The markets clearly remain in correction mode due to heightened uncertainty related to Fed hawkishness. So much so that we are fretting about headlines without considering the facts hidden inside.
Many would have for instance been concerned that consumer confidence declined in January. But if you only look further into Conference Board’s press release, you find that the Present Situation Index—based on consumers’ assessment of current business and labor market conditions—improved.
And this means that the operating environment, that a rate hike wont fix is getting better. And if you look further down, you find it says that “the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months all increased.” Inflation concerns are also easing so price hikes should moderate. The pandemic remains the only wild card.
The same can be said about the decline in weekly initial jobless claims, that reversed a four-week trend during which claims increased as a result of the more infectious Omicron variant. The decline seems to indicate that Omicron fears are easing if not disappearing.
But most important (and unfortunate) is the fact that we are ignoring how this is turning out to be a perfectly decent earnings season. And so, we are afraid of jumping into stocks that report strong results and provide encouraging outlooks, even when this is one of the most important factors driving any market. This may sound irrational, but irrationality is a natural consequence of fear.
Watching the way markets continue to fall every day is disconcerting of course. But fear makes things worse because it leads us to miss opportunities. Weak markets are a good time to scout for undervalued growth stocks. And if they are large-cap stocks with operations across diverse markets or sell into diverse markets, all the better. Especially if they have solid cash flows and also pay a dividend.
That’s what I’m presenting here in this list of five stocks-
Whirlpool
WHR
One of the largest manufacturers of home appliances in the world, Whirlpool produces things like refrigerators and related products; laundry appliances and related laundry accessories; cooking and other small domestic appliances; and dishwasher appliances and related accessories, as well as mixers. It operates production facilities in a number of countries and sells these products in nearly every country around the world. So it has great geographical diversity.
Although the company is seeing rising raw material costs, its pricing actions are improving the mix of business and offsetting the negative impact on revenue. As a result, it was able to produce strong results for 2021, in which revenue grew 13% and earnings 44%.
Management is projecting 5-6% revenue growth in 2022, which is above the 4%
expected CAGR
for the market between 2021 and 2026. Rising interest rates should also benefit the company, first, by containing inflationary costs and second, by helping the consumer that buys its products.
As a result, Whirlpool generates strong cash flows and has a strong balance sheet.
It returns value to shareholders through both share buybacks and dividends. Its current dividend yield is 2.80%.
The shares carry a Zacks Rank #2 (Buy) and growth score of A. The forward P/E is under 10 and price to sales below 1, with both values being below the median level in the last 5 years and below the S&P 500. The PEG is also under 1, which means that Whirlpool’s earnings potential is undervalued. So the shares look undervalued and worth picking up at these levels.
United Microelectronics Corp.
UMC
United Microelectronics is one of the largest semiconductor foundries located in Taiwan. The nature of the business is such that only hi-tech companies would require it’s the manufacturing services that it provides. So its diversification stems from the end markets that use these chips (communication, consumer, computing and other) and the countries and regions that use the end products into which its chips go.
The market for chips remains extremely tight, which is leading to high utilization of existing capacity and strong pricing, which together are translating into robust profitability. Additionally, capacity is being built up to alleviate current chip shortages.
United Microelectronics also pays a dividend that currently yields around 2.14%.
The shares carry a Zacks Rank #2 and growth score of A. The PEG is below 1, which means that United Microelectronics’ earnings potential is undervalued. The forward P/E is under 10 and price to sales although above 1 is well below the S&P 500. Overall, the shares look reasonably valued and worth picking up at these levels.
FedEx Corporation
FDX
FedEx provides transportation, e-commerce and business services both in the U.S. and across a number of markets internationally. It operates under the well-known FedEx brand.
The company is managed for the long term, so investments in technology and assets are made in a way that tends to generate long-term stability. It is currently focused on increasing core capabilities and digital innovation.
The company has particularly benefited from the surge in ecommerce since the pandemic first hit. Strong demand continues across its business, leading to pricing strength.
Shareholders are rewarded through both share buybacks and dividends. Fedex’s dividend currently yields 1.23%.
Fedex shares carry a Zacks Rank #2 (Buy) and growth score of A. Its shares are trading below median value on the basis of forward twelve months’ earnings and sales over the last 5 years. While its PEG is over 1, it is only slightly over the S&P’s.
Donaldson Company, Inc.
DCI
Donaldson is a manufacturer of filtration systems and replacement parts. It describes its core strengths as being its leadership in filtration technology, its strong customer relationships and its global presence.
Donaldson’s geographical diversity (manufactures and sells products across the world) and end market presence (agriculture, construction, aerospace, defense, mining and truck) are likely to provide stability this year and generate secular growth going forward. Acquisitions will further boost this growth. New European emission standards and new equipment production across end markets and geographies are positive for the off-road trucking business. A huge aftermarket business is also encouraging.
There are concerns that the higher-margin on-road business will soften this year and like other players, Donaldson is seeing supply chain and labor issues that are likely to drive up costs this year.
Notwithstanding these headwinds, its earnings are expected to grow., likely helped by recent investment in building operating leverage.
What’s more, it also buys back shares and pays a dividend that yields 1.60%. Donaldson generally raises the dividend every year.
Donaldson shares carry a Zacks Rank #2 (Buy) and growth score of B. its shares are trading below median value on the basis of forward twelve months’ earnings and sales over the last 5 years. Its PEG is under 1 and also below the median level in the last 5 years. It compares favorably with S&P 500 on all valuation metrics.
HP Inc.
HPQ
HP is the world’s second largest provider of personal computers and a leading supplier of other access devices, imaging and printing products, and related technologies, solutions and services to individual consumers, SMBs and large enterprises, including customers in the government, health and education sectors. Its products are sold all over the world.
While the computing market is undergoing a slowdown after a couple of years of very strong growth, and continued supply chain issues remain a headwind, a broad base of served markets softens the impact. And even as the consumer side softens, enterprise demand is coming back to offset some of the weakness. This makes for a relatively steady business that generates strong cash flows.
And as a result, HP is able to return cash to investors through both share repurchases and dividends. HP’s current dividend yields 2.86%.
HP shares have a Zacks Rank #2 and growth score of A. Valuation is also reasonable with a P/E well below 10 and a P/S well below 1. Both values are below their median levels over the last 5 years. So although the PEG value exceeds 1, the shares are worth buying at these price levels.
One-Month Price Movement
Image Source: Zacks Investment Research
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