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Beaten-Down Stocks Present Opportunities for Investors

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4.7

Andrew R. Michaud

• January 18, 2024

The recent market downturn offers an opportunity for stock buyers to consider investing in undervalued companies that are sensitive to changes in economic demand. The equal-weighted S&P 500 index, which provides a more accurate performance measure for the average stock, has decreased by 3% from its late December high.

The Federal Reserve's target inflation rate remains above 2%, suggesting that interest rate cuts may not happen as soon or as frequently as investors anticipate. Consequently, some companies, including Wells Fargo, have adopted conservative revenue forecasts in response to the potential economic impact of sustained higher rates.

Additionally, investors are closely examining fourth-quarter earnings reports and guidance. Unfavorable results could trigger a new wave of selling, making beaten-down stocks even more attractive.

So, where can investors find cheap, economically sensitive stocks that have already factored in lowered earnings projections? The objective is to identify stocks that have the potential to rebound when economic growth inspires greater confidence.

One such stock is FedEx, which we recommended in our recent trader column. With shares trading at a price-to-earnings ratio of 12 based on analysts' consensus estimates, FedEx is significantly discounted compared to the S&P 500, which has a ratio of 19 according to FactSet data. Since reaching a multiyear peak in late December, FedEx shares have experienced a significant decline following the company's sales decline guidance.

However, there are positive factors that could drive both earnings and share prices higher for FedEx. The company aims to limit the increase in salary and related expenses to single digits. Analysts predict that these costs will amount to $31.6 billion this year. As volumes recover, with expected sales reaching $94.5 billion by 2025 (up from $90.6 billion this year), earnings per share could reach $23.33 compared to $20.04 this year.

Another potential investment opportunity is Hillenbrand, an industrial company with a market capitalization of $3.2 billion. Recently, Hillenbrand sold its declining casket-making business for $761 million. Small-cap stocks, like Hillenbrand, are currently trading at an attractive discount compared to large-cap stocks. Hillenbrand's stock is trading at slightly over 11 times earnings, representing a 43% discount to the S&P 500 and approaching its historical low discount.

These undervalued stocks provide investors with the chance to seize opportunities as the market regains confidence in economic growth. By identifying companies that have already adjusted their earnings projections accordingly, investors can position themselves for potential gains in the future.

Stock Potential: Hillenbrand's Renewed Focus

Hillenbrand, a company specializing in aftermarket manufacturing parts, is poised for growth with its renewed focus on selling to food, plastic, and pharmaceutical companies. While many Hillenbrand customers have not yet made additional purchases, the company aims to surpass the rate of global economic growth and achieve sales of $3.4 billion this year.

With effective cost management, Hillenbrand's earnings could potentially grow at a similar or higher rate. This favorable scenario presents an opportunity for the stock to flourish.

Bloomin' Brands: A Forward-Looking Investment

Bloomin' Brands, the parent company of Outback Steakhouse, presents an intriguing investment opportunity. Trading at just under 10 times earnings and sporting a $2.1 billion market cap, this company has room to perform on par with the S&P 500.

While near-term growth might not be extraordinary, Bloomin' Brands demonstrates long-term potential. In 2023, it is expected to maintain sales similar to those of the previous year, with a possibility of slower price increases. Nevertheless, the company's expansion in Brazil and its increasing emphasis on digital sales could boost market share. Analysts project a 4% sales growth by the year 2025.

Thanks to annual earnings of over $500 million before interest, tax, and noncash expenses, Bloomin' Brands effectively manages its total debt of less than $800 million. This favorable position allows the company to pursue share buybacks, resulting in faster growth in earnings per share.

The future looks promising for Bloomin' Brands.

SPDR S&P Regional Banking ETF: A Favorable Investment

Investors seeking exposure to regional banks may find the SPDR S&P Regional Banking exchange-traded fund (ETF) appealing. This ETF includes key players such as Citizens Financial Group, Truist Financial, and New York Community Bancorp. Currently trading at a multiple of 9.5 times earnings, which is less than half of the S&P 500's multiple, this fund presents an attractive investment opportunity.

While analysts predict only a 1% sales growth for these lending pure plays in the current year, stable or lower interest rates could significantly boost loan volumes. Consequently, banks operating within the ETF could experience accelerated earnings-per-share growth as they navigate past recent increases in funding and operating costs.

Investors should closely monitor the performance of these shares.