The stock market appears to be entering a fall slump. September and October have historically often been rough months for equities and this year is following that trend. It’s not hard to see why investors are nervous.
Amid high inflation, soaring interest rates and a softening housing market, there are reasons for concern. On the flip side of that coin, there is also great opportunity. Many traders are indiscriminately dumping any and all stocks that could be seen as losers due to higher interest rates or a recession. Not all firms are equally at risk, though. In fact, these five stocks, which all made new lows at the end of September, are primed for a major comeback in the fourth quarter of 2023 and beyond:
Hershey Co. (HSY)
Hershey has gone from overvalued to a solid buy in a hurry. Shares peaked at $277 in May, which amounted to a price-to-earnings multiple of nearly 30 for the chocolate giant. However, shares melted under the summer sun, sliding to around $201 today. That makes for a far more reasonable 20-times-forward-earnings multiple now. Hershey faces some risks. Some analysts have pointed to increasing competition from newer chocolate brands. And Hershey has raised prices a lot over the past couple of years, leading some to wonder if the firm will have to concede some ground on its pricing strategy going forward. Regardless, chocolate is a recession-resistant business with strong brands and great profitability. Hershey stock has tumbled more than 25% from its recent highs, making for a great buy-the-dip opportunity.
JD.com Inc. (JD)
JD.com is one of China’s largest e-commerce companies. Unfortunately, it finds itself weighed down by two unfortunate trends. For one, e-commerce growth has slowed as the economy has reopened following the pandemic. And the Chinese economy in particular remains in a slump, which has limited the recovery in Chinese retail spending. There’s also mounting geopolitical tensions between China and the U.S.
The bear case is a powerful one for Chinese stocks, including JD. However, at some point, value becomes its own catalyst. JD stock has slumped from a peak of $100 in 2020 to just $29 now. That’s an incredible fall considering that the underlying business is growing and has become more profitable. In fact, the company is expecting to grow earnings by double-digits this year and is trading for less than 10 times forward earnings. In a show of strength, the firm also initiated a dividend and now yields 2.2%, giving investors a nice income stream in addition.
Kenvue Inc. (KVUE)
Johnson & Johnson (JNJ) recently spun off its personal care and wellness operations as a separate company named Kenvue. This will allow J&J to focus on more research-and-development-driven parts of its business like pharmaceuticals while giving investors the option to own Kenvue directly. Kenvue’s products such as Tylenol, Nicorette and Zyrtec are unlikely to grow quickly, but they throw off steady and predictable cash flows year after year. With the economy potentially heading into a recession, this is a fine time to play defense with a brand portfolio like that. Kenvue shares started trading around $26 following the divestment from J&J. They have now slid to $20, marking a solid discount. Additionally, shares go for less than 16 times forward earnings.
Brown-Forman Corp. (BF.A, BF.B)
Brown-Forman is one of America’s largest spirits companies. The Brown family built the business over several generations by turning Jack Daniels into a world-renowned whiskey brand. In recent years, it has achieved further growth through mergers and acquisitions, such as its shrewd move to get into the tequila business back in 2007. Tequila has subsequently exploded in popularity, earning Brown-Forman a windfall return on that investment. It also has shown organic growth through things such as new flavors of Jack Daniels and ready-to-drink canned alcoholic beverages. Brown-Forman is typically a very expensive stock, as investors pay up for the firm’s recession-proof business and market-leading brands. However, the current sell-off in the consumer staples sector and worries around interest-rate-sensitive stocks have pushed shares down more than 20% from their recent peak.
Essential Utilities Inc. (WTRG)
Essential Utilities is a leading water utility. In fact, it was a pure-play water utility named Aqua America until a few years ago, when it purchased a gas company and changed its name. Regardless, it built a tremendous business for itself over the decades rolling up dozens of small water utilities around the country. As water is a highly fragmented market with many cities and towns having subscale local utilities, Essential should have a long runway to keep adding more water customers to the fold. Shares have gotten whacked over the past year on rising interest rate worries. It’s true that Essential will have to pay more on its debt going forward. However, investors are arguably overreacting. It’s not like water or natural gas demand is going anywhere, and over time, either interest rates will moderate or Essential will push through utility rate increases to offset the changing interest rate environment. WTRG stock has slumped more than 20% over the past year, making for a great entry point on this stock, which pays a 3.6% dividend yield.
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