FICS Editors' note

On January 3rd, Bristol-Myers Squibb announced plans to purchase Celgene in a cash and stock deal valued at $74 billion.

What to buy after the stock market selloff

Ugly month for stocks has created plenty of value opportunities in 2019.

  • By Charley Grant,
  • The Wall Street Journal
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The year is ending badly for stocks, which has investors averting their eyes. But there are deals to be had for those who can bear to look.

After the 15% decline since September, there are plenty of ways to look for stocks that have gotten too cheap. One is by looking for beaten-down names that will generate lots of free-cash flow, which is often a better measure of a company’s business than earnings.

There are 10 companies in the S&P 500 (.SPX) that are down at least 40% in 2018 through Thursday and are trading at less than 11 times free-cash flow estimates for next year, according to FactSet data. That is a significant discount to the market’s average valuation.

The diverse list includes fashion retailer L Brands (LB), flooring company Mohawk Industries (MHK), consumer health company Perrigo (PRGO), chip maker Western Digital (WDC), food makers Conagra Brands (CAG) and Kraft Heinz (KHC), and biotechnology company Celgene (CELG).

These stocks are all down for good reasons beyond the market selloff and probably won’t rebound quickly. Celgene fell sharply after the Food and Drug Administration refused to review a new drug application. Perrigo has changed CEOs twice this year and recently disclosed a potentially crippling surprise tax bill.

Conagra had a disappointing update on the integration of its Pinnacle Foods acquisition last week. Falling memory prices have weighed on Western Digital. And stocks like Mohawk aren’t likely to perform well if housing markets weaken meaningfully. Analysts have lately lowered earnings estimates for most companies in the basket.

The problems these companies face are real. Still, investors should remember that a pleasant back story forms the basis for stocks to sell at high prices. Bad news can be an investor’s friend when paired with a long time horizon.

Celgene, for instance, trades at six times forward earnings estimates, according to FactSet, in a business that isn’t particularly sensitive to the economy. That figure was about 12 times to start the year and as high as 25 times in the frothy health-care market of 2015. As a bonus, earnings estimates for next year have trended higher since June.

Any investor who can wait out the weak market stands to profit handsomely in the longer term.

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