Steel producer Nucor has been setting earnings records all year, but trades at just four times earnings.
Courtesy of Nucor
The market’s pullback in the past month—triggered by the Delta variant, rising inflation, expectations of Fed tapering, and the congressional tug of war over spending—presents opportunities for investors to buy some high-quality stocks at bargain prices.
Barron’s looked at S&P 500 stocks that tumbled more than 10% in September, and screened for companies that have less debt, strong earnings outlooks, and high profits. Specifically, the stocks need to have a debt-to-assets ratio lower than 30%, next 12-month earnings growth estimates above 10%, and return-on-equity ratio higher than 20%.
Ten companies across several sectors met our measures: steel producer Nucor (ticker: NUE); water-heater manufacturer A.O. Smith (AOS); home construction companies PulteGroup (PHM) and D.R. Horton (DHI); software giant Adobe (ADBE); industrial manufacturer Trane Technologies (TT); swimming-pool supplier Pool (POOL); mining company Freeport-McMoRan (FCX); analytical-instrument manufacturer Agilent Technologies (A); and semiconductor producer Skyworks Solutions (SWKS).
Oversold Opportunities
These high-quality stocks have tumbled more than 10% in September, presenting opportunities to enter at bargain prices.
| Name | September Price Change | Debt to Assets | Estimated Earnings Growth | Return on Equity | Price to Earning |
|---|---|---|---|---|---|
| Nucor (NUE) | -16.2% | 23.4% | 125.5% | 35.0% | 4.3 |
| A. O. Smith (AOS) | -16.0% | 4.9% | 11.3% | 23.2% | 20.1 |
| PulteGroup (PHM) | -14.7% | 20.7% | 36.3% | 23.9% | 5.4 |
| Adobe (ADBE) | -13.3% | 17.9% | 12.8% | 39.1% | 42.2 |
| Trane Technologies (TT) | -13.0% | 27.0% | 15.4% | 22.8% | 26.3 |
| D.R. Horton (DHI) | -12.2% | 20.4% | 29.4% | 26.6% | 6.5 |
| Pool (POOL) | -12.1% | 29.2% | 14.3% | 26.8% | 30.4 |
| Freeport-McMoRan (FCX) | -10.6% | 21.3% | 70.7% | 26.0% | 9.7 |
| Agilent Technologies (A) | -10.2% | 29.0% | 13.1% | 25.3% | 33.9 |
| Skyworks Solutions (SWKS) | -10.2% | 22.2% | 12.2% | 32.1% | 15.1 |
Source: FactSet
While their valuation multiples range widely from four times forward earnings to 42 times, all of these stocks have become cheaper than they were a month ago and seem well positioned to gain back their losses.
Nucor, for example, has been setting earnings records all year, but trades at just four times earnings. The stock has dropping lately because of a weaker outlook of global growth and the uncertain fate of the $1 trillion bipartisan infrastructure bill. If Congress passes the bill, however, the massive spending would be a strong tailwind for steel producers like Nucor.
Nucor should be high of the list for both investors concerned about sustainability and dividends. On the environmental side, the company’s greenhouse gas intensity is less than a third of the global sector average, said CEO Leon Topalian on a conference call this year. In September, Nucor announced plans to build a $2.7 billion low-carbon steel mill. For income seekers, the stock has been raising dividends for nearly 50 consecutive years.
Adobe, on the other hand, trades at a high valuation of 42 times earnings even after the market’s broad losses. While that seems expensive, especially compared to Nucor, many on Wall Street are expecting strong growth from the creative-software company to justify the price.
Adobe has already seen a string of better-than-expected quarters. The 29 analysts polled by FactSet now expects the firm to grow its earnings per-share by 23% in fiscal 2021, and another 14% in fiscal 2022. All but five rate the stock as Buy or Overweight, with an average target price of $710 a share. The price now is $553. CFO John Murphy, who is retiring in a couple of weeks, told Barron’s that the work-from-home environment has helped accelerate a shift from paper to digital documents.
The future looks bright for Skyworks Solutions, too. The semiconductor manufacturer is set to benefit from the shift to the 5G for cellular networks. Skyworks chips are used by major smartphone brands— Apple (AAPL) and China’s Xiaomi are two—that make up more than half of global market share.
The company delivered eye-popping revenue and earnings growth for the third quarter as well as better-than-expected guidance, but its shares have dropped 14% since August. The stock is trading at 15 times forward earnings—a great buying opportunity.
Write to Evie Liu at evie.liu@barrons.com