It’s almost time for stock buyers to feast on beaten-down names whose earnings are fairly sensitive to changes in economic demand.
The equal-weighted
S&P 500 index,
which shows a more-accurate performance of the average stock, has dropped 3% from a recent high set in late December.
Inflation remains above the Federal Reserve’s 2% target, so the Fed may not be able to cut interest rates as soon or as often as investors expect. Some think the economic damage from higher rates for an extended period is starting to set in, prompting companies such as Wells Fargo to make conservative revenue forecasts.
Also, fourth-quarter-earnings reports are still rolling in, and investors will scour numbers and guidance. If they don’t like what they see, they might start another wave of selling—and beaten-down stocks will look even more attractive.
Where are the cheap, economically sensitive stocks now? The idea is to identify names that already reflect lowered earnings projections, and that can rebound once the market becomes more confident in economic growth.
One is
FedEx,
which we argued for in last week’s trader column. Shares trade at 12 times analysts’ consensus earnings per share estimates for the coming year. That a historically wide discount to the S&P 500—which is at 19 times—according to FactSet. FedEx shares are steeply down from a multiyear peak in late December, after the logistics company guided for a sales decline.
Now, some positive factors would bring earnings—and shares—higher. The company is limiting the increase in salary and related expenses to the low single digits, with analysts forecasting $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 can reach $23.33, up from $20.04 this year.
Another pick is
Hillenbrand,
a $3.2 billion market-capitalization industrial company that recently sold its declining casket-making business for $761 million. Small-cap stocks are still trading especially cheaply versus large caps. Hillenbrand stock now trades at just over 11 times earnings for a 43% discount to the S&P 500, right around its lowest historical discount.
That’s why the stock could flourish if Hillenbrand executes on its renewed focus, selling aftermarket manufacturing parts to food, plastic, and pharmaceutical companies. Since many Hillenbrand customers haven’t yet bought additional parts, the company aims to grow sales—which are expected to reach $3.4 billion this year—above the rate of global economic growth. If cost inflation remains under control, earnings can grow at a similar rate or higher.
Another idea is
Bloomin’ Brands,
parent of the Outback Steakhouse chain. With a $2.1 billion market cap, shares are trading at just under 10 times earnings, whereas it can trade almost in line with the S&P 500 when investors are confident in consumer spending.
The company may not shine this year, but it can grow long term. Sales grew almost 6% to $4.7 billion last year. Since the rate of price increases could slow down this year, sales could be flat with 2023. But the company is still growing its presence and sales in Brazil faster than it is in the U.S., and has increased its use of digital sales over the past several years, with could help Bloomin’ take market share. Analysts forecast 4% sales growth in 2025.
Since the company generates over $500 million in annual earnings before interest, tax, and noncash expenses, which easily covers much of its less than $800 million in total debt, Bloomin’ can continue to buy back shares, helping earnings per share grow faster than revenue.
There’s also the
SPDR S&P Regional Banking
exchange-traded fund, which owns regional banks such as
Citizens Financial Group,
Truist Financial,
and
New York Community Bancorp.
The fund trades at 9.5 times earnings, less than half of the S&P 500’s multiple.
One key for these lending pure plays, which analysts expect to produce just 1% sales growth this year, is that stable or lower rates could boost loan volumes. Banks could leverage that into even faster earnings-per-share growth as they move past recent increases in funding and operating costs.
Watch if these shares slip further.
Write to Jacob Sonenshine at [email protected]
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