We're now three-fourths of the way through 2019, and it's certainly been an eventful year so far. Although the S&P 500 is up by nearly 20% year to date, there has been quite a bit of volatility along the way. And while the market as a whole has performed well, some stocks still look cheap as we head into the last quarter of the year.
With that in mind, we asked five of our top contributors to discuss some of the stocks they have their eyes on, and here's why they chose iRobot (NASDAQ:IRBT), Etsy (NASDAQ:ETSY), Chart Industries (NASDAQ:GTLS), Macy's (NYSE:M), and SSR Mining (TSX:SSRM) as their top stocks to buy in October.
Don't let short-term headwinds distract from the long-term potential
Matt Frankel, CFP (iRobot): Robotics company iRobot, maker of the Roomba vacuum cleaners and other household robotic products, has been in quite a slump lately. Since the end of the second quarter, iRobot has lost roughly 35% of its value.
The main culprit in the tech stock's poor performance is the impact the trade war is having on the company's business. Shares plunged 16% immediately after the company's second-quarter earnings, where management lowered the full-year outlook specifically on the impact of tariffs. As Chairman and CEO Colin Angle said, "We believe that the direct and indirect impacts of the ongoing U.S.-China trade war and the recently implemented 25% tariffs are likely to constrain U.S. market segment growth in the second half of the year below our expectations at the start of 2019."
To be fair, the company is absolutely right -- tariffs are likely to be a headwind in the near term, and it's impossible to know when the trade war could come to an end. For all we know, the tariffs will be in place for another year or more. Despite the poor performance and the near-certain impact of tariffs over the short run, it's important to keep the big picture in mind. Plus, the company has wisely begun shifting production out of China to mitigate any future tariff effects.
For starters, despite the nasty market reaction to the company's earnings, iRobot's numbers have actually been pretty decent. Revenue grew by 15% year over year, and international revenue growth was an especially strong point at 18.2%. And the company has done a great job of maintaining its leading market share despite growing competition.
Furthermore, iRobot is still in the early stages of creating a consumer robotics ecosystem. Its Roomba vacuum cleaners have been very successful, but the Braava line of mopping robots hasn't been as widely adopted, and several new products are in the works. The first Terra robotic lawnmower is being released in 2020, and the company acquired Root Robotics, a leader in educational robotics, in June.
In short, iRobot seems like an incredibly good value right now. The stock trades for roughly 20 times its TTM earnings, and given the strong revenue growth, favorable trends, and upcoming new product rollouts, this seems like a huge bargain for patient long-term investors.
The market trend toward smart devices could be a major tailwind for iRobot's growth over the coming years. For example, you can already use the Amazon Echo to control newer Roomba models, and as the trend toward connected device adoption continues, iRobot is well positioned to create new and innovative smart home robots to capitalize. For example, a robotic lawnmower that you have to physically walk outside to start is one thing. Being able to simply say, "Alexa, mow the front yard" is quite another.
A hand-crafted platform
Brian Feroldi (Etsy): It's no secret that more and more retail sales are moving online. With millennial buying power on the rise, this is a megatrend that is likely to continue for decades to come. While there are numerous ways for investors to play the shift, my favorite choice right now is Etsy.
Etsy has established itself as the default platform for people who want to buy or sell handcrafted goods. Its a perfect outlet for creative types who want to put their talents to use and earn some extra income. It's also a great place for buyers who prize quality above all else to browse for one-of-a-kind items.
Importantly, Etsy doesn't sell products or carry inventory; it simply runs a marketplace that connects buyers and sellers. The platform now has more than 43 million active buyers and 2.3 million active sellers, both of which are growing at double-digit rates.
Etsy's thriving platform is helping to drive impressive financial results. Last quarter, Etsy's revenue grew 37% to $181 million. The increased scale allowed Etsy's margins to expand and helped drive 439% growth on the bottom line (albeit from a small base). Management expects more of the same for the rest of the year and recently increased its full-year guidance.
But why should investors expect that this strong growth can continue over the long haul?
- Uniqueness: 78% of buyers agree that Etsy sells items that cannot be found elsewhere. This helps to keep its buyers coming back for more even as the competition continues to increase.
- Repeat purchases: 60% of Etsy shoppers only buy from the site once per year. Management has numerous programs in place to increase awareness and drive more purchases.
- Awareness: Etsy is investing in numerous marketing programs to help make its brand top of mind with shoppers.
- Free shipping: Etsy is making it easier for sellers to offer free shipping on orders of more than $35. Buyers loathe shipping fees, so this change should help to spur demand.
- Buybacks: Etsy uses a portion of its cash flow to repurchase its stock.
- New categories: The acquisition of Reverb, an online site for buying and selling used music gear and equipment, brings in a new pool of consumers to its platform.
- Room to run: Etsy facilitated almost $3.9 billion in transactions last year, which shows that it is the clear top dog in its niche. The good news for investors is that management thinks its niche is actually huge. The company believes that its addressable market opportunity is around $250 billion, which means it has still only scratched the surface of what's possible.
When all these factors are considered, I believe that Etsy can continue to grow at a double-digit rate for years to come. While the stock can't be called cheap -- shares trade around 61 times next year's earnings estimates -- the price is down more than 15% from its all-time high. With lots of room to run and a unique platform that separates itself from the competition, I think this is a great e-commerce stock to buy and hold for the long run.
Buy the dip on this hidden winner in the global LNG boom
Jason Hall (Chart Industries): Over the past few years, cryogenic gas processing equipment maker Chart Industries has done incredibly well by shareholders. The stock price is up 116% from where it was three years ago, crushing the (rather strong) 49% in total returns the S&P 500 has generated over the same period.
So what's driven Chart's big gains? The company has spent much of the past several years undergoing a major restructuring to address what had become a somewhat inflexible business, with bloated overhead and a handful of business units that didn't really fit with its core strengths. Fast-forward to today, and the company has divested noncore assets, has made a handful of acquisitions that fit far better within its business, and is hitting its pace at the right time: just as the global build-out of LNG export and import facilities kicks into high gear.
We are starting to see the results, too. Chart expects earnings per share will increase 50% by the end of 2019, driven by growth across its business but with the biggest driver being so-called "big LNG" orders for equipment in LNG export facilities. The company says it has a line of sight to 10 of these facilities that it's already been chosen to supply that should get the go-ahead for construction over the next two years, with construction to be complete within the next three to five years. In addition to those 10 projects that Chart is already lining up to generate profits, management says it's in the running for another 14 projects in various stages of planning and federal approvals.
Just to be clear, these are massive projects, costing anywhere from $8 billion to $25 billion to build depending on the capacity. A significant portion of that cost pays for concrete, steel, and labor, but they are very lucrative for Chart. For instance, the company just got the go-ahead for the cold boxes and brazed aluminum heat exchangers for privately held Venture Global's 10 MTPA Calcasieu Pass liquefied natural gas (LNG) export terminal project that will be built in 2020, and it will net more than $135 million for this single order over the next several years. For context, that's nearly 13% of Chart's entire 2018 sales result from a single order.
These deals are also incredibly profitable for Chart. Between the Calcasieu Pass project and several similar deals that it will recognize part of before the end of 2020, Chart expects to generate $125 million in revenue and up to $1.00 per share in adjusted earnings. For context, Chart's full-year guidance before these deals calls for up to $1.4 billion in revenue and $3.80 adjusted earnings per share. You're reading that right: Chart expects to generate an extra 26% in adjusted earnings per share on a less-than-10% boost in 2020 revenues. That's Chart leveraging its existing operations to generate incredible incremental margins.
Looking at the next couple of years, Chart expects adjusted earnings to go from $2.02 per share in 2018 to $3.03 per share at the midpoint of 2019 guidance to as much as $8.38 per share in 2020. With shares down more than 30% from the 2019 high, you can buy Chart for about 7.9 times the midpoint of 2020's expected earnings. Better yet, CEO Jill Evanko made it clear on Chart's second quarter earnings call that 2020 isn't likely to be the peak in the LNG cycle, either. Now is an excellent time to invest in the global LNG boom, and Chart is the ideal way to profit.
Too cheap to ignore
Jeremy Bowman (Macy's): Brick-and-mortar retailers have become anathema to investors, and everybody knows why. Online retailers like Amazon are making retail stores increasingly irrelevant, and that trend will continue as long as online shopping keeps getting faster and easier.
However, despite rumors of a retail apocalypse, 90% of retail sales still take place in stores, and even stodgy chains like Macy's are still seeing growth. The venerable department store chain has posted seven consecutive quarters of comparable sales growth, though that figure slowed to 0.2% in its most recent quarter.
Nonetheless, Macy's shares have been hammered by a series of negative headlines in the last couple months. First, the company slashed full-year earnings-per-share guidance after a weak performance in the second quarter, lowering it from between $3.05 and $3.25 to between $2.85 and $3.05, both of which include $0.25 in asset sale gains. Then the stock got dumped along with much of the retail sector due to trade tensions again flaring with China, and investors were also spooked by the sudden departure of the founders of Bluemercury, the beauty business the company acquired in 2015.
The upshot of the recent sell-off is that Macy's stock looks like a bargain by most conventional measures. Even ignoring the expected asset sale gains and assuming that EPS comes in at the low end of its forecast range at $2.60, the stock is trading at a forward price-to-earnings ratio of 6.2, significantly cheaper than peers like Kohl's and Nordstrom. Macy's is also trading for 21% less than its book value. In other words, if its balance sheet is correct, the company would be worth $6.3 billion if it liquidated today, $1.3 billion more than its $5 billion market cap, and that measurement doesn't even take into account the hidden value of its real estate.
To sweeten the deal, investors today can take advantage of a well-funded dividend yield of 9.4%. Though a yield that high might look like a trap, it's simply a function of how cheap the stock has gotten as dividend yields rise while P/E ratios fall. Even assuming its lowest EPS estimates this year, the dividend payout ratio is still less than 60%, meaning it's not in danger of being cut.
However, a low price alone does not make a stock worth buying. Macy's deserves your consideration because it's a stronger business than the market believes, making it a true value stock. The company has seen double-digit growth in digital sales for 40 consecutive quarters, and it has made smart acquisitions, including Bluemercury and Story -- though it could arguably do more to unlock the value of those, as both brands have the potential to be significant traffic drivers for the retailer. Meanwhile, the company has expanded its off-price business, Backstage, and accelerated initiatives in digital and mobile like Vendor Direct, allowing its third-party sellers to ship online orders directly to customers.
Finally, Macy's has been wisely unwinding its excess retail space and downsizing stores where prudent. Its prized real estate effectively puts a floor on the stock, as its value has been estimated by the investment firm Cowen to be worth $16 billion. Macy's is also making moves to tap into the value of its real estate with a plan to build a 1.2-million-square-foot office tower on top of its Herald Square flagship store in New York and a partnership with Brookfield Asset Management to build multiuse facilities on excess parking space Macy's currently owns.
Heading into the holiday season, now could be an excellent time to capitalize on the sell-off in Macy's shares. Though the company has warned that the third quarter will be tough due to comparisons with a strong performance in the quarter a year ago, it's more optimistic about the fourth quarter, as it will lap a disruption caused by a fire at its distribution center in West Virginia and benefit from growth in digital sales.
A strong holiday-season performance would likely make the market forget about the short-term challenges that have sunk the stock, giving investors a chance to make double-digit returns and keep a 9% dividend yield at the same time.
This stock's luster may be unparalleled
Sean Williams (SSR Mining): In a sea full of high-growth technology stocks, my top stock to buy in October is...a gold and silver mining stock: SSR Mining.
The way I see it, small-cap SSR Mining offers one broad-based catalyst and an incredible growth and value proposition.
The catalyst in question is the macroeconomic landscape for gold and silver, which in my opinion hasn't looked this robust in more than a decade. Gold is a physical metal that we know best as a safe-haven asset. In other words, it tends to do well when the stock market is doing poorly or when investors are worried about other factors, such as the trade war, military conflict, high inflation, and so on. More than a half dozen factors can affect the price of gold and its sister metal, silver.
But what has Yours Truly particularly excited about the intermediate-term outlook for both metals is the plunge in global bond yields. Last month, $17 trillion worth of government bonds around the world had a negative-yielding interest rate. In other words, if these bonds were held to maturity, investors who purchased them would get less money back than they put in. This is significant, because the enemy of gold and silver, two physical assets that have no yield, is a high guaranteed yield that outpaces the inflation rate. As yields plunge, the attractiveness of physical metals like gold and silver soars.
The case could even be made that positive-yielding bonds are spurring precious-metal investment. The recent dip in U.S. 10-year bond yields, and nearly every other maturity, aside from the 30-year, is producing a negative yield on a realized basis (i.e., once inflation is factored in). With the Federal Reserve now clearly switching gears from monetary tightening to monetary easing, gold and silver have a real shot at eclipsing all-time highs in the years to come. And it doesn't take a genius to realize that higher gold and silver prices will allow for increased revenue and improved margins for all precious-metal miners.
That's the broad thesis. Now let me dig into the meat and potatoes of why SSR Mining is the gold and silver mining stock you should own and not one of the five dozen others you could choose from.
What's consistently drawn me to SSR Mining is the company's focus on improving the efficiency of its existing mines, all while maintaining fiscal discipline. The company's flagship mine in Nevada, Marigold, is on track to grow annual output by approximately 30% between 2019 and 2021/2022 to 265,000 ounces of gold per year. At the same time, ongoing exploration and expansion have pushed Marigold's existing mine life to 10 years.
There's also the Seabee mine, which was acquired when SSR Mining bought Claude Resources in mid-2016. Since being brought into the fold, Claude's key resource has hit record gold production each year, all at an incredibly low all-in sustaining cost. Seabee projects having roughly 100,000 ounces of gold output per year through 2023, representing a 29% increase from what the mine generated in 2016.
More recently, SSR Mining commenced commercial production at the Chinchillas mine in Argentina. This was originally a 75%-25% joint venture with Golden Arrow, but SSR Mining bought out its joint-venture partner and now has the robust silver-mining operations all to itself.
Even with production upgrades and modest acquisitions a regular part of the SSR Mining game plan, the company ended the second quarter with $452.2 million in cash and cash equivalents, $37.7 million in marketable securities, and debt of $283.1 million. That's almost $207 million in net cash, assuming SSR Mining liquidated its marketable securities. Very few mining companies are sporting a net cash position, which demonstrates the financial flexibility SSR Mining brings to the table.
Finally, it's still quite the value. As a company that has historically (based on my own research) been fairly valued at 10 times its free cash flow per share (CFPS), Wall Street is calling for $2.23 in CFPS by 2021. If SSR Mining were to trade at 10 CFPS, the company would offer more than 50% upside from its current price -- and even more if physical gold and silver motor higher.
This is about as perfect a scenario as I could imagine for SSR Mining.