20 2018 Losers That Will Be Big Winners

rebound stocks - 20 2018 Losers That Will Be Big Winners

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Choppy trading this year has created buying opportunities in the market. After a 14-month bull run sent stocks of all kinds soaring, there have been a few stocks this year that have seen unwarranted sell-offs. Those “rebound stocks,” for lack of a better term, have been caught in market concerns about rising Treasury yields and a potential trade war, among other factors.

Indeed, a little over half of stocks are down so far this year, despite modest gains for broad market indices. Many of those stocks perhaps ran too far amid the unbridled optimism seen coming out of the U.S. presidential election. But more than a few are good companies which have sold off — and now trade at attractive levels.

Here are 20 of those stocks. All have declined at least 5% so far this year, and all have strong bull cases that suggest those declines should reverse, both during 2018 and beyond.

20 Rebound Stocks: CBS Corporation (CBS)

YTD Performance: -14%

For a moment, it looked as if CBS Corporation (NYSE:CBS) was set for a reversal. CBS stock headed into Q1 earnings earlier this month at a post-election low, but a Q1 beat sent CBS stock up as much as 9%. Optimistic commentary from CEO Les Moonves — who argued that cost-cutting actually was a benefit to CBS instead of a negative trend to be managed — seemed like it could turn the tide.

Meanwhile, a potential merger with Viacom, Inc. (NASDAQ:VIA, NASDAQ:VIAB) appears to have been scuttled. Given that most CBS shareholders didn’t want that deal — one reason why the CBS board took legal action to try and prevent it — that, too, should be good news.

And yet CBS is scuffling back toward the lows and looks far too cheap. The stock trades at less than 9x 2018 consensus EPS estimates, one of the lowest multiples in the media space. Given the dominance of its shows, early monetization success in streaming and still-solid earnings growth, that valuation looks ridiculously low.

20 Rebound Stocks: ABB (ABB)

YTD Performance: -12%

A number of industrial stocks have sold off of late, and Swiss conglomerate ABB Ltd (ADR) (NYSE:ABB) looks like one of the more attractive at the moment. ABB shares sold off sharply earlier this year despite a Q4 earnings beat, though a solid (if unspectacular) report for Q1 has stemmed the bleeding.

Still, there are some reasons to see a rebound here. ABB looks cheap, at just 15x consensus EPS for 2019. Organic growth is modest, at just 1% in Q1, but offerings like robotics and EV charging could start contributing to growth. The Industrial Solutions business acquired from General Electric Company (NYSE:GE) last year will take some time to see margin improvement, but it should contribute some level of growth going forward as well.

The conglomerate model in the industrial space is a bit out of favor (as seen in the performance of GE stock). But this is a high-quality business with huge reach, some level of growth, and a cheap valuation. Add in a 3.5% dividend yield and ABB looks too cheap at the moment.

20 Rebound Stocks: T-Mobile (TMUS)

YTD Performance: -10%

To be honest, I’m still not 100% sold on T-Mobile US Inc (NASDAQ:TMUS). I like the company and management — but as I wrote back in March, TMUS still looks like the best business in a bad sector.

But TMUS now has pulled back toward near its lowest levels since the beginning of 2017. Investors appear skeptical about the company’s merger with Sprint Corp (NYSE:S) — but T-Mobile CEO John Legere has earned the benefit of the doubt at this point. Assuming the deal gets antitrust approval, the combined T-Mobile-Sprint will be a significant competitor to Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) — with a possible path to having the largest share of the US market.

Industry concerns are real: I’ve called the US wireless industry a circular firing squad in the past. But the past few years have shown that T-Mobile far and away has the best chance of navigating that tough market, and between cost savings and a larger customer base, a Sprint deal could give the company even more options.

20 Rebound Stocks: Consolidated Edison (ED)

YTD Performance: -11%

Utility stocks have struggled of late, as 3%-plus Treasury yields have made the dividends in the sector less attractive. But New York City provider Consolidated Edison, Inc. (NYSE:ED) has taken a particularly large stumble. ED is down 10.5% so far this year against a 4.1% drop in the Utilities SPDR (ETF) (NYSEARCA:XLU).

There’s not much reason for the divergence. ConEd is dealing with costs from a subway outage a year ago — but even a revised estimate of $264 million is barely 1% of the company’s market cap. 2018 EPS guidance was confirmed coming out of Q1, and ED now trades at less than 18x the midpoint of that guidance — toward the lower end of its historical range.

ED isn’t a hot stock, and it’s not likely to soar. But it does look too cheap, and with a 3.8% dividend, it’s now a safe, defensive play with room for upside as well.

20 Rebound Stocks: Lennar (LEN)

YTD Performance: -14%

Another victim of higher interest rates has been the homebuilders group. The nation’s largest homebuilder, Lennar Corporation (NYSE:LEN, NYSE:LEN.A), has been particularly hard-hit. LEN has dropped almost 29% from late January highs — a huge move even considering a reasonably leveraged balance sheet.

Obviously, there are risks here. Higher interest rates will lead to higher mortgage rates — which could dampen new home demand. Lennar took on more debt in its recent acquisition of CalAtlantic Group. And any macro weakness could send LEN even lower.

Still, the recent sell-off looks more than a bit overdone. It’s not as if new home sales have been that impressive since the crisis — and most accounts, there’s still need for more homes. Cyclical concerns are a factor, but macro risk exists throughout the market. Lennar posted a monster Q1 beat last month now trades at under 8x 2019 consensus EPS estimates, with more benefits from CalAtlantic potentially coming beyond that.

The sell-off here isn’t necessarily illogical, but it seems to have gone too far. And it sets LEN up for a nice rebound in the second half of 2018 — at least.

20 Rebound Stocks: Quanex Building Products (NX)

YTD Performance: -26%

The building products space largely has followed homebuilders down, and window and cabinet component manufacturer Quanex Building Products Corporation (NYSE:NX) has been caught in the downdraft. After reaching a post-crisis high in December, NX has dropped about 29%.

But there really hasn’t been much, if anything, in the way of news driving the declines — and it leaves NX looking awfully attractive ahead of Q1 earnings next week. Current levels around $17 represent support that has held for several years now. A 16x forward P/E multiple doesn’t look cheap — but Quanex’s free cash flow is much higher than its net income, and on that basis the stock is trading at something closer to 10x-11x.

The company continues to deleverage, with interest savings benefiting free cash flow. Also, an aggressive decision to walk away from unprofitable business last year is helping margins this year.

NX hasn’t been a great performer long-term, with the stock mostly stuck in a range between $16 and $23 since the beginning of the decade. But there’s a case for NX to finally break out to new highs, if all goes well. And in the meantime, investors can benefit from a cyclical swing, assuming that support once again holds.

20 Rebound Stocks: Broadcom (AVGO)

YTD Performance: -2.5%

As a stock, Broadcom Inc (NASDAQ:AVGO) actually has had a relatively quiet time of it lately. AVGO stock has gained less than 5% over the past year, and dropped a bit over 5% so far this year in mostly range-bound trading.

As a company, of course, the past year has been anything but quiet. Broadcom tried to acquire Qualcomm, Inc. (NASDAQ:QCOM) in what would have been one of the largest mergers in history. That deal was blocked by the U.S. government, however. Since then, concerns about the impact of a potential US-China trade dispute, and some volatility in the chip space more broadly, have led the stock to drift down.

But I think AVGO looks attractive here, as I wrote last month. While Broadcom is known as an M&A story, its organic growth actually has been better than that of the industry as a whole. A 12x forward EPS and a nearly 25% discount to the average analyst target price both suggest an awfully cheap stock.

There’s little reason why AVGO can’t trade in line with a large peer like Intel Corporation (NASDAQ:INTC), which would suggest about 15% upside, to $275-$280. And if the market gives Broadcom credit for its growth and more value creation through M&A, the gains could be even larger.

20 Rebound Stocks: Southwest Airlines (LUV)

YTD Performance: -22%

It took investors a while to trust the airline industry again, but stocks like Southwest Airlines Co (NYSE:LUV) managed to soar earlier this decade. LUV went from under $10 toward the end of 2012 to $65 five years later.

But the sector, and LUV, have pulled back this year. Long-running concerns about capacity and fuel prices have returned. Southwest stock touched an eight-month low this week.

The decline here, too, seems a bit overwrought. Southwest long has been the most solid stock in the industry from an operational standpoint. A sub-10x forward P/E looks cheap. And as Bret Kenwell detailed this month, the charts could look favorable for LUV if the stock finds support. The airline industry always has its risks, but LUV has the potential for real rewards, too.

20 Rebound Stocks: Michaels Stores (MIK)

YTD Performance: -22%

The retail sector has rebounded since late last year, but crafts retailer Michaels Companies Inc (NASDAQ:MIK) has been left behind. MIK is threatening to hit a four-year low, and at $19 is only modestly above its 2013 IPO price of $17.

Performance hasn’t been spectacular, admittedly, but relative to peers it certainly hasn’t been bad. Same-store sales rose 0.9% in fiscal 2017 (ending Feb. 3 of this year), including a strong 2.5% performance in Q4 which followed a solid Q3. The company had to close its Aaron Brothers stores due to weakness in custom framing, but that move shouldn’t have a significant impact on earnings.

Meanwhile, crafts seem reasonably well-protected from the Amazon.com, Inc. (NASDAQ:AMZN) threat, given low price points and the desire of customers to touch, see and feel the product. And yet, at under 8x forward EPS, Michaels has one of the cheapest valuations in the entire retail space. With the rest of the industry rebounding, MIK should join in at some point.

20 Rebound Stocks: Nutrisystem (NTRI)

YTD Performance: -33%

Nutrisystem Inc. (NASDAQ:NTRI) shares are down by a third this year, but the decline actually was much worse at one point. In conjunction with Q4 earnings in February, Nutrisystem admitted that it had basically blown the key diet season. Guidance for 2018 was well below expectations, and NTRI fell 22% the next day. By early April, NTRI was down by over half for the year.

But I argued after Q4 that the sell-off was overdone. And NTRI has rebounded already, gaining 35% from those early April lows. I don’t think the upside is finished, either. This is a stock that was trading at 20x-plus earnings just last year — it’s at about 15x the midpoint of 2018 EPS guidance backing out its net cash. The recently acquired South Beach Diet is posting torrid growth. A strong Q1 report supports management’s argument that the early 2018 weakness was driven by fixable advertising errors.

NTRI may not reclaim its $60 levels from last year immediately, but there’s a path for the company to get there as it gets back on track over the next few quarters. At $35, that leaves a lot of room for the recent rebound to continue.

20 Rebound Stocks: MGM Resorts International (MGM)

YTD Performance: -6%

As I noted this week in highlighting 20 gaming stocks for investors, the sector has been one of the best-performing in the entire market — even this year. And yet MGM Resorts International (NYSE:MGM) is down so far this year.

A soft Q1 report last month didn’t help.

Still, MGM seems forgotten in a torrid space. It has a new casino coming online in Macau next year, which should allow it to better compete with rivals like Las Vegas Sands Corp. (NYSE:LVS) and Wynn Resorts, Limited (NASDAQ:WYNN). Business on the Las Vegas Strip remains solid, even with last year’s tragic shooting. And the new Springfield, Massachusetts property will open this summer.

Meanwhile, MGM trades at a discount to LVS and WYNN, and a recently announced $2 billion repurchase program adds to an existing 1.5% dividend yield. Relative to the sector, MGM has been a laggard over the past few months — and past few years. But I’d expect it would catch up at some point.

20 Rebound Stocks: Kraft Heinz (KHC)

YTD Performance: -26%

The consumer products space has been smacked down of late, and Kraft Heinz Co (NASDAQ:KHC) has been one of the biggest losers. A 27% decline is absolutely a huge move for a defensive, low-beta stock like KHC.

The drop in the sector, and in KHC, isn’t without merit. Grocery store operators are facing margin pressure and pushing private-label alternatives as a result. As seen in the utility space, high-dividend stocks in the space have lost some luster with Treasury yields normalizing. And big brands are struggling across the board.

Still, the fall looks like a bit much. KHC is trading at 14x forward earnings. It yields 4.4%. The market is pricing in something close to zero growth, which even given Kraft Heinz’s challenges seems like a bit much. The drop in the sector isn’t necessarily a broad buying opportunity, but in the case of Kraft Heinz stock, it is.

20 Rebound Stocks: UBS (UBS)

YTD Performance: -14%

Shares of UBS Group AG (USA) (NYSE:UBS) have gone pretty much straight down since the end of February – for reasons that aren’t entirely clear. Investors clearly have some concerns about the investment banking business, as Goldman Sachs Group Inc (NYSE:GS) has weakened as well. But UBS is focusing more on its wealth management business, now the world’s largest.

Concerns about European economies may be weighing on investors. But UBS has a diversified book worldwide, including solid exposure to fast-growing Asian markets.

And at an eight-month low, UBS looks too cheap. A price-to-book ratio under 1.2x is one of the lowest in the space. So is a sub-10x forward P/E multiple. Like other financials, UBS has risks. But what is now a 23% pullback doesn’t make a lot of sense, and seems to create an opportunity to own UBS at a very attractive price.

20 Rebound Stocks: Gray Television (GTN)

YTD Performance: -32%

Network affiliate operator Gray Television, Inc. (NYSE:GTN) looks like another opportunity in the media space. The stock has lost almost a third of its value this year – despite strong results. In Q1, Gray posted record revenue, net income, and free cash flow.

As with CBS — one of the networks for whom Gray acts as an affiliate — there are real challenges here. But the challenges facing Gray don’t look much different than they did just a few months ago. Cord-cutting is an issue, but Gray networks are becoming part of online streaming packages. So-called “retransmission revenue” — Gray’s share of fees paid by cable and streaming operators to carry its channels — is rising. Political revenue will bounce back this year thanks to midterm elections.

Gray has a good-sized amount of debt, which has amplified the recent declines. But a single-digit P/E implies that Q1 was something close to a peak in terms of earnings, which seems too aggressive. With GTN just off 52-week lows, it looks like another value play in the media space.

20 Rebound Stocks: Cirrus Logic (CRUS)

YTD Performance: -26%

Chip maker Cirrus Logic, Inc. (NASDAQ:CRUS) has had a bit of an odd 2018 so far, in at least one key respect. About 79% of the company’s fiscal 2017 revenue came from Apple Inc. (NASDAQ:AAPL). And while AAPL trades near an all-time high, CRUS hit a 21-month low last month.

To be fair, CRUS shouldn’t necessarily track AAPL. Some of the optimism toward Apple stock is coming from the services business, which isn’t driving demand for Cirrus Logic’s audio chips. Still, iPhone X demand clearly is better than feared – and that should be good news for Cirrus Logic. Yet CRUS hasn’t seen much of a bounce along with AAPL.

There are some concerns here. Growth remains negative, and CRUS itself isn’t looking for a return to growth until fiscal 2020. But with a rock-solid balance sheet and a valuation that prices in further declines, any investor who believes in Apple should look at this key supplier as well.

20 Rebound Stocks: Walgreens (WBA)

YTD Performance: -13%

The market seems to have decided that Walgreens Boots Alliance Inc (NASDAQ:WBA) is headed for trouble — even in the face of evidence to the contrary. The initial deal to acquire Rite Aid Corporation (NYSE:RAD) was largely cheered by the market. Even a slimmed-down version of that deal looks like a good one for Walgreens — and yet investors have shrugged it off.

Instead, investors have focused on the negatives. The threat of Amazon put a lid on both WBA and CVS Health Corp (NYSE:CVS), but even with Amazon apparently not interested in the space, Walgreens stock still trades near a multiyear low.

At this point, the valuation applied to Walgreens seems almost ludicrous. This is a Dividend Aristocrat with nationwide reach and a hugely valuable brand trading at less than 10x earnings. The healthcare space isn’t perfect, but it’s certainly not this bad.

20 Rebound Stocks: American Tower (AMT)

YTD Performance: -4%

American Tower Corp (NYSE:AMT) isn’t necessarily trading at a huge discount. But a quality stock like AMT isn’t going to be very cheap very often.

AMT represents a play on self-driving cars, which will require data to run through its owned towers. There’s a potential headwind a few years out from 5G. Internet of Things can drive more demand for data usage – and more revenue for AMT properties.

In the meantime, AMT yields 2.2%. That isn’t necessarily spectacular on its face, but this is a company that still has years of growth in front of it. And the valuation seems attractive enough given the opportunities here.

20 Rebound Stocks: Constellation Brands (STZ)

YTD Performance: -5%

Like AMT, Constellation Brands, Inc. (NYSE:STZ, NYSE:STZ.B) hasn’t had a particularly poor year thus far. And STZ doesn’t look amazingly cheap either, at about 20x forward earnings.

But this, too, is a stock that doesn’t look cheap — and really shouldn’t. Constellation has developed an impressive beverage portfolio, with Corona and Modelo beers, Svedka vodka and wineries as well. There’s a potential self-driving car play here, too.

Constellation has also moved into the marijuana industry.

STZ has been one of the best performers in the market of late, gaining over 300% over the past five years. I wouldn’t necessarily expect that same type of performance going forward, but with a modest pullback of late, STZ still has intriguing potential upside ahead.

20 Rebound Stocks: Ford Motor Company

YTD Performance: -8%

Ford Motor Company (NYSE:F) stock hasn’t been able to get into gear over the past few years. Unlike rivals General Motors Company (NYSE:GM) and Fiat Chrysler Automobiles NV (NYSE:FCAU), Ford made it through the financial crisis without going through bankruptcy. But this decade has been pretty much lost for Ford stock.

The company’s decision to shut down nearly all of its car development in the U.S. looks like as a potential game changer for F stock. And after being cautious at best toward F stock for some time, it leads me to see a lot more promise in the bull case than I did in the past.

The bull case isn’t perfect. Peak auto remains a concern. Ford may have to play catch-up in electric and autonomous vehicles. But a 5%-plus yield and a single-digit earnings multiple mean even stable profits are good enough for substantial upside. With capex and R&D costs coming down, and a focus on higher-margin and higher-profit trucks and SUVs going forward, that goal hardly seems far-fetched.

20 Rebound Stocks: B&G Foods

YTD Performance: -23%

KHC is one option in the CPG (consumer packaged goods) space. Another is B&G Foods, Inc. (NYSE:BGS). A weaker brand portfolio and a more leveraged balance sheet make BGS a riskier play. But a nearly 7% dividend and decent growth make BGS worth the risk.

B&G is even instituting a price hike, its first in three years. That should offset some of the pressure seen from rising freight costs — and allow B&G to hike its margins. And while the high yield suggests investors are fearing a cut, B&G actually just raised its dividend, albeit by 2%.

Like many stocks on this list, the story here isn’t perfect, but a sell-off to a six-year low seems far too much for even a challenged space. With B&G still growing earnings — and its dividend — more upside looks likely, even after a recent bounce.

As of this writing, Vince Martin is long shares of Nutrisystem Inc. He has no positions in any other securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2018/05/20-2018-losers-that-will-be-big-winners/.

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