring much better than all the Buffett-inspired benchmarks, except for price to book, for which it is only 9% more expensive than the industry average. Analyst Konik of Jefferies believes that the Kors brand is "fundamentally strong, with healthy demand." He sees international expansion as offering the potential to boost earnings. Kors is increasing its international footprint through its recent acquisition of Italian luxury brand Gianni Versace, which operates about 100 stores of its own.
It warrants repeating that just because a stock looks cheap today, even on multiple criteria, it is not necessarily a bargain that will rebound in value. Indeed, it may be cheap for a reason, precisely that its long-term prospects look bleak. With the retail stocks listed above, it may indeed be the case that the worst is over for the industry, and that pessimism has peaked. Or, it may not, and there may be yet more bad news to come. With Michael Kors, for example, the acquisition of Versace offers opportunities, but also the risk that a strategic fit may not be achieved. Also, the market reacted negatively to the announcement, suggesting that Kors overpaid for Versace.