Market momentum is Green. Investors are eyeing that 415 level on the SPDR S&P 500 ETF (SPY), digesting the $16.1 billion reduction from the Federal Reserve’s balance sheet this week, and waiting for tomorrow’s critical July jobs report. The next level higher for the markets would be the 430 level on the SPY, but a breakdown could push us back to the 50-day moving average around 392.
The S&P 500 held at resistance against today, as I projected on Wednesday. This has been a very unusual, slow-burn higher over the last few weeks. Volume remains low. There remain few positive catalysts. Traders just bought markets off oversold conditions yet again in June.
One of the big challenges for most investors is knowing when it’s time to buy. Typically, the time to buy is when you don’t want to. When there is fear in the streets. When you have oversold conditions and the S&P 500’s tracking index ETF (the SPY) around 30. But remember… the market isn’t rational. So, there is always value in these markets. You simply need to know where to look.
Finding Cheap Stocks that Make Stuff
Today, we learned that alternative investment manager Apollo (APO) would take air freight giant Atlas Air Worldwide (AAWW) private. This is an absolute coup for the private equity giant. Atlas Air has been sitting out on the market for months, trading at extremely cheap multiples in an industry that will never disappear.
Air freight? It’s clearly a “need” in the global trading markets. This deal comes after other cheap companies that make and move stuff achieved the heavy interest of private equity teams. I’m pointing to West Fraser Group (WFG) and Resolute Forest Partners (RFP), both in the “lumber space.”
Clearly, private equity teams benefit by playing the long game. They’re looking to take a company private, restructure its operations, maximize its profits, and ultimately sell it or take it public again in five to seven years. The goal here is massive gains on the backside of that payoff period.
Right now, these firms are scooping up stocks at incredibly low multiples. They’re thinking well beyond the recession. Private equity firms have been sitting on cash, and they can take advantage of panic selling due to recessionary fears.
But there remain several companies that trade at similar metrics… even if they are not takeover targets – they trade at incredibly low multiples, generate solid cash flow, and make “real stuff” that will always be needed in civilization. You’d need something worse than a recession for these companies not to recover.
Let’s look at three examples.
Cheap Stock No. 1: Albertsons Companies (ACI)
Do you foresee a scenario where people stop using the grocery store? Do you expect that food demand is going to drop? Yet, Albertsons holds solid margins, a strong balance sheet, and no credit worries.
It trades at 8.6 times free cash flow and under 10 on an enterprise to earnings before interest and tax (EV/EBIT). The average price target on the stock is more than $32, representing a more than 20% upside. Patience…
Cheap Stock No. 2: Tri Pointe Homes (TPH)
Not a lot of investors want to touch the housing market with the recent slowdown in prices. This might be a mistake. There remains a supply gap in the housing market of roughly 3 million units, and Tri Pointe operates in the space of more affordable housing – where the biggest supply problems exist.
This stock is trading at 0.73% of book value, which is comically low for a stock operating in a great industry of need. Its EV-EBIT is just 4.3, making it an attractive takeover target by another builder or a private equity firm. The average price target on Wall Street is more than 26% higher than today’s prices. A buyout would easily push this company north of $22.00.
Cheap Stock No. 3: TO BE ANNOUNCED
What if I told you that a restaurant stock that generated private equity interest in October 2020 was trading back at those levels after falling more than 50% since February 2021. The company has double-digit margins… an F score of 7, and EV/EBIT of under 8. Also, the average price target is about 15% higher than today’s prices. Do you think you’d put aside your bias when I tell you the name?
Because it’s Denny’s (DENN). Yes… that Denny’s. The company has just acquired Keke’s Breakfast Café, but nothing has shifted on the balance sheet. At some point, you have to hold your nose and buy the stock.