Investors have to get creative right now to find cheap stocks in the S&P 500, with the index up 15% from a low point in late October and nearing its record high.
But there is one good way to do it—find stocks that have been losers, but still have strong earnings trends.
That is why Evercore strategists screened for stocks on the
Russell 1000,
a similar index to the
S&P 500,
to locate shares that are beaten-down, but have earnings power the market may under appreciate.
To make the list, stocks had to have been down at least 10% from the start of 2022, just as the market was hitting its peak. The companies must have analyst 2024 EPS growth forecast at 7% or greater, since that is a long-term historical average growth rate for EPS on the Russell 1000.
Also, companies must have beaten bottom line estimates in at least seven of the past eight quarters. Shares must not be too expensive, with forward price/earnings multiples at below 50 times. And their market values must be $5 billion or greater.
The screen identified a handful of stocks, and we chose six:
Citigroup,
Comcast,
deck and railing manufacturer
Trex,
paint and glass company
PPG Industries,
payroll services company
Paychex,
and chip maker
Qorvo.
Comcast, the $173 billion media company, is down about 14% from its price to start 2022 and has beaten EPS estimates in each of the past 20 quarters, according to FactSet. That could easily give investors confidence in the earnings outlook.
Analysts call for low single-digit annual sales growth over the next three years to $126 billion by 2026, as cable revenue suffers, which would be offset by increasing revenue in streaming and television subscription services.
Earnings per share can grow at almost 12% annually to $5.40 in 2026 since the company is using most of its free cash flow—$13.9 billion expected this year—to repurchase shares. This can help the stock can climb over the coming years.
Trex, the $8.4 billion maker of home decking and railings, has seen its stock drop 42% from the start of 2022. It has beaten EPS estimates in seven of the past eight quarters.
The company sells composite deckings, which sell for higher price points, helping drive analyst sales growth estimates of 11% annually to $1.35 billion by 2025. But EPS can grow 17% annually to $2.55 by 2025, partly driven by rising operating margins.
That is because analysts expect gross margins to rise over the coming years as the company limits costs by increasingly using recyclable materials.
Marketing expense shouldn’t rise too much. CEO Brian Fairbanks told Barron’s the company aims to use its brand strength to sell composites, though it would rely on higher spending if it must.
“That brand is the golden child and we will protect it at all costs,” Fairbanks said.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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