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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| December 5, 2017
Don't look now, but the S&P 500 is having its third-best year in the past decade, which is amazing when you consider we'll be entering the tenth year of the bull market in March. It's a big indication the 2008 financial crisis is clearly in the rearview mirror, making it very difficult to find cheap stocks to buy.
With the S&P 500 up 16% year-to-date, it's getting harder to find those down-and-out names like General Electric Company (GE)—down 42% on the year—that just can't seem to get their act together.
New GE CEO John Flannery's got his work cut out for him as he enters 2018. The chief executive says it's going to concentrate on healthcare, aviation and energy to get the industrial conglomerate out of the multi-year funk it's experiencing.
Is the plan good enough to get me to name GE one of my nine stocks to buy on the dip? Read on and you'll find out.
Prices and data are from the original InvestorPlace story published on Nov. 27. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
It seems like only yesterday that former Foot Locker (FL) CEO Ken Hicks was talking about the turnaround he'd successfully executed over the course of three years between 2009 and 2012.
"The mojo is just a lot better. You feel it in the stores," stated Sam Poser, an equity analyst for Sterne Agee, in a 2012 Forbes article about the turnaround. "It's hard to invest in that, but sometimes it's subtle things that really make a difference, and I think you're really seeing that there."
Let's put it this way.
When Hicks took the top job at Foot Locker, FL stock was trading near $10; when he stepped down as CEO on December 1, 2014, it was in the high $50s. His successor, Dick Johnson, hasn't had nearly as much fun since taking over, but here's why I think he'll ultimately right the ship.
Nike (NKE) accounts for 72% of Foot Locker's sales in its stores. Analysts think that's a bad thing; I don't. Nike will get its groove back and when it does, no one will benefit more than Dick Johnson and Foot Locker.
Down 45% YTD, Foot Locker's shares hadn't traded this low since 2012, when Hicks was enjoying the benefits of a job well done.
They're bound to rebound.
The shop that many do-it-yourselfers visit to buy auto parts is having a rough year. Advance Auto Parts (AAP) stock is down more than 47% with just five weeks left in the year.
The company's story took a turn for the better Nov. 14, when it announced Q3 earnings that beat analyst estimates by 22 cents, sending AAP stock 16% higher in a single day's trading.
Now, let's not get ahead of ourselves. The company's earnings-per-share of $1.43 were still 30 cents lower than last year, but it's a start.
Looking at the company's outlook for 2017, it still expects to generate a minimum of $300 million in free cash flow for the year, not nearly as robust as the almost $600 million in free cash flow it delivered in 2011 on two-thirds the revenue mind you, but still very positive.
One need only look at any of its valuation metrics to know that AAP stock is cheaper than it has been over the past five years. With long-term debt of $1 billion or just 15% of its market cap and almost $5 in cash-per-share, it has a solid balance sheet to handle any current difficulties.
Like Foot Locker, AAP stock is in uncharted territory. I see it recovering nicely in 2018.
It's never a good day to be CEO of a publicly traded company when your stock drops 35% on terrible guidance, but that's exactly what happened Nov. 1 to Envision Healthcare Corporation (EVHC) CEO Christopher Holden.
The day before, Holden delivered Q3 2017 adjusted EBITDA of $234 million for the quarter, $33 million short of analyst expectations. However, that wasn't the worst part. He then declared that fourth-quarter EBITDA would be between $182-$202 million—34% below consensus.
Down went EVHC stock from $43 on Oct. 31 to $28 the very next day. Holden tried to be as honest as possible with investors about the state of its healthcare services.
"Looking forward we are operating our business based on more recent utilization trends, and our guidance for the fourth quarter of 2017 reduces the assumptions for utilization of our services," stated Holden. "Our organization has effectively managed through cycles."
Translation: Business isn't great.
With its stock now down 53% on the year, Envision has done a reasonable job explaining to investors since its Nov. 1 earnings release how its full-year adjusted EBITDA guidance managed to drop from $1.04 billion on Aug. 7 to $922 million today.
Essentially, the company continues to work to integrate the merger with itself and AMSURG that closed at the end of last year. A case of indigestion shouldn't drop you $1.8 billion in market cap, but that's exactly what's happened to Envision.
Speculative investors ought to jump on this one. Conservative investors might stay away until its business stabilizes.
In a market that's flying, you don't want to miss on earnings.
Sally Beauty Holdings (SBH) did just that Nov. 15 and investors took it out to the woodshed, albeit temporarily. But when you're already down 40% on the year, missing can be expensive.
Although its Q4 2017 earnings were hurt by the hurricanes that affected many businesses in the southern part of the U.S., even taking that into account, CEO Chris Brickman was still disappointed by revenues.
SBH finished its fiscal year with operating earnings of $478.6 million on $3.9 billion in revenue. Both of these numbers are down from last year, but only by low single digits.
In late October, I called SBH one of three stocks to buy instead of Twitter (TWTR). At the time, SBH was trading around $18, the same as Twitter, and I felt you were better off with the beauty retailer's stock rather than the social media stock.
Down about $3 in just four weeks, it's too early to admit I was wrong. However, the changes Brickman is currently trying to implement better take hold in 2018 or this stock could be trading in single digits by Easter.
Investors are getting skeptical about its ability to reignite growth, but I still like its upside potential despite the concerns.
The bubble finally burst for Ulta Beauty (ULTA) in October, causing the stock to drop below $200 for the first time in 18 months.
Down 18% YTD, I have the utmost confidence in CEO Mary Dillon—one of Fortune magazine's top 20 businesspersons of 2017—to do what's best for shareholders and employees.
It's never easy taking on an industry giant like Sephora, but that's exactly what Dillon and company are doing—very successfully, I might add.
Investors are skeptical that Ulta can keep growing at its current pace—Q2 2017 same-store sales growth of 11.7%, following on a 14.4% gain in Q2 2016—but as I said in August, the company hasn't explored international expansion in places like Canada where the only real competition is Sephora and Shoppers Drug Mart.
That's a big growth lever in my opinion.
The company is also looking to capture a bigger slice of higher-priced cosmetics; department stores are sitting ducks and will continue to lose market share to Ulta.
Valuation-wise, ULTA stock is cheaper than it has been in the last five years and that's saying something in this red-hot stock market.
It seems so long ago that Newell Brands (NWL) beat its Q1 2017 earnings estimate and raised guidance for the rest of the year.
That was May.
Then came a big Q3 2017 miss Nov. 2 and its stock fell a jaw-dropping 26.8% in one day, by far the biggest S&P 500 loser on the day.
Newell lost a quarter of its value in a single day because of the following three numbers: First, analysts expected $0.92-per-share in the quarter; Newell delivered $0.86, 10.3% higher year-over-year. Second, analysts were expecting quarterly revenue of $3.7 billion; Newell came in $24 million short. Finally, and the dagger that did in NWL stock, it lowered full-year EPS by 15 cents from a minimum $2.95 to $2.80, a 5.1% cut in its guidance.
Does that justify a $5.4 billion haircut? Not by a long shot.
I get that Newell has too much debt—$11.5 billion as of Sept. 30—and its core sales growth projection of 1.5%-2.0%, down from as much as 4.0% before Q3 announcement, is disheartening, but the company is still integrating Jarden into the business.
Martin Franklin, Jarden's former CEO and the architect of its growth and subsequent sale to Newell, still owns over two million shares in the company. He's not going to be too happy about a $25 million reduction in the value of his remaining holdings.
I believe he'll continue to hold these shares and he might even buy more. Regardless, Newell's business is in better shape than a 26.8% haircut suggests.
There aren't many bargains out there. In five years, this will have been one of them.
If I told you that I owned a bunch of retail malls across North America whose vacancy rate over the past 25 years had never dropped below 96% and offered you an opportunity to share in the rental income generated by those malls, you'd say "Where do I sign up?"
Tanger Factory Outlet Centers (SKT) is such an opportunity and because its stock is down 28% YTD through Nov. 15 and trading perilously close to its five-year low, I'm offering it to you at a steep discount.
Seriously, it currently has a better dividend yield than Simon Property Group (SPG) at 5.6%, yet its share price is trading at ten times funds from operations (below the five-year average of 15.5), significantly lower than Simon's multiple which is over 14.
Tanger operates outlet centers, one of the few areas of retail that's doing well these days. Add to this a management team that has lots of experience and you're looking at a very safe, income-generating investment.
With the economy doing well, I'm not sure how you can miss with Tanger at this price point.
I recently included Acuity Brands (AYI) as one of seven stocks I thought investors should buy with $2,000.
I reasoned that as one of North America's leading lighting companies, it was positioned to benefit from the ongoing environmental concerns pushing companies of all kinds to use more environmentally-friendly lighting in their offices and facilities.
YTD, AYI stock is down 31%, 10% in the last three months alone. It's working on a second losing year on the markets.
So, what's the catalyst that will bring its stock out of its slump? Growth and profits, both of which it delivered in the fourth quarter.
Especially noteworthy in Q4 2017 was its record adjusted operating profit margin of 18.4%, 150 basis points higher than a year earlier. For the year, Acuity's revenues increased 6.5% to $3.5 billion with adjusted operating profits of $592 million, 7% higher than a year earlier.
The company has very little debt, lots of free cash flow and is building a robust IoT business that should bring growth in the years to come.
This might be my favorite stock to buy on the dip.
Darren Shaw via Flickr
Neither of Sumner Redstone's businesses are doing well in 2017—Viacom (VIAB) is down 24% YTD, while sister company CBS Corporation (CBS) is down 12%... but Viacom is definitely considered the weaker company by investors.
On Nov. 16, it announced Q4 2017 earnings, which sent VIAB stock lower despite delivering higher revenue and profits for both the quarter and the year. Analysts estimated that Viacom would earn $0.86 a share in the fourth quarter, but were 9 cents short due to a $59 million expense associated with a failed $1 billion funding deal. Excluding that expense, it would have beaten the estimate by a penny.
The big problem weighing on Viacom after earnings were its admission that U.S. carriage fee revenue won't resume growing until 2019. Carriage fees are what cable companies pay Viacom to be able to show their programs to their customers.
However, CEO Bob Bakish was very excited about the company's future during its Q4 2017 conference call.
"In the fourth quarter and full year, we made strong progress against our plan to fundamentally stabilize and revitalize Viacom, with top-line gains in both media networks and filmed entertainment segments driven by continued execution on our strategic priorities," Bakish said during the call. "In the coming year, we will continue to focus on unleashing the full creativity and energy of Viacom to create greater value for our shareholders and audiences."
Viacom stock hasn't had a winning year since 2013. That's about to change in 2018.
This article is from Will Ashworth of InvestorPlace. As of this writing, Ashworth did not personally hold a position in any of the aforementioned securities.
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