Value stocks

Cash is still king, but here are 3 valuable stocks you can buy

  • Stocks have fallen significantly, but we are entering a seasonally stronger period.
  • Doug Kass thinks big companies are increasingly available at good prices.
  • Paul Price targets two consumer stocks and a bank that are trading at a discount to historical valuation.

The stock market has fallen significantly this year, creating opportunities for investors with time horizons spanning a year or more. Undoubtedly, there will be a rollback in future earnings estimates after the third quarter earnings season. Nevertheless, some stocks are trading at a historically low price-to-earnings ratio which may protect them against a slightly downgraded outlook.

This year’s “cash is king” mantra remains unchanged. However, bargain-oriented investors with cash on the sidelines might want to take advantage of lower prices by choosing certain discount companies.

Historically, the best six months of market performance occur in the period between November and May. Also, while midterm election years are notoriously poor, performance in pre-election and presidential years is much better.

The following chart shows how the presidential election cycle has played out in the past. While there are plenty of reasons why stocks might not turn around and rally after the November election, the story tends to rhyme.

Some more reasons to buy stocks

Upside potential for stock prices not lost Real Money Proit’s Doug Kass. Kass tipped his hedge fund increasingly higher last month after significantly bullish readings on sentiment indicators.

In his diary this week, Kass said he remained bullish on stocks and bonds, writing: “The historic decline in stock prices has provided an opportunity to buy big companies at good prices and companies not still great at good prices”.

He lists four reasons for his optimism:

  • “Lower stock prices are the friend of the rational buyer. They offer better medium-term upside reward versus downside risk and sow the seeds of superior investment performance when stocks resume a trajectory. ascending.
  • Warren Buffett professed that “Investors should be scared when others are greedy and greedy when others are scared”. Fear is humanity’s oldest and strongest emotion. But it is the logic of argument and analysis – not fear or greed (the two emotions that drive markets) – that should guide our investment process. While times like this are tough, being emotionless when others lose their minds remains an integral part of my investing methodology.
  • My view is that the historic fall in stock prices has provided an opportunity to buy big companies at good prices – but not yet big companies at good prices.
  • Although there are currently growing concerns about financial stress, particularly in Europe, I think these worries are overblown because most financial stress indices place too much weight on US dollar appreciation than real world considerations. of the balance sheet. On that last point, I don’t see excessive conditions – similar to previous cycles like in mortgages and financials – that suggest a systemic breakdown.”

In general, Kass suggests it’s leaning long because investors have priced in a lot of what could go wrong, indicating that this path of least resistance could be up because everyone else has turned broadly bearish.

This week, Bank of America’s survey of money managers found they were holding the highest levels of cash since the internet meltdown. This normally happens when people hide under desks because they are convinced things are getting worse, not better. High liquidity levels prompted Bank of America to write: “FMS [Fund Manager Survey] screams macro capitulation, investor capitulation, political capitulation begins.”

Assume Kass is correct, systematic risk is smaller than some imagine, and Bank of America is correct that cash levels indicate that too many people have thrown in the towel on stocks. In this case, logic dictates that some of that money will eventually end up in stocks.

Value of shares to buy

As Kass suggests, many stocks are trading at good prices, especially based on price-earnings ratios relative to historical valuation.

Real Money Pro value investor Paul Price recently highlighted stocks that fit this bill, including two consumer companies, G-III Apparel (GII) and Wolverine worldwide (WWW) and a bank, Signature Bank (SBNY) .

G-III markets consumer apparel and accessories from many well-known brands, including Tommy Hilfiger, Calvin Klein, and DKNY.

Price writes of the G-III:

“If you think we’re ready for a nice rally, here’s a stock that looks set for a huge rally…GIII buyers on October 16, 2022, at close were more than triple the earnings per share of 10 years earlier at an absolute price that was 18% lower than exactly ten years ago… A look at the data below shows that a typical P/E for G-III is around 14 At last week’s close, that number was shockingly cheap at just 4.3 times its estimate for FY2022. That valuation was well below what was in effect at the bottom of the Covid panic … 2020 nadir value seekers have seen the GIII rise from $3.00 to $35.80 in less than 14 months This is what can happen from absurdly low valuation points… Even a comeback partial towards the mean at 13 times next year’s estimate could send GIII north of $50.

Analysts expect G-III EPS to decline 10% to $3.67 in 2023. Still, if it can factor in that outlook, its forward P/E of 4.6 remains unchallenged. doubt cheap. Even if they cut that estimate by 20% in the coming months, you’d still be paying less than six times next year’s EPS to hold the stock at current prices, which is half of “typical” P/E prices. mentioned.

Wolverine World Wide has many popular shoe brands including Keds, Merrell and Saucony. As with G-III, Price believes its stock is undervalued due to its earnings potential.

Price writes:

“If the second half goes as planned, sales per share and 10-year EPS will have more than doubled. Dividends have grown decently. Total shares outstanding will have fallen by more than 20%…You you’d expect exceptional results like this to translate into equally good returns for investors.That was true in April 2021, when stocks hit an all-time high of $44.70.Since then, however, WWW fell to an insane low of $15.11 on Oct 16, 2022… At that price, the 10-year total return was decidedly negative What else can you buy today for less than 10 years earlier, even if it is unequivocally much more valuable?

Since 2012, Wolverine’s typical price-to-earnings ratio has been around 16.6 times, accompanied by around 1.04% of the current yield. At its closing quote of $15.11 on October 14, it was offered for just 7 times this year’s earnings per share estimate and about 6 times its 2023 EPS projection while producing 2.65%. Assume a multiple of 15 below average on Wolverine’s estimate for 2023, and you get a 15-month target price of $37.50. This implies 148% plus dividends in upside potential.

Analysts estimate Wolverine World Wide’s EPS will rise 8% to $2.14 in 2022 and 15% to $2.47 in fiscal 2023. Similar to G-III, although these estimates drop by 20%, you still pay the bottom of the historical valuation. Over the past five years, his P/E range has been 6 to 41. If the 2023 estimates drop 20%, his forward P/E would be around 8.

Finally, Price also picked Signature Bank NY as a stock too cheap to miss. The bank provides a range of traditional banking services to businesses and their owners through 37 private client offices in the New York metropolitan area, Connecticut, California and North Carolina.

He writes:

“Signature Bank NY went from undervalued to overvalued, then back again – and now it’s a bargain. Its average P/E from 2012 to 2021 had fallen slightly, to 16.4 times. closing of $148.45, SBNY was offered for just 6.8 times its 2021 EPS estimate and only less than 6.3 times next year’s projected earnings….This valuation is lower than the stock price report. /SBNY earnings at its covid-panic bottom….The bank is not bad.Earnings per share for 2021 and 2022 should be all-time highs…What is SBNY worth?…Assume a PER of 14 still below average on next year’s earnings, and there’s no reason stocks can’t hit $331 by Dec. 31, 2023. That suggests total return potential of around $125 %.

Analysts expect SBNY EPS to be $22.87 in 2023. A 20% discount to this estimate corresponds to a forward EPS estimate of 8.3. Again, that’s near the bottom of its five-year PER range of 7 to 23.

The smart game

It is important to note that even though Kass is more bullish than a few months ago, he is still very cash rich. When we discussed cash levels yesterday, he said he had “around 75% cash on average all year”. Also, despite buying opportunistically on bearish waves, it is still below 30% net long.

Kass isn’t the only one who, while looking for stocks to buy on sale, still keeps plenty of dry powder. Real Money’s James DePorre wrote today to make sure you have “plenty of cash in hand”. When we chatted he said he ran 75% to 80% cash.

Additionally, Stephen Guilfoyle recently stated, “My opinion is that traders should always stay ‘cash’, especially well into the wee hours and on weekends. Exchange the present? OK. Exchange specific news that one finds personally interpretable? Sure.”

Investors should also recognize that while the forward price/earnings on these stocks looks cheap, even including a 20% downgrade, each could still fall further. There is no rule guaranteeing that stocks stop falling at a particular valuation.

In short, cash remains king. There may be more buying opportunities in the future, so consider dip-toes trades rather than buying all at once.

For example, if your normal position size is 3% and you want to add the price of the three stocks mentioned above, buy 1% now and add to that position over time. After all, risk control is paramount in a bear market, the Federal Reserve isn’t done raising interest rates yet, and earnings season could mean that forward earnings estimates will be revised down in over the next few weeks. By buying stocks gradually, you can test the waters while maintaining your flexibility.