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These 3 Big-Brand Stocks Are Ridiculously Cheap

By Rich Duprey – Nov 27, 2016 at 11:00AM

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You know these big-brand stocks, but do their dramatically lower stock prices make them worth buying?

More often than not, if a stock is cheap it's for a very good reason, so a low price by itself is no reason to jump in and buy shares. But if the business's story remains intact, or management has a plan for correction, then that discounted stock can be a bargain.

Below are three companies whose shares have been battered over the last three months -- and rightly so. But they also represent an opportunity to buy them on the cheap because each has a chance to rebound. And that will give investors the opportunity to reap the rewards if their management teams are successful.

HTZ Chart

HTZ data by YCharts.

Hertz Global Holdings (down 48.4%)

Car rental giant Hertz Global Holdings (HTZG.Q) is one of those companies that has been beaten up for a very good reason. It completely misjudged the resale market for compact and midsized cars causing it to hike per-vehicle depreciation by 14% and leading the depreciation expense for its U.S. fleet to rise by 16% to $462 million. Residual rates for vehicles declined faster than expected, so coupled with falling rental car volumes and declining rental rates in the U.S., the market shredded not only Hertz's stock, dropping it by 50% at one point, but also took down rival Avis Budget Group (CAR 5.84%) by almost 20% over fears it will suffer from excess capacity, too (Avis stock has since recovered).

So what does Hertz plan to do to reverse the situation? It is in the process of fixing its fleet, a program that started in the first quarter to get those small vehicles off their lots and off their books; it's continuing its cost-cutting program, though it wasn't able to pull forward as much savings into the third quarter as it thought; and it's rolling out its new Choice program to 30 cities that guarantees gives you the freedom to pick a different car on the spot at no cost. That puts it into a more competitive position with National Car Rental, which offers a similar program.

Image source: Getty Images.

While having a plan is certainly a start -- after all, Hertz had a plan before and failed miserably in executing it -- what gives me hope it will carry it out correctly this time is twofold: CEO John Tague accepted full responsibility for the failure, choosing not to blame some outside event for the situation, and billionaire investor Carl Icahn continues to increase his stake in the car rental company, most recently boosting it to 35%.

Two years ago, Icahn announced an 8% position in Hertz and after earnings said he was doubling it again to 16%. Now he's doubled it once more suggesting he either has great confidence in management to change the company's direction or he's preparing to agitate for some strategic alternatives. Either scenario could boost shareholder value and see Hertz Global's shares jump from their current level.

Tyson Foods (down 22.1%)

The year hadn't been going too badly for the country's largest meat processor Tyson Foods (TSN -0.64%) until the other day when it forecast lower-than-expected profits for 2017 and announced CEO Donnie Smith would be stepping down at the end of the year.

Amid sharply lower beef prices and lower prices for value-added chicken products that caused fourth-quarter sales to fall almost 13% from a year ago to $9.2 billion, it was also facing a period of increased investment spending and soaring soybean meal prices that it absorbed just as demand for chicken was falling. Tyson has since said it would be cutting back on chicken production to focus more closely on higher-margin products like branded sausages.

But the higher chicken feeds costs are a short-term hit to margins, and though demand for chicken itself was lower than expected (likely a result of beef prices falling), Tyson says demand has returned with vigor.

Image source: Getty Images.

In fact, Smith says a lot of the hits Tyson took this quarter were really one-time events and absent them its business would have operated at a normalized level. And seven weeks into the new fiscal year Smith said, "We feel like we are going to be in a great shape." It's true beef has impacted the chicken business, yet Tyson believes it is is still on the top of its game with pork, and the processor is looking for this to be a good category for the coming year.

What really threw the markets was Smith's retirement announcement. His tenure at Tyson is seen as being one of the best for the meat processor, and his stepping down adds a bit of uncertainty at a time of transition in the industry. His successor, though, is Tyson's current president Tom Hayes, an industry veteran who came to the company when it acquired Hillshire Brands.

Despite the hiccup in the fourth quarter, 2016 was still Tyson's fourth consecutive year of record gains and 2017 is off to a strong start. As Hayes noted, "The first seven weeks of fiscal 2017 have been phenomenal as we are off to the best start we have ever experienced."

The sharp decline in Tyson Foods' stock looks like an overreaction to the retirement news just as the meat processor reported a tough quarter. Its ability to handle such difficulties suggests Tyson's lower stock price won't be low for long.

Tempur Sealy International (down 19.5%)

Bedding specialist Tempur Sealy International (TPX 4.29%) was another company that was having a good year until recently. Its stock had enjoyed huge gains this past summer when its second-quarter earnings beat expectations and shares surged 17% in one day, but it gave all that back and more when it announced in September that its full-year results were going to be weaker than anticipated.

Image source: Getty Images.

Yet it's been working its way back up after reporting earnings that weren't as bad as people thought. While it missed on sales, which came in at $832 million, short of Wall Street's consensus of $835 million, profits were better than expected at $1.32 per share, up 19% from a year ago and well ahead of analyst projections of $1.21 per share.

Even though Tempur Sealy's shares are 25% above their 52-week week lows, they remain down more than 20% for the year, and there's reason to believe they can climb higher still. After releasing the disappointing outlook in September, the bedding maker began a cost-cutting initiative to bring down its cost of sales and overhead in the face of declining sales.

CEO Scott Thompson was pleased with the result, noting it was "the flexibility of our business model" that allowed Tempur Sealy to still deliver significant margin expansion and EPS growth for the period. While he also laid some blame on this year's election that may have partly played a role in high-end customers getting nervous, he's now looking forward to this post-election period as a return to normalcy.

While that's something close to the type of excuse-making we don't like to see, Thompson also did accept responsibility for Tempur Sealy's own actions. He noted that sales began falling in August and then really plunged around Labor Day, but he says the company didn't respond appropriately. Not only were its sales promotions too complicated, but the company actually reduced its Labor Day incentives and then failed to promote its mid- and lower-end products.

Those do seem like bonehead moves, but the fact management is able to own up to them and make a plan to correct them indicates it has a handle on the situation, which ought to enable the mattress maker to rebound. The stock is doing just that, and it's probable Tempur Sealy Internaitonal still has more room to grow.

What it means for investors

When a stock is damaged, it's often because it shot itself in the foot, as we saw with both Hertz and Tempur Sealy. Sometimes it's due to macroeconomic forces beyond its control, as Tyson experienced with rapidly falling beef prices that exceeded its ability to cut back on chicken production to maintain equilibrium. In all three cases above, however, management has a plan in place to correct the situation so that the low prices their stocks trade at make them excellent entry points for investors to benefit from their recovery.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. We Fools may not 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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