The stock market has been rallying so far this year. After a forgettable 2018, which ended with a sharp double-digit decline, the S&P 500 has increased 12% since the start of 2019. Nevertheless, many stocks remain well off all-time highs and are sporting cheap valuations. Gun-shy because of last year's ugly showing, many investors are still playing wait-and-see, holding shares back from an all-out rally.
Better times ahead for chips?
Nicholas Rossolillo (ON Semiconductor): Clouds of uncertainty have gathered around technology manufacturers, especially chipmakers, in the last year. A trade war between the U.S. and China has bogged down investor sentiment as much of the manufacturing process takes place across the Pacific. A global economic slowdown hasn't helped, either. Semiconductors are a cyclical business, prone to ebbs and flows in end-customer spending.
ON Semiconductor hasn't been immune. Though sales and adjusted earnings increased 6% and 34%, respectively, in 2018, the stock fell 21% on the year because of a sharp slowdown compared to 2017 -- one that is expected to persist through the first half of 2019. However, the outlook later this year looks much better, with ON's management reporting strength from automakers, industrial equipment, telecom, and data center customers.
Longer term, demand for the sensors, power management, and connectivity chips ON makes should only increase as the world goes digital and mobile networks grow in importance. Thus, this stock looks mighty cheap at the moment. Trailing-12-month price to free cash flow sits at just 12.1, and forward price to earnings based on expected profits is even lower at 11.3 as ON's profit margins on new product sold continues to rise.
Thus, the shortsighted worry over trade wars and an economic downturn -- in spite of ON Semiconductor's optimism that growth will resume in the near future -- means this stock is worthy of consideration right now.
A potential winner from an inverting yield curve
Chuck Saletta (Lennar): Bonds recently sent shockwaves through the overall financial market when the yield curve inverted. Inverted yield curves happen when longer term interest rates are lower than short-term interest rates, and they're often thought of as harbingers of recessions. But they're not perfect predictors. Indeed, a recent Forbes column concluded that the inverted curve indicates a 25% to 30% chance of a recession sometime in the next six to 18 months.
In other words, the stock market dropped because the bond market indicated that there's a chance of a recession, sometime in the not-too-distant future. But if that recession doesn't come to pass in the near future, the reduction in 10-year bond rates that drove the yield curve inversion suggests a potential windfall for homebuilder Lennar. Mortgage rates generally move in tandem with 10-year Treasury bonds, which means homebuyers can buy more house for the same payment when rates drop.
That translates directly to more potential revenue for Lennar. Either it can sell more houses or bigger ones or houses with more upgrades -- any of which will translate to more money in its pocket. What makes Lennar worth looking at right now is the fact that its shares currently trade at less than nine times its trailing earnings and less than eight times its anticipated earnings. That price, combined with the fact that its earnings are expected to grow over the next few years, makes it a potential value right now.
Of course, if there is a recession on the horizon, Lennar's projected earnings growth may not materialize. Even in that situation, however, Lennar's shares still look well positioned within its industry, given its price tag at around 1.1 times its book value and its reasonable overall debt load. As a result, Lennar looks like a homebuilder that's somewhere between absurdly cheap and reasonably valued, depending on whether the inverted yield curve is accurately predicting a recession.
A lucrative future awaits
Daniel Miller (Ford): After years of consistent growth, vehicle sales in North America are beginning to slow as this sales cycle matures. Slowing sales are obviously not good news for automakers, and that's why Wall Street has largely stayed away from buying shares of Detroit automakers, sending shares of Ford to a paltry price-to-earnings ratio of 9 times. Despite that absurdly cheap price, investors might be overlooking the automaker's positive moves and decisions recently, and might be underestimating its future potential in driverless vehicles.
Here are a few examples of how Ford is restructuring its business in the near term. In South America, Ford reduced its administrative head count by 20% in 2018 and exited the heavy-truck business. it's also refreshing 75% of its vehicle lineup in North America, which will help drive demand even as overall market sales slow and it's expanding its range of more profitable SUVs. The company plans to introduce more than 10 new Ford and Lincoln products in China this year alone and more than 30 by 2021, which will help refresh its dated vehicle portfolio in the world's largest automotive market.
And while Ford is taking steps to improve its business in the near term, the long-term growth story revolving around driverless vehicles is beginning to take shape. Earlier in March, Ford announced it would invest roughly $900 million in its southeast Michigan manufacturing to produce its next generation of fully electric vehicles and its first autonomous vehicle starting in 2021. The future driverless vehicle market is lucrative: Intel and Strategy Analytics estimate that worldwide mobility-as-a-service will be worth more than $3 trillion by 2050. If Ford can improve its business in the short term, and become competitive in the massive driverless vehicle and mobility-as-a-service market in the future, the stock is absurdly cheap today.