Cheap Stocks That Could Beat an Economic Slowdown

With the high market volatility of the past few years and the recent reports of a slowdown in the economic recovery, many investors might be starting to feel the "sell" panic. You know the feeling: The market looks bleak, prices seem to continue dropping, and you're starting to consider the value of hiding your money under your mattress. The duck-and-cover route may feel like the best solution given the circumstances, but let me tell you why now is the time to buy, rather than sell, the following companies.

Joy to the G
Joy Global
(Nasdaq: JOYG  ) has been manufacturing and servicing mining equipment for the extraction of coal, copper, iron ore, oil sands, and other minerals since 1884. Since March 2009, Joy Global's stock has gone from $20 to $103 per share. However, with concerns of a global slowdown affecting cyclical companies like Joy Global, shares have taken a beating and currently hover around $90.

This is great news for investors looking to get into the company at a discount. Right now, Joy Global's P/E ratio is 18.30. Compared with competitors Bucyrus International (Nasdaq: BUCY  ) , at 22.37, and Caterpillar (NYSE: CAT  ) , at 18.52, Joy Global looks like a bargain.

More promising signs? Joy Global has more than $417 million in net cash on its balance sheet, net income has steadily increased since 2008, long-term debt has steadily decreased since 2008, and sales are expected to grow by 15.6% over the next five years. Not too shabby if you ask me.

Wringing out the dirty laundry
Whirlpool
(NYSE: WHR  ) is another company that's faced turbulent stock prices. As investors worry that an economic slowdown will affect cyclical companies like Whirlpool, stock prices have dropped from a high of $118 per share in April to less than $74 in June. But luckily for investors, Whirlpool has a number of things working in its favor.

At the moment, Whirlpool has a P/E ratio of 10.06, which, compared with competitor Electrolux's (OTC BB: ELUXY.PK) 23.91, definitely looks cheap. Plus, since 2008, Whirlpool has grown its net income from $418 million to $619 million in 2010 and has a debt-to-equity ratio of 54.86.

In addition, Whirlpool's five-year expected sales growth is 9.40%. And even better, Whirlpool pays a dividend yield of 2.6% -- pretty good compared with the average 1.5%. That's great news for investors looking for a cheap dividend stock.

Ignore the siren call
Yes, the stock market has taken a beating over the last few years, and yes, there are valid concerns of a slowdown in the economic recovery. But that just means some stocks are trading at rock-bottom prices and now might be the time to buy in.

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Fool contributor Katie Spence thinks lumpy mattresses are uncomfortable and likes to keep her money in the market instead. She owns no shares of any company mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 30, 2011, at 5:51 PM, aaanglemyer wrote:

    In this article you stated that WHR's expected sales growth over the next five years will be 9.40%. Revenue growth expectations like this make Whirlpool an extremely attractive buy opportunity. Here is how I get there:

    Step 1:

    Whirlpool has had a positive and rising NOPAT Margin for the past 3 years. NOPAT Margin, which is calculated as Net Operating Profit After-Tax / Operating Revenue, displays the % of Revenue the company has net of operating expenses. A positive and rising NOPAT margin shows that WHR's Revenues are increasing at a higher rate than their operating expenses.

    Step 2:

    Whirlpool also has had a positive and rising Return on Invested Capital (ROIC) for the past 3 years. ROIC, which is calculated as NOPAT / Invested capital, reflects management ability to effectively allocate capital. A positive and rising ROIC communicates that NOPAT is increasing at a higher rate than Invested Capital.

    Step 3:

    Whirl pool has as positive and rising Free Cash Flow (FCF) over the past 2 years. FCF, which is calculated as NOPAT - Change in Invested Capital, communicates the amount of Cash the company has after all operating expenses and capital expenditures.

    Conclusion:

    If the 9.40% Revenue Growth is accurate and the company continues on its current track of positive and rising NOPAT Margins and ROICs than Revenues are going to increase at a higher rate than Operating expenses which will produce higher NOPATs and NOPAT will increase at a higher rate than Invested Capital which in turn will produce higher FCFs.

    Whirlpool's current stock price implies that Cash Flows will decrease by 35% and stay there forever. Per the logic above, I believe WHR is positioned to outperform the current market expectations and is therefore a strong buy opportunity.

    Check out the following link for additional information on the effectively picking stocks:

    http://blog.newconstructs.com/2010/05/19/how-to-make-money-p...

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Related Tickers

7/8/2011 4:00 PM
BUCY.DL $92.00 Down +0.00 +0.00%
Bucyrus Internatio… CAPS Rating: *****
CAT $102.51 Down -1.83 -1.75%
Caterpillar, Inc. CAPS Rating: ***
JOY $58.01 Down -1.21 -2.04%
Joy Global, Inc. CAPS Rating: ****
WHR $155.82 Up +1.93 +1.25%
Whirlpool Corp CAPS Rating: ***

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