The Dow Jones Industrial Average continues to test new record highs as investors figure out what a Donald Trump presidency means in terms of what stocks to buy both in the short and long term. For now, investors simply should enjoy the buoyant markets, because we all know how fast they can turn.
With the Dow and S&P 500 up 8.6% and 6.7% respectively through Nov. 15, it’s not surprising how many U.S. stocks are hitting 52-week highs.
CNBC’s Dominic Chu reported on Power Lunch on Nov. 14 that 22 S&P 500 companies hit all-time highs while 73 hit 52-week highs compared to just three stocks hitting 52-week lows.
Talk about throwing a dart at the stock pages … everyone’s seemingly a winner. And that should scare investors — but it’s not.
So, going contrarian, I thought I’d take a look at the broader U.S. stock market looking for some rare examples where companies are actually testing 52-week lows.
As the previous example illustrates, there aren’t a whole lot out there, but of the group of stocks trading within 5% of their 52-week lows, I see some really interesting names.
Here are my seven stocks to buy from the scrap heap.
Stocks to Buy From the Scrap Heap: Estee Lauder (EL)
I last wrote an InvestorPlace article about Estee Lauder Companies Inc (NYSE:EL) three years ago, at a time when EL stock was underperforming its peers but had some good things going for it, such as its travel retail and e-commerce business.
Since that article, EL stock is up almost 20%, but that could have been a lot higher if not for the recent downturn brought on by a lackluster first-quarter earnings report.
Then, like now, I believe its leadership position in the beauty industry will continue to play in its favor; the recent $1.45 billion acquisition of Too Faced Cosmetics, a company growing 60% annually over the past three years, is bound to move the stock higher at some point.
Why should you buy a stock that has underperformed the S&P 500 in recent years? Because it continues to consistently grow free cash flow, which is what allows it to make big acquisitions like the one it just made and is what truly matters when evaluating companies.
Roll up the truck and buy lots of EL stock should it go much lower.
Stocks to Buy From the Scrap Heap: Nike (NKE)
Just a few days ago I suggested that Warren Buffett shouldn’t just buy Nike Inc (NYSE:NKE), a company whose shares he held for five years until Q4 2010, but that Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) should buy the company lock, stock and barrel.
Down 19% through Nov. 15, NKE stock is on course to deliver its worst performance since 2008, a year we’d all sooner forget. Up until 2016, Nike generated double-digit returns in eight out of 10 years, including six of those years returning 20% or higher.
Stocks can’t keep going up forever but Phil Knight has a team of people in place, including CEO Mark Parker, who know what they’re doing and will continue to guide it through its long-standing battle with Adidas AG (ADR) (OTCMKTS:ADDYY) and Under Armour Inc (NYSE:UA).
It hasn’t traded this low since early 2015 and yet all of its business segments continue to grow, providing $3 billion – $4 billion in free cash flow each year to reinvest in the business and to return capital to shareholders.
To me, this seems like a no-brainer.
Stocks to Buy From the Scrap Heap: Dr. Pepper Snapple Group (DPS)
Since the soft drink manufacturer became a stand-alone, publicly traded company, Dr. Pepper Snapple Group Inc. (NYSE:DPS) has taken its larger competitors to the cleaners.
In fact, in its eight full years trading on the NYSE, only once has The Coca-Cola Co (NYSE:KO) managed to deliver better performance for its shareholders. Down 9% year-to-date through Nov. 15 versus -1.1% for Big Red, it looks as though KO is going to get a second notch on its belt, albeit coming on a dismal 2016 performance of its own.
While I wouldn’t suggest that DPS stock is currently deep value, it is much cheaper than where it traded in 2015, when investors were paying 25 times earnings to own its stock.
Given DPS is growing its earnings and revenues while Coke’s are shrinking, paying 18 times forward earnings for DPS compared to 25 times for Coke seems like a fair bargain to me.
Stocks to Buy From The Scrap Heap: Liberty Global (LILAK)
Of the 51 stocks trading within 5% of their 52-week lows, only five are currently trading at less than book value — generally a good starting point for finding deep-value stocks.
Liberty Global Plc (NASDAQ:LILAK) is actually a tracking stock of Liberty Global, the global cable operation controlled by billionaire John Malone, that first began trading July 2, 2015. Liberty Global distributed one share of LILAK to existing shareholders for every 20 shares held in Liberty Global’s Class C ordinary shares.
It did this to provide investors with a Latin American pure-play cable operation that included VTR, the largest cable operator in Chile, and a 60% interest in Liberty Cablevision, the largest cable company in Puerto Rico. With cable installed in more than 4 million homes in Chile and Puerto Rico, the majority-owned subsidiary generates more than $1.2 billion in annual revenue.
LILAK opened trading at $50; it’s down 60% in 17 months to less than $20 through Nov. 15. Ouch.
While Q3 2016 earnings weren’t horrific by any stretch of the imagination, investors are rightly concerned about the higher levels of debt resulting from the CWC acquisition.
John Malone didn’t get to be worth $7 billion by making bad financial decisions. If he’s doubling down, investors should be too.
Stocks to Buy From the Scrap Heap: Vista Outdoor (VSTO)
I’m a big fan of sports stocks. Several years ago, I created the Global Sports Portfolio, a group of 16 stocks from around the world making money from sports. I haven’t updated its performance in a while but I do know it has seriously outdone the S&P 500.
Suffice to say I’m familiar with most sports-related stocks. Except it seems, Vista Outdoor Inc (NYSE:VSTO).
It turns out that Alliant Techsystems, now part of Orbital ATK Inc (NYSE:OA) after merging in 2015, spun off its ammunition and outdoor recreation business in 2014 under the new name of Vista Outdoor. Since then, VSTO has gone on to make several acquisitions including its most recent, paying $74 million to buy the Camp Chef brand of camp stoves and barbecue grills.
It reminds me an awful lot of Jarden, now part of Newell Brands Inc (NYSE:NWL) and its former CEO Martin Franklin, who grew the company over 14 years into a multi-billion-dollar company that delivered cumulative gains of over 4,000% to its shareholders over that period.
Of course, Franklin had a bit more skin in the game than Vista Outdoor CEO Mark DeYoung — Franklin owned more than 7% of Jarden’s stock in 2003 when he was just getting going while DeYoung currently owns 1% of Vista Outdoor. Still significant enough to keep him engaged but maybe not to the point of forgetting he’s a hired gun.
Expecting to generate as much as $160 million in free cash flow in fiscal 2017, its 20%-plus decline since the beginning of August provides investors with the best entry point since it was spun off from its parent in 2014.
With a 7% FCF yield, I see it as an outstanding buy.
Stocks to Buy From the Scrap Heap: Fomento Economico Mexicano (FMX)
Fomento Economico Mexicano SAB (ADR) (NYSE:FMX), or FEMSA as it’s known, is Mexico’s third-largest retailer by revenues. It operates in two segments: 1) Convenience Stores, where Oxxo is the largest convenience store chain in the Americas; and 2) Soft Drinks, where it holds 63% of the voting shares of Coca-Cola FEMSA, S.A.B. de C.V. (ADR) (NYSE:KOF), the world’s largest franchise bottler by volume.
In addition, it has a 20% economic interest in Heineken N.V. (ADR) (OTCMKTS:HEINY), one of the world’s largest brewers.
These are some very nice holdings and a big reason why Bill Gates’ Cascade Investments LLC has been its second-largest shareholder (7.9%) for several years.
There’s so much to like about this company starting with its dividend payout which has grown 26% compounded annually over the past 11 years. Conservatively financed with net debt just 1.2 times EBITDA, its market cap has achieved 13% CAGR since 2005. Down 10.9% year-to-date through Nov. 15, it hasn’t had a total return of 13% or more since 2012.
It’s definitely due.
Helping keep the company growing is FEMSA Commercio’s move into the pharmacy business, where it now operates more than 1,000 drug stores in Mexico representing just 3% of the total. Replicating what Oxxo has done in the convenience store business, it’s now consolidating a fragmented drug store industry in Mexico.
Currently trading under $80, I expect its shares to test its five-year high of $126.11 within the next 12-18 months.
Stocks to Buy From the Scrap Heap: Brown Forman (BF.B)
Of the 51 companies trading within 5% of their 52-week lows, six are related to beverages, both alcoholic and nonalcoholic, and while I thought about finishing with Anheuser Busch InBev SA NV (ADR) (NYSE:BUD), FEMSA already gives me that exposure to beer. Besides, spirits, especially American whiskey, in my opinion, have a much better growth trajectory.
Family controlled, Brown-Forman Corporation‘s (NYSE:BF.A, NYSE:BF.B) total return over the past year through Nov. 15 is down 9.7%, 721 basis points worse than its peers in the Wineries and Distilleries category of the beverage industry. However, as a business focused on the long term, it’s not a big concern. Over the past 15 years, it has beaten its peers by 218 basis points.
What catalyst is going to move its stock off its 52-week low? Emerging markets. Currently, they account for about 20% of Brown-Forman’s overall business.
In its first-quarter earnings for the quarter ended Aug. 31, 2016, it reported emerging market net sales declined 5% year-over-year on poor results in Turkey, Brazil, Russia and China. However, its two largest emerging markets — Poland and Mexico, which account for 40% of the revenue in emerging markets — grew 8% and 17% respectively.
Once the political situations in Turkey and Brazil and to a lesser extent Russia and China improve, the revenues and operating earnings from those countries will increase, putting a fire under BF.A stock. Here in North America, its business continues to grow and will do so for the foreseeable future.
I wouldn’t be shy buying at current prices; if it falls below $42, you absolutely want to own Brown-Forman stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.