Ignore the Headlines and Focus on These Four Stocks
November 14, 2017, 2:29 pm
Geoffrey Chaucer is known more as a poet than a market commentator, but one of his idioms did apply to Wall Street last week: “All good things must come to an end.” Both the Dow and S&P 500 were down for the first time in two months, the longest winning streak in four years.
That’s absolutely fine. Every bull market needs a little reality check now and then to keep investors alert and in the game. Last Thursday saw the S&P veer as much as 1.1% from its record-breaking trajectory while the technology-heavy NASDAQ 100 sank 1.4%. If you were only listening to the chatter, it might have felt like the end of the world, especially when you throw in deeper declines in less resilient corners of the market like small-cap stocks and high-yield bonds.
But sometimes a shudder is just a shudder. Everything we saw last week makes me think Wall Street is simply pausing before getting back to work in the remaining weeks of the year. That’s what the reality check is all about. After all, we’re wrapping up a surprisingly robust earnings season with growth far above what the models predicted, and I think the talk about Congress failing to deliver on taxes is overdone. The smart money wasn’t counting on a huge tax windfall as it was, so if it’s more realistic for the Senate to delay corporate cuts a year in order to get the votes, I think the Street would come to terms with that.
We may see more negative headlines as Wall Street is coming up on the dregs of the earnings cycle over the next few weeks as struggling retail chains report results. I urge you to ignore the headlines and instead focus on stocks that could make good investing opportunities regardless of where the market turns next. I have four more names on my watch list to share with you, so let’s take a closer look at them now.
Stamps.com (STMP) had a very difficult time a few weeks ago, falling 24% despite reporting strong earnings results. Although sales and operating income were up 24%, there was some disappointment as operating margins did not expand. I think the stock also needed a rest after its strong run.
Looking ahead, the company has solid growth prospects, as it sells not only stamps, but total shipping solutions. The number of customers was up 13% last quarter, with revenues per customer at 14%. This is a balance I like to see as STMP continues to grow its customer base and grows within its existing customers as well.
Blackhawk Network Holdings (HAWK) is a leading provider of gift cards. Following its quarterly results on October 11, it fell from $45 to $32.50 due to disappointing revenue growth of 16% and lowered guidance for 2017 because of increasing competition. However, management’s new earnings projections of $1.56-$1.70 a share do not differ significantly from the preannounced earnings estimates of $1.68 a share. And considering that HAWK earned $1.43 a share last year, it remains on a solid growth track, led by digital channels and expanding services.
Airline stocks are very volatile, and somewhat controversial given the industry’s poor long-term performance in generating returns for shareholders. As recently as six months ago, however, it appeared that a new industry, one with greater capital discipline that would cure past problems, was emerging. Unfortunately, flattening utilization and rising fuel prices knocked the stocks back down again.
One company that was hit especially hard was Hawaiian Holdings (HA), the parent of Hawaii Airlines. It fell from close to $60 at the beginning of 2017 after Southwest Airlines (LUV), a formidable competitor, began offering flights to Hawaii. However, I feel fears of competition are overblown, as LUV is only offering limited flights. HA has been a strong operator historically, and even assuming a decline in EPS from the expected $5.50 this year to $4.40 in 2018, the shares look cheap. Once the group shows signs of stabilizing, HA could become a go-to name.
Newell Brands (NWL) has declined about 40% since May, including an over 25% drop two weeks ago after management lowered 2017 EPS guidance to $2.80-$2.85, versus expectations for $3. The fears of the decline of value of branded products in the age of online retailing, as well as the company’s heavy debt load due to acquisitions, has caused the stock to trade for a miniscule 11X PE.
However, there could be significant upside in NWL if it can show that its cash flow is sufficient enough to pay down debt and that earnings will stabilize. Management noted that on a point-of-sale basis, revenues were up 3.5% last quarter as inventory adjustments held results down. I would not recommend NWL until after its fourth-quarter earnings are out and investors have calmed down, but the potential upside here makes this stock one that should not be ignored.