Market volatility has reached levels we haven’t seen in a long time. After the market reached bear market territory with a 20% correction, the 1,000-point rallies that followed did little to bring back the bull market back.
Maybe only the top 20 widely traded stocks in the S&P 500 will truly rebound for now. Investors just do not want to hold beaten-down stocks amid heightening selling pressure.
Many countries in Europe have closed stores and businesses. In Italy, the government locked down the entire country. Spain followed on Saturday, March 4, 2020 by ordering Spaniards to stay at home. School shutdowns across the world will further slow the global economy. With such dire headwinds ahead, why should investors consider picking stocks headed to a bottom?
Value investors are no strangers to buying stocks once a bottom is in. Picking when that happens will prove difficult, if not impossible. But cheap stocks are ready to run once the coronavirus from China is contained and the global spread ends.
Here are seven stocks to buy once a bottom is in.
Stocks to Buy: Alliance Data Systems (ADS)
The company described 2019 as a transitional year filled with strategic changes. It sold down assets, including divesting Epsilon and Precima and returned the capital earned to its shareholders. The company reduced operating costs by $100 million.
Restructuring at LoyaltyOne will lower costs. For example, changes to its reward miles will grow EBITDA in the low single digits in 2020. And in the long term, management expects strong cash flow and EBITDA margins in the 40% range.
Facilitating customer acquisitions throughout 2020 will stabilize the revenue declines. But management still expects 2020 will be a turnaround year. Investors should watch for the return on equity growth to the 30% level.
Darden Restaurants (DRI)
Darden Restaurants (NYSE:DRI) lost half its value in just the last month alone. The coronavirus-driven lockdown will threaten customer traffic. Just as movie theaters and subways may bring people near each other, the restaurant business does the same.
In the short term, Darden’s business will get hit hard on a loss of dine-in customers. It will likely post a dramatic drop in revenue in the next quarter, too.
At current levels, Darden stock trades at a forward price-earnings ratio of around 7 times. Plus, the stock has a dividend that yields around 8.6%. Given the extraordinary situation of a short-term slowdown, the firm may cut dividends temporarily to save its cash.
If that happens, the stock already prices in a worst-case scenario. Darden may re-invest the cash in advertising or back to the business in the following months.
After weeks of lockdowns, customers will slowly return to eating out at places like Darden Restaurants. When that happens in the months ahead, the stock will rise.
Stocks to Buy: Flowserve (FLS)
Flowserve (NYSE:FLS) is a diversified machinery firm that is dropping like the rest of the stock market in March. In the fourth quarter, the company reported modest results and strong equipment sales. But the market has a short-term memory on past results and is punishing the company in anticipation of a business slowdown.
Flowserve reported fourth-quarter sales growing 8.2% year-over-year to $1.1 billion. Earnings rose 10.4% to 53 cents. Original equipment bookings grew $535 million.
The risk here is that customers delay or cancel orders due to the coronavirus slowing demand. If that happens, Flowserve will have to revise its 2020 revenue growth of 3% to 5%. It may instead expect zero growth or a decline.
Value investors should have the confidence that Flowserve will survive. The company has over 225 years of heritage in flow control expertise. Bookings grew for three years straight. So, chances are good that its business will return to normal faster than other economically sensitive stocks.
Analysts have a $36.33 average price target on Flowserve stock.
Expedia Group (NASDAQ:EXPE) is a lodging services firm getting hit hard from the coronavirus outbreak. Not only did travel demand slow before the lockdowns, but the border closures worldwide will cut into its business. On March 13, 2020, Expedia withdrew its 2020 guidance due to the impact of Covid-19.
The company said that uncertainty in travel trends led to a $30 million to $40 million impact on results. That is just the start. Travel trends worsened in the last two months. And now that the pandemic has no end in sight, Expedia cannot forecast what will happen next. Yet after the stock fell from its $140 yearly high to below $60 recently, investors cannot ignore the 60% discount.
Expedia has over $23 a share in cash per share and a manageable debt level. Plus, the Federal Reserve rate cut to 0% will only cut its variable interest cost on debt. At these levels, investors may take some risk buying the stock. The firm has a healthy cash balance and may weather the slowdown for as long as it needs to
Western Digital (WDC)
Storage suppliers tend to get punished the most on market meltdowns. Western Digital (NASDAQ:WDC) is no exception to that observation.
Back in the last financial crisis, investors ignored the steady and growing demand for storage. Its dividend (which is 6.4% today) is another bonus. Also, WDC bought SanDisk to secure its position in solid-state drives (SSD). In the last few years, the upgrade cycle from slow mechanical drives to super-fast SSDs led to the 82% sequential EPS growth to 62 cents.
In the last quarter, the firm posted strong results for its massive 14-terabyte storage drive. It also benefited from strong “continuing momentum of NVMe enterprise SSDs at hyperscale and OEM customers.” In 2020, Western Digital forecast a doubling in enterprise SSD revenue. Now, given the coronavirus-induced slowdown, the company may miss that near-term projection.
But when business returns to normal, even at a slow pace, WDC’s SSD sales will rebound.
In the June quarter, WDC anticipated shipments into a new gaming platform. So, if that timeline is delayed by a quarter, then the revenue uptick will get delayed, too. Investors may buy WDC stock at a discount and wait for holiday sales to lift results later this year.
Seagate Technology (STX)
Seagate Technology (NASDAQ:STX) is typically the more favored storage supplier over Western Digital.
Before the sharp selloff in the stock, investors liked the company for its consistent quarterly report results. For example, Seagate posted revenue of $2.7 billion, similar to last year’s level.
This is despite the heavy competition in the storage space. Gross margins rose from 26.1% in Q1 to 28.1% in Q2. Also, the stock paid a consistent dividend in the last five quarters. This suggests that investors who buy STX stock on the dip will collect a dividend that yields roughly 6% annually.
Seagate benefited from a steady increase in average capacity per drive in the last five quarters. In aggregate, it shipped 106.9 exabytes in the most recent quarter. On its balance sheet, the firm had $1.7 billion cash and $4.1 billion in debt.
Once again, that Fed rate cut will only lower the cost of managing its debt levels. And while revenue slowly bounces back, free cash flow will improve steadily throughout 2020.
Flir Systems (FLIR)
Flir Systems (NASDAQ:FLIR) is a scientific and technical instrument supplier. It has a vision of being the world’s sixth sense, revolutionizing human perception. As a company that strives to innovate on increasing awareness and insight, its business will recover easily.
Thermal sensing, unmanned solutions and machine vision are only some of the novel technologies that the world needs. It is active in 173 countries, so the global shutdown will understandably disrupt Flir’s business in the short term. But once the travel bans are lifted, this company’s business will resume normal operations.
FLIR stock now trades at a price-earnings ratio near 18. With EPS expected to grow 22% over the next five years, chances are good that margins will expand at that time.
At these levels, the market is ignoring its positive impact its products will have in the robotics industry. For example, it won a 5-year, $109 million contracts with the U.S. Army to build a robot. This robot is designed to disarm explosives or perform heavy-duty tasks.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.