While the novel coronavirus rages on, the stock market has largely moved past it. The S&P 500 is only down a couple of percent for the year. Meanwhile, the tech-heavy Nasdaq Composite just hit new all-time highs. While investors agree that 2020 earnings will be dreadful, it’s time to focus on the future. In doing so, people have bid most stocks back up to generous valuations. Not all stocks are back up, however. That brings us to today’s seven rebound stocks.
All seven of these firms are still down 35% or more year-to-date. However, unlike many other firms struggling with the novel coronavirus, these seven rebound stocks have a path to a quick recovery as the economy starts to turn things around.
It may not be immediate, as the virus is seeing a bit of a second wave right now.
In coming months, though, many of these seven will rebound, like the rest of the market, offering strong returns for traders that bought in while sentiment was still lagging. These are the seven rebound stocks to be looking at today:
- General Electric (NYSE:GE)
- Spirit AeroSystems (NYSE:SPR)
- Tyson Foods (NYSE:TSN)
- Kontoor Brands (NYSE:KTB)
- Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B)
- BP (NYSE:BP)
- Berkshire Hills Bancorp (NYSE:BHLB)
Rebound Stocks: General Electric (GE)
Year-to-Date Decline: 38.7%
GE has had an up-and-down year, but lately, it’s been mostly down. Shares currently go for less than $7 — that’s way off the $12 high it hit in February. For opportunistic investors, there’s a lot to like with GE, even though the company is currently going through a hard time.
Two weeks ago, I explained the three reasons why GE bears are wrong about the company. In short, the company has plenty of liquidity to get through this downturn, aviation isn’t as bad as you might think and new CEO Larry Culp is a fantastic leader.
Many investors are thinking back to 2008, when GE had subpar management and devastating exposure to flimsy parts of the financial system. Nowadays, General Electric has a much better leader and is no longer in harm’s way as far as banking and credit go. Yes, the aviation slowdown is a real and significant problem.
However, GE has enough financial resources to manage its way through the mess, and at $6.80, the stock price is already reflecting a massive slowdown in both aviation and other GE lines of industry. Buyers here will be rewarded as sentiment moves back up from current rock-bottom levels.
Spirit AeroSystems (SPR)
Year-to-Date Decline: 68.9%
Boeing (NYSE:BA) stock has already doubled since the March lows. It’s been a remarkable turnaround for the company hit with the one-two punch of devastating safety problems and a brutal blow to the commercial aviation industry. However, investors are willing to look at the long-term prospects for the jet maker. They’ve bid the stock back up from $90 to $180.
As such, Boeing stock is certainly not a bargain anymore. However, if you’re still looking to play a rebound in the aerospace sector, why not look at Boeing’s suppliers? Some of them are still way down in the dumps. For example, there’s Spirit AeroSystems, which makes fuselages, engine pylons, wing components and more for Boeing planes.
SPR stock nosedived from a high of $90 to just $13 at the height of the March wipe-out. Spirit has only modestly recovered, it’s trading just above $22 now.
And to be sure, there’s risk. Spirit’s financial situation is cloudy given the Boeing mess. Spirit has warned that it may breach its financial covenants if the 737 Max isn’t recertified soon. It cut its deliveries to Boeing for this year in half. However, with airline traffic starting to recover a bit, and Boeing aiming to get the 737 flying again later this year, Spirit could enjoy a swift turnaround. With the stock still down more than two-thirds on the year, Spirit is a high-powered travel turnaround stock.
Rebound Stocks: Tyson Foods (TSN)
Year-to-Date Decline: 35.4%
One of the more surprising busted stocks this year has been Tyson Foods. You’d think a basic chicken, pork and beef provider would fare well during the pandemic. Demand for its staple products increased as people cooked more at home rather than eating out. Most other packaged food and grocery store companies soared this year. Yet, Tyson finds itself among the S&P 500’s big losers.
There’s a logical explanation for this, though. Last year, Tyson had profited from a global pork shortage. Due to the African swine fever, the supply of pork plummeted. China, which consumes huge quantities of pork per capita, was particularly hard hit. This created an opportunity for Tyson to earn abnormally high profits on its production. Since U.S. pork hasn’t been widely impacted by the fever, it put domestic producers such as Tyson at an advantage.
With the coronavirus, however, China’s consumption patterns changed. The demand for imported meat fell, and Tyson’s profits have slid. Throw in supply chain complications in the U.S. — Tyson plants have been hard-hit by virus outbreaks — and the company has gone from blow-out earnings to big declines in profits.
Investors should take advantage of the discount. Tyson’s earnings are lumpy in the short run — that’s always been true. Over the longer haul, however, Tyson has consistently created shareholder value. Over the past four years, Tyson has earned between $5 and $8 per share each year. That means the stock is selling around 8x-11x earnings, depending on where the commodity cycle swings next. That’s a bargain even if earnings remain subdued due to the virus for a few more quarters.
Kontoor Brands (KTB)
Year-to-Date Decline: 61.2%
Kontoor Brands is probably an unfamiliar name. However, it is the maker of well-known lines of blue jeans, in particular, Lee and Wrangler. It’s also a fairly new public company.
Until recently, Kontoor was part of V.F. Corp (NYSE:VFC), a diversified apparel giant. V.F. spun off Kontoor last year, and the timing was difficult, as the newly independent company now faces a major challenge.
Clothing sales in general face a bump with so many stores being closed due to the virus. Kontoor and rival Levi Strauss (NYSE:LEVI) are facing a particular obstacle. That’s because schools and universities are closed or are being held virtually. That will crush key back-to-school sales that should be occurring now through August. This will be a difficult year for Kontoor.
Kontoor has hunkered down. It suspended its previously generous dividend, and has otherwise cut costs. Yet shareholders are still concerned. The stock is off 65% from last year’s highs. As things open up again, clothing demand will return. As Kontoor’s profits return to normal and it reinstates a dividend, look for shares to rebound.
Rebound Stocks: Royal Dutch Shell (RDS.A, RDS.B)
Year-to-Date Decline: 43.4%
The coronavirus has absolutely crushed demand for oil and gas. It’s not hard to see why. People are driving far less while they work from home. Many of the world’s planes are grounded. Chemical demand has plunged as industries have slashed production. It’s a global recession and oil has gotten pummeled.
That said, there’s a bit of a comeback under way. Since oil briefly crashed under $0 per barrel three months ago, prices are back on the upswing. Oil topped $40 in recent weeks, meaning that prices aren’t actually down that much: Oil traded in the low-$50 range for much of 2019.
Yet energy stocks remain in the dumps. Royal Dutch Shell, for example, has lost almost half its value this year. The company slashed its dividend to conserve cash. Even after the cut, the stock still yields a solid 4%, but many investors sold following the reduction.
While income investors punished Shell, value investors are stepping in. Long-term owners realize that Shell has invested heavily in natural gas and renewables. This gives it a substantially different — and better — profile going forward versus other oil majors assuming oil prices remain stuck down here for awhile.
Year-to-Date Decline: 38.6%
Like Royal Dutch Shell, BP is another big energy firm that’s having a rough year. The big difference between Royal Dutch Shell and BP is their dividend policies. Royal Dutch Shell already caved on its dividend, putting through a major cut this past quarter.
BP, by contrast, is holding out on its existing payment. So far, it’s a huge benefit for shareholders — BP stock is yielding an astounding 11%. Of course, a big part of the reason why shares are down is that investors fear a similar dividend reduction. BP helped ease those concerns recently, when it issued $12 billion of new hybrid bonds. That gives the company plenty of wiggle room to wait for the economy and oil to rebound.
Still, like with Royal Dutch Shell, BP ultimately needs higher oil prices to make a full recovery. However, any pickup in global economic trends would help greatly. And with the stock off 40% this year, any change in sentiment would reap huge returns for shareholders.
Rebound Stocks: Berkshire Hills Bancorp (BHLB)
Year-to-Date Decline: 70.5%
Rounding out the list of rebound stocks, we have Berkshire Hills Bancorp. Don’t confuse it with Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Both take their names from the Berkshires region of western Massachusetts. Berkshire Hills remains active in the Berkshires, along with the surrounding regions. It has branches in various surrounding states.
Of the nation’s larger regional banks, Berkshire Hills is among the hardest hit, down a stunning 70% year-to-date. The company announced a small quarterly loss in Q1. That, plus a CEO departure in late 2018 might have investors fearing the worse. Historically, however, Massachusetts tends to do well in financial downturns. All else equal, it’s unlikely that Boston-area banks would be the hardest hit in the current downturn.
As it stands today, Berkshire Hills currently offers an astounding dividend yield of 9.3%. To be fair, it’s far from certain that the bank will choose to maintain this high level of payout indefinitely. However, in its most recent dividend declaration last month, it did elect to maintain the usual 24-cent payout.
If the economy reopens on schedule and loan losses don’t hit worst-case models, Berkshire Hills could rapidly bounce back. That, in turn, would allow it to maintain the dividend providing a 10% annual return for buyers today. And in the event that the stock price remains depressed, it’s an ideal takeover candidate. Berkshire Hills is the largest independent bank in Massachusetts and one of the biggest overall in the Northeast. It’d make a fine tuck-in acquisition for a national bank at its current depressed valuation.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned BP, BRK.B, VFC, and RDS.B stock.