Companies that make laundry detergent…provide senior housing…mine gold…or drill for oil all have something in common—they’re in the most beaten-down sectors of the stock market this year. But in some cases, investors have misperceived or overreacted to problems, dumping stocks in well-run companies that actually have great outlooks for growth. Investing in cheap, unloved stocks can be risky, but such stocks also can offer rare opportunities in a market with few bargains left.
Bottom Line Personal went to four top stock experts to find the most promising picks among the carnage for 2018 and beyond…
Businesses that produce essential everyday products have been the worst-performing sector of the Standard & Poor’s 500 Index this year. Household and food products have done particularly poorly, including a drop of 22% for General Mills and 19% for Kraft Heinz.* Consumer-staples companies are suffering from lower profit margins and slower growth because of the attrition of younger customers who have little sense of traditional brand loyalty and prefer more sustainable and/or organic products. However, some well-known companies can overcome these disadvantages. Two attractive consumer-staples stocks now…
Procter & Gamble (PG) makes the world’s most recognized consumer-staples products, including Tide laundry detergent and 20 other products that each generate more than $1 billion in annual revenue globally. But earnings growth has barely increased in the past several years, and the stock has fallen 14% this year. What investors are missing: Hedge-fund billionaire and activist Nelson Peltz won a seat on P&G’s board of directors last year and has pressured the company to use its $15 billion war chest to spur growth through acquisitions. Example: P&G recently acquired Merck KgaA’s health-care products business, giving it highly profitable vitamin brands in fast-growing markets in Asia and Latin America.
PepsiCo (PEP) has 22 brands that each generate more than $1 billion in annual revenue. However, the consumer trend away from sugary sodas such as Pepsi and Mountain Dew continues to hurt PepsiCo’s North American sales and has driven down the stock price by 9% this year. What investors are missing: The company is transitioning to healthier beverages, but the real driver of future growth is the company’s Frito-Lay snack division, which is well-positioned for international gains.
Stephen Yacktman is chief investment officer of Yacktman Asset Management, Dallas, and comanager of the AMG Yacktman Focused Fund (YAFFX). Yacktman.com
Real Estate Investment Trusts (REITs)
Shares of commercial real estate companies fell 5% overall this year because the typically high dividend yields that they generate become less attractive as interest rates rise for lower-risk investments such as bonds. Retail REITs have been hit especially hard as traditional retailers close stores to fend off e-commerce competition. But some REITs aren’t hurt by the “Amazon effect” and have exposure to much faster-growing areas of the economy. An attractive REIT now…
Welltower (WELL) is the largest US health-care REIT, with more than 1,300 properties including senior-housing complexes and skilled-nursing/postacute facilities. The shares plunged 7% this year because an oversupply of senior housing around the country is causing a drag on profits. What investors are missing: The company will capitalize on the fact that a long-term wave of rising demand is about to hit senior-living facilities. The first baby boomers will turn 75 in three years, and the 80-plus population (which spends more than four times the national average on health care per capita) will double over the next decade.
Kevin Brown is an equity analyst specializing in financial stocks and REITs at Morningstar Inc., Chicago, which tracks 570,000 investment offerings. Morningstar.com
Gold prices peaked in 2011 at $1,920 per ounce and dropped by more than 30% since then. Investors simply don’t feel the need for a defensive asset such as gold to protect against geopolitical chaos and economic turmoil, especially with the global economy improving and inflation still moderate. Shares of major gold-mining companies have fallen about 60% in the past seven years as investors reacted to falling gold prices and the companies’ high debt levels. But the best-managed gold-mining companies could see substantial stock gains during the next US and global recession when gold prices could go on an extended run. The cost to mine gold is relatively consistent, so when prices rise, gold miners’ profits are greatly magnified. An attractive gold-mining stock now…
Agnico Eagle Mines Ltd. (AEM) has mines in stable countries such as Canada, Finland and Mexico that produce annual revenue of more than $2 billion. The stock is down nearly 35% since gold’s 2011 peak. What investors are missing: Unlike many miners, Agnico Eagle carries minimal debt. It has some of the lowest production costs in the industry and is poised to increase production from its current mines by more than 30% by 2020. It also may benefit from its extensive cobalt deposits in Ontario. Demand for cobalt is growing because it is an essential component in the rechargeable lithium-ion batteries used in electric vehicles.
Bruce W. Kaser, CFA, is associate editor of The Turnaround Letter, Boston, whose model portfolio has produced annualized returns of 10.5% over the past 20 years vs. 6.5% for the S&P 500. TurnaroundLetter.com
Energy Master Limited Partnerships (MLPs)
Energy MLPs, which trade like stocks and own oil and gas pipelines and storage facilities, have fallen nearly 40% from their 2014 peak and are down 1% this year despite a spike in oil prices. MLP’s haven’t grown in the past few years and have slashed their payouts to shareholders repeatedly. They also are facing new federal regulatory hurdles that could force those with pipelines that cross multiple states to reduce what they charge customers. Still, most MLPs aren’t materially affected by the new federal regulations and have specific catalysts for growth. An attractive MLP now…
EQT Midstream Partners (EQM) transports natural gas primarily through Pennsylvania and West Virginia. About 75% of revenue comes from long-term contracts with customers in the Marcellus and Utica shale basins, the epicenter of the fracking boom. The shares recently yielded 7.2%, but the value of shares has dropped 21% this year. What investors are missing: EQT Midstream, which was spun off from EQT Corp. in 2012, has raised its cash distribution every quarter since 2013 and should be able to significantly increase its earnings over the next several years. Reason: The company gathers and transports natural gas for EQT Corp., the largest US natural gas producer, which is expected to increase production by 10% to 15% a year over the next several years.
Nick Holmes, CFA, is director and energy investment analyst at Tortoise, an asset-management company that oversees $19.6 billion, Leawood, Kansas. TortoiseAdvisors.com
*All performance figures are year-to-date returns for 2018 through June 15, 2018.