5 Laggards For The Week Ending July 8, 2022

Dairy Discount in Grocery Store

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Major indexes began the first trading day following the 4th of July holiday relatively muted, with gains in the Nasdaq offset by losses in the DJIA. At the start of the day, markets moved higher on news that the Biden administration is seeking to ease Chinese tariffs. But those gains reversed course throughout the day. Declines in the broader index were driven by a nearly 10% drop in Brent crude on recession fears, which sent the oil majors broadly lower.

While there was slightly more activity on Wednesday, markets still finished in neutral territory as investors absorbed details included within the minutes from the Federal Reserve, which showed that officials broadly agreed on the need to pick up the pace of interest rate increases. By late afternoon, Federal-funds futures were pricing in a 50% chance of the benchmark rising to 3.5% by December. Another development during the day was the inversion of the yield curve, which is a well-known recession indicator. Though news, it was hardly enough to move the markets one way or the other.

Stocks were carried higher on Thursday, with 10 of the S&P 500’s 11 sectors up for the day. This followed the release of data on jobless claims, which showed a slight increase in claims. This came in advance of Friday’s highly anticipated monthly jobs report. With the labor market seen as cooling, this provided some investors confidence that inflationary pressures could be tamed in the months ahead.

Though investors were provided slight reprieve in the current week, volatility remained omnipresent, with indexes still swinging between gains and losses throughout the trading hours. With many quality names still trading at the bottom of their 52-week range, there are five low P/E laggards this week that could provide long-term investors with attractive returns in the months ahead.

Caterpillar, Inc. (CAT)

CAT is the world leader in heavy duty equipment and machinery, which includes construction and mining equipment, off-highway diesel and natural gas engines, and industrial turbines. They operate in three primary segments: Construction Industries; Resource Industries; and Energy & Transportation (ME&T).

In the most recent filing period ended March 31, 2022, CAT reported total revenues of +$13.6B, which was up 14% from the same period last year and over +$100M better than expected. Reported earnings also came in higher due to higher sales volume and favorable price realization that offset inflationary pressures incurred within the SG&A and R&D line items.

At period end, the company had a sizeable balance of cash of +$6.5B, in addition to available credit of +$9.2B. With +$42.6B in total current assets and +$29.5B in total current liabilities, there are no apparent concerns regarding short-term liquidity.

Q1FY22 Form 10-Q - Summary of Available Credit

Q1FY22 Form 10-Q – Summary of Available Credit

The strong financial position of the company enabled a dividend increase of 8%, bringing their current annual payout to $4.80/share, which is a yield of 2.80% at current pricing. With shares down about 20% in the past month, CAT is currently one of the worst performing components of the DJIA. At an estimated intrinsic share price of $250, the stock has significant upside potential. For investors seeking a quality DJIA component for their long-term portfolios, CAT is certainly one name to watch.

Kite Realty Group Trust (KRG)

KRG is one of the largest REITs focused on open-air shopping centers and mixed-use assets. As of March 31, 2022, the company had interests in 181 properties, comprising nearly 30M square feet of gross leasable space. Some of their top tenants include The TJX Companies, Inc. (TJX), Best Buy (BBY), and PetSmart, to name a few. Of their top 15, none account for over 2.5% of total ABR. This minimizes tenant concentration risk to the company.

Exposure to the fast-growing sunbelt region of the U.S. is one competitive advantage that is contributing to earnings growth and improving occupancy rates. Additionally, their primarily grocery-anchored portfolio with greater holdings of essential retail is another advantage that provides resilience to continued cash flow strength.

Q1FY22 Investor Presentation - KRG Geographic Concentration

Q1FY22 Investor Presentation – KRG Geographic Concentration

KRG’s strong liquidity profile, which includes declining net debt and nearly +$1B in available funds, provides further protection against uncertain market conditions. It also provides the flexibility to return excess cash to shareholders via dividends.

Q1FY22 Investor Presentation - Summary of Net Debt and ABR PSF

Q1FY22 Investor Presentation – Summary of Net Debt and ABR PSF

In the most recent quarter, for example, the company increased their payout by 5%, which translates to a yield of about 4.8% at current pricing. With shares trading near their lows at less than 10x forward FFO, it may be worth the extra dig into this beaten down REIT.

HCA Healthcare, Inc. (HCA)

HCA is one of the leading health care services companies in the U.S. For the full year ended December 31, 2021, the company operated 182 hospitals and 146 freestanding surgery and endoscopy centers in 20 states and England.

In the full 2021 fiscal year, the company reported +$58.8B in total revenues, +$9.0B in operating cash flows, and +$5.4B in free cash flows. Additionally, HCA had +$1.5B in cash on hand and a readily liquid balance of A/R of +$8.1B.

In the most recent period filing period, revenues were higher and better than expected. Guidance, however, disappointed. This sent shares tumbling following the release. Recently, shares have hit fresh 52-week lows on further downgrades.

YCharts - HCA's Price History Following Most Recent Earnings Release

YCharts – HCA’s Price History Following Most Recent Earnings Release

Driving guidance lower were current period labor pressures that contributed to higher contract expenses and heightened turnover, which constrained capacity, preventing the company from delivering hospital services to certain patients. While HCA does have initiatives in play surrounding retention, recruitment, and capacity management, improvements in labor costs are still expected to be slower than originally anticipated.

Though the concerns are valid, they aren’t insurmountable. At less than 10x forward earnings, HCA is trading at a sizeable discount to their five-year average of 12.7x. As a leading healthcare services company, HCA is one worth a second look.

Newell Brands, Inc. (NWL)

NWL is a leading global consumer goods company that sells their products in over 200 countries and has on-the-ground operations in 40 of these countries. Some notable brands within their portfolio include Rubbermaid, Calphalon, Sharpie, Yankee, and Elmer’s, to name a few. Some of these brands are household names and have been time tested through every business cycle.

The company’s most recent earnings release included net sales growth of 4.4% and core sales growth of 6.9%, with a reaffirmation of full year 2022 guidance. This beat estimates all around, sending shares higher post-release.

YCharts - NWL's Price History Following Most Recent Earnings Release

YCharts – NWL’s Price History Following Most Recent Earnings Release

Shares, however, came under notable selling pressure following Target’s (TGT) earnings disappointment, with shares dropping 10% immediately following the report. Since then, the stock slid to a low of $17.86 before rebounding to its current level of $19.30.

YCharts - NWL's Share Price Movement Following TGT's Earnings Release

YCharts – NWL’s Share Price Movement Following TGT’s Earnings Release

Despite its volatility over the past several months, NWL still trades within a narrow 52-week range of just $10 separating their high and low. This, along with a 4.7% yielding dividend, provides investors with some degree of safety in a turbulent market. Additionally, at 10x forward earnings, shares are discounted to historical averages and the broader index. With the worst likely behind it, NWL looks poised for an eventual rebound.

Truist Financial Corporation (TFC)

TFC is a top 10 U.S. commercial bank that was formed by the merger of BB&T and Suntrust. Their operations have a leading share in many high-growth markets in the country, such as Florida, Georgia, and Virginia. In recent months, TFC has expanded their operations in Chicago, which is the nation’s third-largest market.

Q1FY22 Form 10-Q - Partial Summary of TFC's Market Share by Region

Q1FY22 Form 10-Q – Partial Summary of TFC’s Market Share by Region

Similar sized regional competitors include the PNC Financial Services Group (PNC) and M&T Bank Corporation (MTB). From a market cap standpoint, PNC is their closest peer.

Seeking Alpha Peer Comparison Tool - Market Cap

Seeking Alpha Peer Comparison Tool – Market Cap

Though total revenue growth has lagged PNC YOY, TFC has exhibited stronger growth over a 3-5yr timespan. Still, TFC trades at a discount to PNC, with a price/book ratio of 1.09x versus PNC’s 1.50x.

Seeking Alpha Peer Comparison Tool - Revenue Growth

Seeking Alpha Peer Comparison Tool – Revenue Growth

Following the Federal Reserve’s stress test, which affirmed the bank’s current stress capital buffer, TFC raised their dividend by 8% to $0.52/share per quarter. This continues a solid streak of increases.

Seeking Alpha - TFC Dividend Growth History

Seeking Alpha – TFC Dividend Growth History

At present, shares are hovering at the bottom of their 52-week range and are trading at less than 10x forward earnings. Close competitor PNC, on the other hand, is trading at a forward multiple of 11.3x. With upside likely in the months ahead, aided in part by higher net interest income, TFC is one regional bank fit for any portfolio watchlist.

Conclusion

Major indexes received a bit of reprieve on a short trading week following the long holiday weekend. Some would attribute it to a short-term bear market rally, while others hold a more positive view. At any rate, each company on this week’s laggard listing still trades at multiples that are discounted to the broader market.

CAT, for example, has been one of the worst performing components in the DJIA over the past month, down nearly 20% versus the DJIA’s 3% decline. Yet, the DJIA is currently trading at 16x forward earnings, while CAT is trading at just 13.9x.

Similarly, KRG, HCA, NWL, and TFC are all trading at multiples of below 10x, which is significantly lower than the multiple given to the broader S&P components. With each providing modest dividend payouts, long-term investors could lock in current yields while waiting for eventual upside, which is likely given the positive fundamentals of each laggard.

As another week in bear territory ends, new opportunities continue to present themselves for long-term focused investors. For those seeking low P/E stocks, perhaps one of this week’s laggards could fill a void in the portfolio.

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