With the inflation rate hitting a 40-year high of 7.5% and the 10-year yield continuing to rise, there is pressure on the Fed to bring a quick and sharp hike in interest rates and a reduction of the balance sheet to reign in liquidity and put the brakes on demand. So many on Wall Street are getting nervous and bailing out of stocks.
But some are going by Warren Buffett’s advice. They still want to buy when everyone is selling. Because high-volume selling often pushes shares down below their intrinsic value and that’s when you can find some real bargains.
But you must choose wisely in order to avoid the value trap. Remember, a high dividend yield doesn’t necessarily mean that the company is doing well. It isn’t always a question of falling share prices. Sometimes, mature companies may actually see stagnating growth prospects, in which case they may decide to raise the dividend. This is not a great pick for a long-term investor.
A much better strategy involves choosing a stock with real prospects operating in an industry with true growth potential. When analysts start raising their estimates on such stocks, such that their prices don’t reflect the good news, that’s when you have a great value stock. Share prices falling because of investor jitters just help to bring it all together. The four stocks discussed below are true value plays based on these considerations-
Eni S.p.A.
E
Rome, Italy-based Eni engages in the exploration, development and production of crude oil and natural gas. Through the Eni gas e luce, Power & Renewables segment, it is engaged in the retail sales of gas, electricity, and related activities, as well as in the production and wholesale distribution of electricity produced by thermoelectric and renewable plants.
The ongoing energy crisis has been good for most oil and gas operators and escalating prices have been particularly beneficial for upstream players. The growing immunity to the virus and broad availability of vaccines and therapies mean that the world is headed for continued and more broad-based reopening. This will mean a return of the travel and tourism sector, as well as a general increase in commute and production as a normal effect of economic growth.
Both the reopening and economic growth are positive for energy demand, which along with limited supply will be good for prices this year. While OPEC+ has agreed to increase production, this will unfold gradually through the year. So the overall outlook for prices remains positive.
The Zacks Rank #1 (Strong Buy) stock has a value score of A.
Eni shares trade at 7.46X forward earnings, which are expected to grow 38.7% this year. Investors are clearly undervaluing its growth potential as the price-to-earnings growth (PEG) ratio is 0.71.
Eni is also undervalued in terms of its sales since its P/S ratio of 0.73X is well below 1.
Franchise Group
FRG
Franchise Group as the name implies has an asset-light model, as the owner and operator of franchised and franchisable businesses. Its four brands are also its reporting segments: American Freight (offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home accessories at discount prices, serving as a liquidation channel for major appliance vendors); The Vitamin Shoppe (omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products); Pet Supplies Plus (omnichannel retail chain and franchisor of pet supplies and services) and Buddy’s (specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements).
A staples business normally does well in uncertain times because it deals in essential goods, demand for which tend to be relatively stable irrespective of economic ups and downs. This is also the reason that Franchise Group has done so well ever since the pandemic hit. So if rate hikes dampen consumer appetite for other things this year, it’s expected that the staples business will remain relatively strong.
Analysts are echoing this sentiment and are looking for revenue and earnings growth of a respective 40% and 32% this year. The 2022 estimate is up 26 cents (5.4%) in the last 30 days.
The Zacks Rank #1 stock has a Value Score A and its dividend yields 5.0% (in December, the dividend was raised by 67%).
Franchise Group shares trade at a forward P/E of 9.68X, below its median level over the past year 10X, below the average P/E of the Zacks universe of around 16X and the S&P 500’s 20X.
It trades at 0.70X sales (meaning that investors are undervaluing its sales) and its PEG ratio of 0.65 indicates that investors are discounting its earnings growth potential.
KB Home
KBH
KB Home designs and builds attached and detached single-family homes, town homes and condominiums for first time, move-up and active adult homebuyers on acquired or developed lands in the U.S. Its four segments are West Coast, Southwest, Central, and Southeast.
Homebuilders are seeing very strong demand driven by the pandemic and the resultant operating-from-home trend it has spurred, which came on top of the demographic push from millennials. The government initiatives in response to the pandemic also led to lower mortgage rates, which made things easier. But inventories have not kept up, for a variety of reasons, including the paucity of land, labor and materials (because of supply chain issues). As a result, prices have soared, leading some buyers to postpone their purchases.
So there is significant demand in the market right now and more demand waiting on the sidelines. This of course is a solid environment for a homebuilder like KB Home.
The Zacks Rank #1 stock has a Value Score A and its dividend yields 1.46%.
KB Home shares trade at a forward P/E of 3.75X earnings (an annual low) and its PEG ratio is 0.93. This is largely because of broader concerns related to inflation and fears of increases in the mortgage rate. The company has continued to beat earnings expectations and the analysts covering the stock have continued to raise earnings estimates. For 2022 (ending September) those estimates are up over 22% (by $2.28). For 2023, they are up more than 20% (by $2.26).
KB Home shares trade at 0.33X sales and its sales have grown strongly in the last few quarters. Its fourth-quarter 2021 sales were 7% higher than the Q4 of 2019.
So on all considerations, the shares are undervalued.
TD SYNNEX
SNX
TD SYNNEX Corp. is the result of a recent merger between SYNNEX Corporation and Tech Data Corporation. The combined company is the largest technology distributor in the world (150,000 customers in 100+ countries), providing a comprehensive range of distribution, logistics and integration services.
At a time when supply chain disruptions have resulted in considerable challenges for buyers, the merger has created the largest distribution network in the world, which therefore positions TD SYNNEX to deal with these challenges and profit from the situation.
Additionally, TD SYNNEX expects resultant synergies of $100 million in the first year after closing, increasing to at least $200 million in the second year.
Investors have largely shrugged off the opportunity possibly because Tech Data is a lower-margin business and also because broader market concerns have weighed on sentiments. This has created a good opportunity for value traders.
The Zacks Rank #2 (Buy) rated stock has a Value Score A and its dividend yields 1.12%.
TD SYNNEX shares trade at a P/E multiple of 9.27X forward earnings, 0.33X sales and have a PEG ratio of 0.93, all of which indicate that the shares are undervalued.
Price Movement Over Past Month
Image Source: Zacks Investment Research
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