With the S&P 500 up by more than 20% so far in 2021, it seems as though the stock market is hitting all-time highs every week. But for investors looking to put some new money to work now, the task of finding buying opportunities that are still attractive at the market's current levels can feel daunting.
Daunting, perhaps -- but not impossible. We asked three of our contributors to share the names of solid value stocks they think would be great additions now to a long-term investor's portfolio. They see American Eagle Outfitters (AEO +0.44%), Lowe's (LOW 0.11%), and McCormick (MKC 0.51%) as favorably priced stocks that could help you achieve your financial goals.
Image source: Getty Images.
A hidden retail gem
Jeremy Bowman (American Eagle Outfitters): American Eagle Outfitters is best known for its eponymous teen apparel chain, but the company actually features two core brands, American Eagle and Aerie, which is its intimates brand for teen girls and young women.
While American Eagle has been a solid business in recent years, Aerie has been growing like wildfire. In the second quarter, Aerie's revenue jumped by 34% year over year to reach $336 million. That was on top of a 32% increase in Q2 2020. On a segment level, Aerie posted an operating margin of 21%.
At a time when Victoria's Secret sales have collapsed as its branding has fallen out of sync with the zeitgeist, Aerie is taking a different approach to intimate apparel, and its branding clearly seems like a breath of fresh air to many in its target market. It avoids the sexualizing marketing tactics of many of its lingerie brand rivals and instead promotes body positivity and inclusion. It also has a policy of not airbrushing the photos of its models.
There's an argument to be made that Aerie as a stand-alone business would be worth more than American Eagle Outfitters, which is valued at $4.1 billion today. The American Eagle brand is no slouch either; the teen apparel chain has been reliably profitable, and in 2021's second quarter, it fully recovered from the sales declines it suffered during last year's lockdown period. In Q2, the brand had an operating margin of 23%, giving the overall company an operating margin of 14.1%, its highest margin since 2008.
Currently, American Eagle Outfitters trades at a price-to-earnings (P/E) ratio of just 11 based on this year's expected earnings. For that price, investors get a stable apparel retailer and a fast-growing intimates brand with a strong e-commerce position, as well as a dividend that yields 3% at today's share price. Compared to the average stock in the S&P 500, which has a current P/E of 29, American Eagle Outfitters looks like a classic value stock, poised to outperform.
A cheap way to play the housing market
Neil Patel (Lowe's): With a forward P/E ratio of just 20, Lowe's stock is a bit cheaper today than the S&P 500, which trades at a forward P/E of 22. Just because it sells at a discounted price, however, doesn't mean that it's a low-quality business. In fact, the opposite is true.
The home-improvement retailer, which reported revenue and net income of $27.6 billion and $3 billion, respectively, in its fiscal second quarter, saw a surge in demand due to the coronavirus pandemic. Consumers, still spending more time than usual at home, focused their attention and dollars on completing renovation projects. Lowe's and its 1,973 stores were there to serve this need.
The robust housing market, characterized by an inadequate supply of homes for sale and low interest rates, is further propelling this trend. "The customers' mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense," CEO Marvin Ellison explained on the earnings call for fiscal Q2, which ended July 30. This makes complete sense, given that a home is likely to be the most valuable asset a person will ever own.
Although Lowe's has historically been known as a mecca for do-it-yourself customers, management is keen on continuing to grow its professional customer base. Small- to medium-sized contractors spend more at its stores per trip and visit them far more often than the average consumer. They also rely on Lowe's to have the right products, equipment, and tools to complete their projects. Over the past two years, pro demand at Lowe's has jumped by 49%, and those customers now account for 25% of total revenue.
As Lowe's continues to gain market share among professional contractors, its sales, profit, and stock price should continue rising. Solidifying the investment case is the fact that the business currently pays a quarterly dividend of $0.80, and management has been steadily boosting that payout since 1980. A generous stock buyback program will further enhance shareholder returns. As such, adding Lowe's stock to your portfolio now could certainly prove to be a wise decision.
Sharp seasoning for a stock portfolio
Eric Volkman (McCormick): I'm going to skip all the "spicy stock" metaphors for spice and condiments specialist McCormick (MKC 0.51%). That's less because I want to avoid cheesy turns of phrase, and more due to the fact that this company will likely never be a hot item on the market.
But that's fine, because McCormick's a well-managed business that has a smart and effective strategy for growth. Combine that with a steady history of dividend raises and its under-the-radar quality, and you have a value stock poised to rise ever higher as the years roll by.
The nice thing about concentrating on pantry items is that they form a broad product category. Almost any brand or company McCormick acquires in the comestibles field can be tacked on with little fuss, and can easily complement its existing portfolio.
The company isn't at all shy about buying new assets. It went on a bit of a tear late last year, picking up Cholula, which makes the eponymous hot sauce, for $800 million. Shortly after that, it spent $710 million to buy FONA International, a flavor solutions maker.
McCormick clearly likes to acquire familiar names. For further proof, look at the RB Foods unit it purchased for a rich $4.2 billion in mid-2017 from Reckitt Benckiser. That deal included condiment mainstay French's Mustard, plus the storied Frank's RedHot hot sauce brand and the Cattlemen's suite of barbecue rubs and sauces.
The company's bulking-up moves have driven its finances notably higher, as has the cook-at-home upswing generated by the pandemic. While restaurants have largely reopened in 2021, it seems many people are still enjoying a renewed interest in home cooking. In the company's fiscal Q3 (which ended Aug. 31), sales rose by 8% on a year-over-year basis to $1.55 billion, while net income advanced by 3%.
More growth is apparently in store, which is particularly admirable given that inflation has affected its recent results. Despite rising costs, the company raised its full-year guidance -- it now believes its sales will climb by 12% to 13% over the 2020 tally, with per-share net income matching Q3's growth rate of 3%.
One item almost sure to increase is McCormick's quarterly dividend. For 35 years in a row, it has upped its payout, firmly placing it among the Dividend Aristocrats, and with both sales and profitability continuing to head north, there's no reason for it to end that streak now. McCormick stock doesn't have the highest yield at 1.7%, but as it's constantly on the rise, that dividend can put some zip in your total returns over time.
