Buckingham’s Bargains: 7 Stock Picks From A Prudent Speculator
“The only thing we have to fear is fear itself!” The well-known quote from Franklin Delano Roosevelt seems apt to describe the state of affairs in the equity markets these days, suggests John Buckingham, a leading value-oriented money manager, the editor of The Prudent Speculator and a contributor to MoneyShow.com.
After all, folks are about as pessimistic today as they have been at any point in the last 35 years. To be sure, it is not as if there is little to worry about as the S&P 500 pierced Bear Market territory (down 20% from the highs) in mid-June before rebounding somewhat, while traders have been fretting about the war in Ukraine, higher inflation readings and the increased risk of recession, not to mention comments and actions from the Federal Reserve.
Of course, history shows that there always are headwinds that stocks have had to overcome on the way to achieving superb long-term returns.
Incredibly, it is not just investors who are feeling frightened as the latest University of Michigan Sentiment index came in at an all-time low on the mood of consumers, while we were recently asked by a financial columnist for advice that we might offer those worried about losing their homes given the market downturn.
At the risk of sounding insensitive to those who have suffered sizable losses chasing formerly hot initial public offerings, cryptocurrencies, so-called meme plays, disruptive technologies and expensively priced growth stocks, we think that many in the media seem to have forgotten that most of us did not start investing in the last year.
Indeed, those who have stuck with their diversified portfolios, be they value- or growth-oriented, have enjoyed very nice returns over the past two, three, five and 10 years. None of this is meant to diminish the equity market losses endured in 2022, nor are we trying to ignore the emotional roller-coaster that many have been riding.
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No doubt, we live in a sensationalistic world with the turbulent political discourse often leading to polarized views on many an issue, the prospects for stocks included. Still, we recommend taking a deep breath, while remembering that volatility comes with the equity territory … and that stocks have proved very rewarding for those who remember that time in the market trumps market timing.
Not surprisingly, it is our view that Mr. Market is naming some very low prices today for what we believe to be good businesses with solid long-term prospects. Of course, when Wall Street holds a sale, few people show up, but for those like us whose time horizon is measured in years, not in days, weeks or months, we would advise being greedy when others are fearful!
Here’s a look at 7 bargains that have been thrown out with the bath water:
Alexandria Real Estate (AR AR E)
Alexandria is a REIT that owns, operates and develops lab space for life science research in primary U.S. markets. ARE has an asset base of 36.7 million rentable square feet (RSF) of operating properties and another 21.4 million RSF in construction and multi-year development.
Shares are down more than a third this year after a sell-off in Biotech stocks last spring, while higher interest rates modestly dampened appeal for public real estate stocks.
However, 50% of ARE’s annual rental revenue is from investment-grade or publicly traded large cap tenants, and we continue to expect secular trends to support significant growth in Life Sciences, and we view Alexandria as the premier name in the space. ARE announced last September that it had expanded its relationship with Moderna, adding a new 462,000 RSF headquarters and R&D facility and anticipates adding $665 million to rental revenue through Q1 2025.
The consensus estimates for respective per share funds from operations for 2022, 2023 and 2024 are $8.38, $9.05 and $9.77, so there is solid growth potential, even as we see ARE’s base of tenants as defensive with both public and private capital likely to continue to flow into biomedical research. Alexandria is well- capitalized, with no debt maturities prior to 2025. The yield is now over 3%.
Celanese CE (CE)
Celanese, a global value-added industrial chemicals company, is one of the world’s largest producers of acetyls and a top producer of polymers used in auto, consumer and industrial products. Shares have fallen by 25% this year even as the $5.54 of EPS in Q1 blew analyst and management projections out of the water ($4.45 and 4.51, respectively).
CE’s global reach has allowed it to mitigate significant supply chain headwinds and boost price realizations. Though commodity prices are expected to abate as the Fed works to cool the economy, we point out that Celanese has typically enjoyed a cost advantage in many of its markets and has been able to push through regular price increases, which ought to modestly offset any reduction in volume.
We also appreciate the company’s exposure to secular growth markets like electric vehicles and 5G through its Engineered Materials segment and think it is positioned to win from customer sustainability efforts. Shares trade for just 7 times NTM adjusted EPS expectations and the dividend yield is 2.2%.
Capital One COF Financial (COF)
Capital One is a diversified financial services company involved in the full spectrum of domestic and international credit card lending, auto lending, consumer installment loans, small business lending and deposit-taking activities. Fears over slowing loan demand and the normalization toward higher credit costs have weighed on shares, which have tumbled some 40% from the 52-week high.
We also acknowledge that marketing spend tends to trend above that of peers on average, but the strategy fits in with the lender’s growth playbook given its lack of physical branches. Of course, COF has embarked on a decade-long path to attract higher-spending customers and has recently launched lounges in certain major U.S. airports.
We continue to think highly of Capital One’s tech-enabled infrastructure and capability and expect increased spending in the coming years to push loan balances modestly higher. The stock price is volatile, but we think a single-digit multiple of earnings presents an opportunity for long- term oriented owners. The dividend yield is 2.2%.
EnerSys is major provider of energy storage solutions, billing itself as the global leader in batteries, chargers and accessories for motive (electric forklifts), reserve (uninterrupted power systems), aerospace (satellites) and defense applications.
EnerSys offers different battery types, ranging from Flooded Lead Acid (FLA) to Thin Plate Pure Lead (TPPL) and Lithium-ion (Li-ion) for various needs and applications. With more than a dozen acquisitions under its belt over the past two decades, the purchase of Alpha Group in 2018 extends the product portfolio across broadband, telecom, renewable and industrial markets.
We think EnerSys sits at the nexus of several megatrends, such as 5G, the electrification of mobility and grid modernization, which offer a terrific runway for growth, and we like that ENS continues to pursue new applications and technology.
Shares have fallen more than 40% from the 52-week high as the industrial worked through rising input costs and supply shortages over the past year. Nevertheless, cost increases began to take effect in the most recent quarter to preserve margins while adaptive design has bridged the supply gap. EnerSys is expected to earn $4.40 per share in 2022, followed by double-digit percentage growth in the next few years.
MDC Holdings (MDC)
MDC is a home builder primarily focused on the western United States. Operating under the name Richmond American Homes, over 70% of its homes are built in California, Colorado, Arizona and Nevada, with additional construction in Florida, Utah and the Pacific Northwest.
Following the surge in home demand that pushed shares north of $60 in 2021, the stock currently sits below its level prior to the pandemic, given a rapid ascent in mortgage rates.
Meanwhile, demand for housing across the nation has remained healthy, as MDC’s backlog continued to climb to almost $5 billion at the end of March. CFO CFO Bob Martin noted that higher interest rates had some consumers in wait-and-see mode in the hope that borrowing costs would come back down.
But Mr. Martin claimed, “The longer period of time that the consumers are taking doesn’t scare us. I think really our focus and our True North is where we’re at from a supply-demand perspective. There’s really just not a lot of supply out there in any of our markets.”
Costs remain a wildcard, but management seems to think its historical discipline in providing incentives for mortgage products offer some flexibility to defend gross margins. We respect that home building is highly cyclical, but we find the next 12-month P/E multiple of 3.0 to be extraordinarily inexpensive, especially for those with an income focus as the dividend yield is a very rich 6.3%.
Meta Platforms (META)
Meta (otherwise known as Facebook) is the largest social network in the world with an estimated base of monthly active users approaching 3 billion, around 58% of the global population with access to the internet.
Following the plummet in February, a trio of headwinds (privacy concerns, elevated R&D, and potentially slowing ad-spend) continue to weigh on the stock and ought to compress margins near-term, while long-time COO Sheryl Sandberg recently announced she would be stepping down.
And, while fiscally insignificant today, a $100,000 fine imposed by the U.S. Justice Department adds fuel to the fire, continuing to remind that a big target remains on the social media giant’s back.
Nevertheless, we find shares attractive, trading below the market multiple with over $30 billion of net cash on the books. Management expects its monetization of short-form video content to improve over time, noting that investments to further develop its AI capabilities are anticipated to partially mitigate the effects of Apple’s AAPL iOS privacy updates.
Fruit borne from investments to build out capabilities for the metaverse are likely off in the distance, although the company further indicated its resolve toward the effort by having just changed its ticker symbol to META from FB.
We remain patient, thinking the runway for the core advertising business remains intact, and should provide plenty of future cash flow as it still presents a tremendous value proposition for most small-to-medium-sized businesses.
Micron Tech (MU)
Micron is a manufacturer of semiconductor components and memory modules. Through its global brands (Micron, Crucial and Ballistix), the company manufactures all of today’s major memory technologies: DRAM, NAND, NOR and 3D XPoint.
Micron shares have retreated meaningfully from their January highs, but CEO Sanjay Mehrotra said at the firm’s recent Investor Day that it was committed to doubling R&D and net income over the next three years.
Micron expects to benefit from the secular trends of artificial intelligence (AI) and new server applications, which have significant computing power and storage needs. Smartphones and automotive applications are also expected to drive revenue, as folks refresh devices as they return to work and seek 5G capabilities.
We think the strong demand environment will endure and MU continues to be an important part of our overall cloud-focused IT sector thesis. Following the latest drawdown, shares trade for a single-digit multiple of the next 12-month EPS projection.
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