After sliding for several months on fears of an impending recession, the stock market began to rebound. The S&P500 rebounded more than 10% from its low point in June.
However, despite this recovery, there are still plenty of bargains. Three valuable actions that our contributors want to highlight are Rockwell Automation (ROK -4.04%), Kinder Morgan(KMI -1.40%)and Ford Motor Company (F -3.26%). Here’s why these stocks still look cheap even with the recent rally.
Saving money never goes out of style
Reuben Gregg Brewer (Rockwell Automation): Recessions are tough, and one of them would definitely impact industrial automation expert Rockwell Automation. During an economic downturn, one of the first things companies do to protect their margins is look for ways to save money. While business automation requires capital outlay, the end goal is to reduce costs. Sure, a recession would likely be a headwind, but Rockwell Automation’s core business will likely end very well in the long run.
This is evidenced by management’s commentary on a record backlog at the end of the third fiscal quarter. This is work that is planned, but has not yet been done – basically, future income. Still, Rockwell Automation lowered its full-year revenue forecast and narrowed its earnings range, which worried investors. So what’s going on?
There are a few issues. First and foremost, Rockwell Automation had to deal with supply chain issues that prevented it from getting as much work done as it had hoped. These bottlenecks will eventually be resolved. Then there’s inflation, which is really beyond management’s control. That said, the company is raising prices, as you would expect, but it will just take time to get through this period. It is unlikely to be a long term problem.
If you can think long-term, the stock’s drop of around 30% since the start of the year should probably be seen as a buying opportunity.
Still incredibly cheap
Matt DiLallo (Kinder Morgan): Kinder Morgan shares are up about 20% so far this year. However, gas pipeline stock is still very cheap.
The company expects to generate about $2.17 per share of distributable cash flow (an indicator of free cash flow) this year, after recently raising its forecast by 5%. With the stock price recently around $19 each, Kinder Morgan is trading at less than 9 times its free cash flow. This low valuation is one of the main reasons why Kinder Morgan now offers a high dividend yield, now above 5.8%.
In addition to paying out its large dividend, Kinder Morgan is using its free cash flow to expand its operations. The company is increasing the capacity of several gas pipelines to meet the growing demand for cleaner fuel. It is also investing $1.1 billion to build a renewable natural gas platform. These investments will help increase the company’s cash flow, which should allow it to continue to increase its dividend, which it has done for five consecutive years.
Kinder Morgan is also using some of its free cash flow to opportunistically buy back its cheap shares. The company has repurchased about 16 million shares this year at an average price of about $17.09 per share. These buybacks help reduce the number of shares outstanding, helping to boost its growth rate per share. For example, while its overall distributable cash flow grew 14.7% in the second quarter, it grew 15.6% per share.
Kinder Morgan offers a lot of value these days. It trades at a cheap valuation for a cash-generating company with decent growth prospects. As a result, investors are well paid while waiting for its valuation to improve.
walk on gas
Neha Chamaria (Ford Motor Company): Despite gaining nearly a quarter of its value in the past month, Ford is still a value stock you don’t want to ignore. Admittedly, the auto giant has had its fair share of challenges in recent months. Supply constraints have been a major headwind, and a series of callbacks amid rising interest rates and fears of a downturn have further dulled the shine in Ford shares. Even after its recent rebound, the auto stock is still down around 24% so far this year.
Still, Ford’s sales remain robust, and the company is outpacing it when it comes to electric vehicles. Electric vehicles are being touted as key growth drivers for Ford in the coming years, and the company is doing everything it can to make up for lost time and expand its presence in the industry. Its latest move speaks to its focus on electric vehicles: Just days ago, Ford announced it would lay off 3,000 workers from its traditional combustion vehicle business in a bid to cut costs and improve efficiency. saving money to invest in electric vehicles.
The electric version of Ford’s hugely popular F-150 pickup, the F-150 Lightning, is already selling out fast. It stopped taking orders in December last year after receiving an unprecedented number of pre-orders, and is now reopening its order book but with a steep price hike. Similarly, Ford announced on August 25 that it would also resume orders for the Mustang Mach-E, again with a price hike.
So, on the one hand, Ford is rapidly ramping up production to meet demand and passing on rising costs to consumers. On the other hand, it is restructuring its legacy automotive business to make more money so it can expand its electric vehicle operations. Those efforts should eventually be reflected in Ford’s numbers and its stock price.