This year has been great for U.S. stock investors, with the S&P 500 index (.SPX) up about 20% year-to-date. Unfortunately, not all S&P 500 component stocks have been along for the ride.
Given the strength of the U.S. economy and the bullish market momentum, many of the laggard stocks are down for good reason. However, a handful of 2019’s worst-performing stocks could be excellent opportunities for long-term investors.
Here are nine stocks down at least 15% in the past six months that investors should be buying on the dip, according to Morningstar.
AbbVie is a global drug company that targets markets such as immunology, virology and oncology. Analyst Damien Conover says key drug Humira represents over half of AbbVie’s revenue, and fears over competition are largely to blame for the stock’s 23.4% six-month decline. However, Conover says AbbVie’s pipeline has some encouraging next-generation immunology and oncology prospects, and its acquisition of Allergan (AGN) should help it diversify away from Humira. In addition, he says cancer drug Imbruvica should reach peak annual sales above $6 billion. Morningstar has a “buy” rating and $102 fair value estimate for ABBV stock.
Carnival shares are down 16.4% in the past six months, but analyst Jaime Katz says Carnival shares are simply too cheap to ignore at this point, trading at around 11 times earnings. Business in Europe is challenged, but aging demographics in the U.S. should help boost Carnival’s business over time, Katz says. Carnival’s U.S. market penetration is only 4%, leaving plenty of room for expansion as the baby boomer generation fully enters retirement. Morningstar has a “buy” rating and $62 fair value estimate for CCL stock.
Buying Gap stock is not for the faint at heart given the seemingly secular decline of U.S. mall retailers. However, Gap is one of several beaten-down U.S. retailers where Morningstar sees long-term value. Katz says Gap’s dismal first-quarter numbers likely weren’t as bad as they seemed given the unfavorable weather to start the year. Morningstar is calling for 1% sales growth, 39% gross margins and 8% operating margins for Gap over the next decade. Morningstar has a “buy” rating and $28 fair value estimate for GPS.
Like Gap, Nordstrom is fighting to tread water in a difficult retail environment. Analyst David Swartz says Nordstrom is a top player in U.S. apparel due to its differentiated products and its brand value. From 2010 to 2018, Nordstrom actually grew revenue by about 60% and reported consistent same-store sales growth while competitors were shrinking and dying in droves. Swartz is forecasting sales growth of between 2% and 3% for both Nordstrom’s full- and off-price segments over the next decade. Morningstar has a “buy” rating and $55 fair value estimate for JWN stock.
Kraft Heinz Co.
When it comes to negative headlines, few companies have had a worse 2019 than Kraft. In February, Kraft announced a huge dividend cut, a $15.4 billion writedown on its Kraft and Oscar Meyer brands and a new SEC accounting investigation. Understandably, shares are down 34% in the past six months, but analyst Erin Lash says there is now tremendous long-term value in the stock. Kraft Heinz should eventually get its act together and increase and improve its brand investments. Morningstar has a “buy” rating and $54 fair value estimate for KHC stock.
Kroger shares are down 25.6% in the past six months after the grocer reported a 1.2% drop in revenue and 1.5% decline in same-store sales in the first quarter. Analyst Zain Akbari says Kroger is still on track to hit its full-year guidance. Private label sales growth of 3.3% was also an encouraging sign. High-growth alternative profit streams, such as data and media analytics, are expected to contribute $100 million in operating profit this year. Morningstar has a “buy” rating and $27.50 fair value estimate for KR stock.
While bears see Macy’s as an obsolete business, bulls see plenty of value remaining in the company. Swartz is a realist when it comes to Macy’s and is expecting sales to continue to decline over the next 10 years at an average operating margin of just 6%. Macy’s is spending aggressively to remodel stores and ad digital capabilities to compete with Amazon.com (AMZN) and others. With a single-digit 2019 earnings multiple, he says Macy’s shares are on the cheap side compared to historical levels. Morningstar has a “buy” rating and $27.50 fair value estimate for M stock.
In May, TripAdvisor stock got hit in May when Amazon announced plans to pursue a full metasearch travel service, putting about 75% of TripAdvisor’s business at risk. Despite the Amazon threat, analyst Dan Wasiolek says TripAdvisor’s network of user reviews and travel content is unmatched and should help the company average 9.3% sales growth over the next 10 years, including 18% annual growth in media and platform revenue. Morningstar has a “buy” rating and $59 fair value estimate for TRIP stock.
Walgreens Boots Alliance
Walgreens stock is down 24.5% in the past six months. In March, Walgreens was hit by fears surrounding drug reimbursements and generic drug pricing pressures. In addition, the FDA singled out Walgreens as a “top violator” of laws banning tobacco sales to minors. Analyst Soo Romanoff says gross margin weakness in the most recent quarter was offset by strong prescription volumes and aggressive share buybacks. Romanoff says Walgreens will continue to leverage its scale to generate cost-effective partnerships and offset negative reimbursement trends. Morningstar has a “buy” rating and $68 fair value estimate for WBA stock.