Although there’s some merit in assuming that strength may beget more strength, targeting undervalued stocks may represent a more sensible option at the moment. With the Federal Reserve mulling a possible interest rate hike, market participants should really prep for investing in downturn cycles.
Yes, it’s true that the June jobs report came in lower than economists anticipated. However, a few indicators suggested that the Fed may have some work cut out for it. Notably, the unemployment rate declined while the length of the average work week increased. Also, wage growth stabilized and remained robust on a month-to-month basis. Taken together, these factors are inflationary. Based on the Fed’s actions, value investing might make more sense.
Essentially, high-growth enterprises may be too overheated. As discussed in my interview with CGTN America anchor Phillip Yin, the risk of pain exists as the central bank pulls back on the culture of accommodation. Therefore, it just might make more sense to consider bounce-back stocks rather than already-hyped enterprises.
One of the world’s leading producers and marketers of concentrated phosphate and potash crop nutrients, Mosaic (NYSE:MOS) in arguably most other circumstances makes a great case for investing in downturn cycles. However, some questions have risen about its value investing proposition, particularly because of ongoing geopolitical flashpoints. Still, the criticality of the underlying business should be enough for intrepid investors to take a shot.
Currently, the market prices MOS with a trailing earnings multiple of 4.43, which ranks better than 91.89% of its peers. Also, MOS trades at a forward multiple of 7.72X. In contrast, the underlying projected earnings multiple for the underlying agriculture industry stands at 10.31X. Thus, Mosaic makes a compelling argument for undervalued stocks when combined with the relevant fundamentals.
Also, Mosaic prints a three-year revenue growth rate (per share basis) of 32.3%, above 80.28% of its peers. And it features a trailing-year net margin of over 15%, making it a top player among prospective bounce-back stocks.
HF Sinclair (DINO)
Headquartered in Dallas, Texas, HF Sinclair (NYSE:DINO) is an independent petroleum refiner and marketer that produces high-value light products such as gasoline, diesel fuel, jet fuel, and other specialty products. On the surface, DINO might seem like one of the undervalued stocks for good reason. In part because of the Fed’s hawkish monetary policy, the hydrocarbon sector has been under pressure.
Another factor that raises skepticism over DINO as one of the prospective ideas for value investing centers on the work-from-home narrative. With millions of white-collar workers still operating remotely, this dynamic may impose headwinds on traffic volumes. However, should the Fed hike rates, the hydrocarbon energy sector may counterintuitively rise based on a sector-specific stock market recovery.
Basically, higher borrowing costs would incentivize cost-cutting measures (read layoffs). As a result, the power pendulum would swing decisively toward employers. And that might be when work from home ends, ushering the return of the morning (and evening) commute. Thus, DINO represents one of the possible bounce-back stocks.
Based in Clayton, Missouri, FutureFuel (NYSE:FF) is a leading manufacturer of diversified chemical products and biofuels. Per its public profile, FutureFuel’s chemicals segment manufactures specialty chemicals for specific customers (‘custom chemicals’) as well as multi-customer specialty chemicals (‘performance chemicals’). Since the start of the year, FF gained a bit more than 7%, a relatively modest performance. However, that also raises the specter of FF’s candidacy as one of the undervalued stocks.
Fundamentally, FutureFuel’s business is incredibly relevant because of the need for not only energy but diversified energy sources. That’s probably one major factor contributing to FF shares gaining over 37% in the trailing one-year period.
On a financial note, FF trades at a trailing multiple of 8.36X. However, the underlying sector median stands at 19.71X. Notably, FutureFuel’s three-year revenue growth rate clocks in at 24.5%, above 83% of its peers. However, shares are still priced at 0.95X trailing sales. Thus, it’s one of the undervalued stocks to consider for forward-looking investors.
Northwest Pipe (NWPX)
Founded in 1966, Northwest Pipe (NASDAQ:NWPX) is a leading manufacturer of water-related infrastructure products. Per its corporate profile, Northwest is the largest manufacturer of engineered steel water pipeline systems in North America. As well, the company produces high-quality precast and reinforced concrete products. Since the start of the year, shares lost almost 10% of their equity value.
It’s understandable given the ebb and flow of sentiment between a possible stock market recovery and investing in downturn cycles. However, Northwest Pipe’s advantage is that irrespective of broader economic conditions, it remains vital to infrastructural health and stability. Therefore, it’s well worth consideration for forward-looking speculators.
On a financial note, the market prices NWPX at a trailing multiple of 10.16. In contrast, the sector median stat stands at 22.81X. Also, Northwest features a three-year revenue growth rate of 17%. Nevertheless, shares traded at a sales multiple of 0.68x ranked lower than 76.48% of its peers. Thus, it’s a strong idea for value investing.
Based in Fremont, California, AXT (NASDAQ:AXTI) presents an extremely risky case for undervalued stocks to buy. A materials science company, AXT develops and manufactures high-performance compound and single-element semiconductor substrate wafers. Given its significant relevance to semiconductor infrastructure, AXTI theoretically should be a compelling idea among undervalued stocks. Still, shares lost more than 31% of equity value since the Jan. opener.
Those that still believe in the relevance of the company have legitimate reasons for hope. Presently, AXT prints a three-year revenue growth rate of 16.2%, above 61.45% of enterprises listed in the semiconductor space. Also, its EBITDA growth rate during the same period comes in at 66.4%, above 88.33% of rivals.
Despite these impressive stats, AXTI trades at a sales multiple of 1.06X. In contrast, the sector median stands at 2.76x. Also, the market prices AXTI at a trailing earnings multiple of 14.29x. As a discount to earnings, AXT ranks better than 68.72% of the competition.
Sensus Healthcare (SRTS)
A medical device company, Sensus Healthcare (NASDAQ:SRTS) specializes in highly effective, non-invasive, minimally-invasive, and cost-effective treatments for both oncological and non-oncological conditions. As part of the broader healthcare complex, SRTS offers a solid narrative for undervalued stocks. Basically, no matter what’s going on with the economy, healthcare will likely never lose its relevance.
That said, SRTS makes for an extremely risky idea among possible bounce-back stocks. Just last Friday, shares gave up more than 12% of equity value. Since the Jan. opener, SRTS hemorrhaged more than 56%. And in the trailing one-year period, it’s down almost 69%. It’s not exactly the most comforting series of chart stats.
Still, from a financial perspective, Sensus benefits from a strong balance sheet, in particular its cash-to-debt ratio of nearly 20X. Operationally, the company prints a three-year revenue growth rate of 16.9%, ranked better than 71.53% of its peers. Nevertheless, the market prices SRTS at a revenue multiple of 1.36x ranked below 77.53% of the competition.
Gulf Resources (GURE)
Based in China, Gulf Resources (NASDAQ:GURE) arguably ranks as the riskiest idea on this list of undervalued stocks. Featuring a market capitalization of less than $25 million, it’s a nano-cap play among nano caps. For those seeking excitement to the extreme, I suppose GURE could be right up your alley. For anyone else, it’s nothing short of daredevil speculation. Then again, if you have some loose change in your pocket, you could throw some at GURE.
Right now, shares lost a bit more than 26% since the Jan. opener. In the trailing one-year period, GURE slipped almost 43%, again making it a risky proposition for bounce-back stocks. However, Gulf claims to be one of the largest producers of bromine in China. Further, the commodity represents a key ingredient for energy storage solutions.
Against a financial framework, Gulf benefits from a strong balance sheet. In particular, its cash-to-debt ratio stands at 11.36X, above 81.32% of its peers. Moreover, for the intrepid market participant, GURE trades at low multiples for earnings, sales, and tangible book value.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.