Investors who’ve been sitting on cash and waiting for a big stock selloff haven’t quite gotten one. For all its gyrations this year, the Standard & Poor’s 500 index (.SPX) is down only about 9% from its Jan. 26 high--and up 34% over the past two years.
Within the S&P 500, however, 35 stocks have fallen into a bear market of their own, losing more than 20% since Jan. 26. Are any of these bargains? Wall Street thinks so. Some of the beaten-down names have received analyst upgrades. We recently screened for stocks down at least 20% that have been the subject of more than one upgrade within the past 30 days, including at least one fresh Buy rating.
General Mills (GIS)
- Price change since Jan. 26: -25%
- Forward price/earnings ratio: 14
As recently as 2016 investors were paying a 20% to 30% premium to the broad market for General Mills (GIS) shares, based on forward price/earnings ratios. Now they’re getting a 13% discount. Low interest rates once flattered big dividend payers, but the Federal Reserve has been raising rates. Amazon (AMZN) and Walmart (WMT) have set off a grocery price war. Consumers have generally been shifting their preference toward fresh food from packaged. And investors don’t seem thrilled about General Mills’ announcement last month that it will pay $8 billion, or about 35 times forward earnings forecasts, for Blue Buffalo Pet Products (BUFF).
But the malaise around food stocks looks overdone, and General Mills in particular looks cheap, according to Susquehanna Financial Group analyst Pablo Zuanic. In a March 22 upgrade note, he pointed to some positives for the company, like recent share gains in snacks and cereal; potential for a rebound in margins; and a modest valuation, with General Mills recently paying a 4.3% dividend yield. Zuanic’s price target of $53 in a year, or 15 times his earnings forecast, implies 17% upside from recent levels, plus dividends.
Tractor Supply (TSCO)
- Price change: -25%
- Forward P/E: 14
Tractor Supply (TSCO) sells tools, farm equipment, home decor, clothing, animal feed and more for rural homeowners. The stock’s P/E ratio has been cut in half since 2015. That has corresponded with a stretch of ho-hum growth at longstanding stores. Since the early 1990s, same-store sales have risen at an average yearly pace of 5.4%. Last year they grew at half that rate. That’s a concern for a company that hopes to ultimately expand its chain to 2,500 stores from under 1,700.
Oliver Wintermantel, who covers Tractor supply for boutique research firm MoffettNathanson, sees a rebound to 3% to 4% same-store sales growth next year, and potential for rising profit margins. The slowdown in recent years is traceable, in part, to deflation in farm products and two consecutive mild winters, he wrote in a March 5 research note, urging investors to “back up the tractor” on shares. His outlook calls for continued yearly earnings growth by double-digit percentages. Tractor Supply is also a key beneficiary of the recent corporate tax cut. Wintermantel’s price target of $77 works out to 30% upside.
United Parcel Service (UPS)
- Price change: -23%
- Forward P/E: 14
United Parcel Service (UPS) delivered a surprise to investors in early February when it guided toward $6.5 billion to $7 billion in capital spending this year. That compares with $5.2 billion last year and $2 billion to $3 billion a year since 2011. The new spending pace should leave enough to cover the 3.6% dividend, but not much extra. There are other concerns that are less quantifiable, like the risk of a trade war or Teamsters strike.
The stock has gotten too cheap to pass up, according to Stifel analyst David Ross, who upgraded it to Buy on March 6. The dividend yield is among the highest in the transportation sector, and the P/E ratio is near an all-time low excluding the Great Recession. Meanwhile, returns on invested capital remain high, suggesting UPS’s spending surge will pay off. Ross’s price target is $121, or 18% above the stock’s recent price.
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