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3 Stocks the Market Threw Out With the Bathwater

By Jon Quast - Updated Mar 4, 2020 at 8:44AM

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A financial software company, a steakhouse, and an online broker have all been sold off with the rest of the market. But these winning companies deserve better.

Fear abounds in the market right now, with many stocks trading down significantly over the last couple of weeks. But broad market sell-offs like this can create individual opportunities as the stock prices for otherwise solid and profitable companies get pulled lower in the swirling rush to sell.

Indeed, here are three stocks where the market is erroneously throwing the baby out with the bathwater. 

1. SS&C Technologies: Light guidance but strong results

In mid-February, financial software company SS&C Technologies (SSNC 4.89%) reported fourth-quarter earnings that exceeded guidance. In the third quarter, it had guided for $247 million to $264 million in Q4 adjusted net income. But the company actually reported adjusted net income of $284.6 million, driven by stronger-than-expected revenue on deal wins among some large customers.

However, SS&C's stock is down around 20% from February highs, mostly because Wall Street perceived its 2020 guidance as weak. The company is only guiding for 0.5% to 3.9% in adjusted revenue growth in 2020, which indeed does sound weak. But there's a key exclusion from this guidance -- it's for organic revenue growth only. But SS&C's management said on its earnings call that it has several potential acquisitions in its pipeline in the $100 million range, so total revenue growth will be higher if any of those potential deals close during the year.

Man lays head on table in frustration with market crash chart behind him.

Image source: Getty Images.

Consider that in Q4, 61% of SS&C's revenue growth came from three acquisitions. These acquisitions are great for the company, as it expands its product offering and customer base. But it does add debt to the balance sheet. It currently has $7.2 billion in long-term debt on the balance sheet. However, SS&C is laser-focused on quickly paying debt down. It repaid $1.1 billion in 2019, despite only having short-term debt obligations of around $80 million.

Going forward, SS&C is guiding for $3.97 to $4.22 in adjusted net earnings per share in 2020. That means the stock only trades at 13 to 14 times forward earnings, which should land this company on value investors' watch lists. 

2. Texas Roadhouse: Continued outperformance

It's hard to find a casual dining company that delivers strong results, but Texas Roadhouse (TXRH 4.54%) is one of them. For 2019, full-year revenue came in at $2.8 billion and net income at $174 million -- both company records. Comparable-sales growth also accelerated during the year and finished up 4.7%, defying industry trends. And yet, the stock is still down around 23% from highs reached way back in September 2018.

Texas Roadhouse only trades at 23 times trailing-12-month earnings, but P/E ratios are meaningless in a vacuum. What matters most is what comes next, and Texas Roadhouse is cooking up plenty of future growth. As already mentioned, comparable-sales (current revenue compared to revenue from the previous year for restaurants open at least 18 months) growth of 4.7% in 2019 was down from the 5.4% of 2018. Sometimes Wall Street gets antsy when growth decelerates like this. But investors can rest easy right now. Comp sales are up a whopping 6.4% to start off the year, setting up a strong 2020.

Texas Roadhouse grew earnings per share (EPS) 12% in 2019 -- in line with its top-line growth despite challenges with food inflation and increased labor costs. Not only did the continued EPS growth allow the company to comfortably pay out its dividend, but it was also able to increase its quarterly payout to $0.36 per share. That's a 20% increase from the previous dividend, and it's the seventh straight year it grew the dividend by double digits. 

All told, Texas Roadhouse is a top-tier restaurant investment undeserving of such a sharp sell-off. If its underlying business continues to perform as it has, I have little doubt patient investors will be rewarded at today's price.

3. E*Trade: Special opportunity

Lost in the noise of the market sell-off was an offer from Morgan Stanley (MS 5.21%) on Feb. 20 to buy out E*Trade Financial (ETFC). Investors and analysts alike were clamoring for this to happen, and E*Trade's stock surged almost 22% on the news. However, since then, both E*Trade and Morgan Stanley have sold off, and now E*Trade's stock trades at almost the same price as before the buyout news came out.

The deal is an all-stock deal, which makes this a little interesting. If the deal goes through, E*Trade shareholders would get about 1.04 shares of Morgan Stanley. Based on Morgan Stanley's stock price on Feb. 20, that values E*Trade at $58.74 per share -- about 28% higher than where shares currently sit. That doesn't necessarily mean that E*Trade's stock will rally back to that price; it's all relative to Morgan Stanley's stock price. But at the very least it demonstrates that Morgan Stanley believes E*Trade is worth significantly more than where it trades today.

E*Trade had previously laid out its plan as an independent company. Through gaining new customers and buying back its stock, management was guiding for $6 EPS in 2023 and $7 EPS in 2024. That's a sharp increase from the $3.85 per share it earned in 2019. But it wasn't a far-fetched goal. E*Trade eliminated trade commissions from its platform in late 2019 and subsequently began to see accelerated user growth. While it lost the commission revenue, an increase in deposits boosts its interest income, putting it squarely on the path to hit its long-term guidance.

Trading at less than eight times forward earnings and with a dividend yielding over 3%, Morgan Stanley stock will certainly appeal to value-investment hunters. But it's trading low for a reason. The company is coming off a rough fourth quarter in which it missed revenue expectations by $750 million. Trading revenue, in particular, was weak, down around 30% year over year.

It seems Morgan Stanley with a struggling business needs this acquisition more than E*Trade. That's why, of these two, I would choose E*Trade. The choice ultimately won't matter if the buyout goes through; E*Trade shareholders will get shares of Morgan Stanley, and that combined company would be interesting. But if the deal doesn't go through, E*Trade with its clear path to further EPS growth is the one I'd want to be holding. 

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Stocks Mentioned

E*TRADE Financial Corporation Stock Quote
E*TRADE Financial Corporation
ETFC
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
TXRH
$76.95 (4.54%) $3.34
SS&C Technologies Holdings, Inc. Stock Quote
SS&C Technologies Holdings, Inc.
SSNC
$60.66 (4.89%) $2.83
Morgan Stanley Stock Quote
Morgan Stanley
MS
$77.82 (5.21%) $3.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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